IRS Forms 'SWAT Team' To Crack Down On Corporate Tax Dodgers

* Tax evasion by 'transfer pricing' a top target for agency

* Talent coming in from Big Four audit, law, consulting firms

* 'The deck is stacked against them' - academic on IRS

By Patrick Temple-West

WASHINGTON, March 20 (Reuters) - The U.S. Internal Revenue Service is staffing up with high-powered talent to crack down on companies shifting profits from country to country to lower their tax bills, a hot strategy the agency has targeted before with only limited success.

The IRS showed its elevated concern on the issue, known as "transfer pricing," last May by hiring Samuel Maruca to fill the newly created post of transfer pricing director.

He has since brought aboard specialists from Big Four audit firms KPMG and Ernst & Young, as well as law firm Mayer Brown and boutique consultancy Horst Frisch.

Maruca, who came from law firm Covington & Burling, is still recruiting. He told Reuters the agency previously had "had a difficult time attracting and retaining economists."

Now, he said, the IRS's international group "has significant external hiring authority."

Transfer pricing is a booming field of global tax law. It involves multinational corporations that are constantly moving goods, services and assets from one subsidiary to another in different countries, and how they account for these "transfers."

By carefully manipulating the pricing of such moves, companies can effectively shift profits to low-tax countries from high-tax ones, lowering their overall tax costs.

Many governments in the developing and developed world, many of them faced with crushing deficits, are working to curb transfer pricing because it reduces their corporate tax revenues.

IRS Commissioner Doug Shulman made changes at the agency in mid-2010 that set the stage for bringing in Maruca, who has filled 40 positions so far and plans to bring on up to 60 more staffers.

The IRS, which employs 90,000 people, saw its budget cut by 2.5 percent by Congress for fiscal 2012 to $11.8 billion.


UNDERPAID AND OUT-GUNNED

Federal agencies often struggle to keep up with higher-paid private-sector professionals. The IRS is no exception, and there is some skepticism about Maruca's chances.

"The economic crisis allowed the IRS to attract talented, experienced industry professionals who might not have been available previously," said ex-deputy IRS Commissioner Michael Dolan, now director of KPMG's Washington national tax practice.

"The $64,000 question is, what will be able to do ... and will he really have enough resources to change the game?" Dolan said.

To curtail tax avoidance through transfer pricing, governments seek to limit corporations' ability to manipulate the transfer prices. National laws, though variable from country to country, generally call for "arms-length" pricing.

In theory, that means corporations must set transfer prices that are at or near market level, not artificially raised or lowered. But enforcement is complex, especially for intangible assets, s uc h as search-engine algorithms or trademarks.

"The valuation problems are insurmountable," said Edward Kleinbard, a professor at the University of Southern California and former chief of staff at the Joint Committee on Taxation, which analyzes tax policy for the U.S. Congress.

"There are billion-dollar disputes on just the arms-length transfer pricing of intangibles" he said.


IRS LAGS

By one measure of transfer pricing enforcement, the IRS lags behind tax treaty partners. In fiscal 2011, 85 percent of transfer pricing audit adjustments were initiated by a foreign country, rather than by the IRS, according to IRS statistics. That was up from 77 percent in fiscal 2010.

Two major transfer pricing court decisions went against the IRS in 2009 and 2010.

"Clearly, the IRS is trying to figure out what to do next on its litigation strategy in these important transfer pricing cases," said Eric Solomon, a director at Ernst & Young, who called Maruca's group a "SWAT team."

As the IRS raises its game, the pharmaceutical and high-tech sectors can expect close scrutiny, tax professionals said.

Businesses are sure to fight back. The IRS has ruffled feathers on transfer pricing before with limited results.

"Anybody who thinks the IRS can ultimately enforce transfer pricing is either an eternal optimist or delusional," said Richard Harvey, a tax professor at Villanova University and former senior adviser to the IRS's Shulman.

The staff changes and hiring at IRS "will help them on the margins," Harvey said. "But they're still fighting a very difficult battle where the deck is stacked against them."

Comments

[max pain]

12:16 AM on 03/24/2012

Wikipedia’s summary of the 16th Amendment states that all arguments against its proper ratification, which allegedly occurred in 1913, and constitutionality have been “rejected in every court case where they have been raised and have been identified as legally frivolous.”
Can a law declared unconstitutional in 1895 be constitutional in 1913 and beyond?

[max pain]

12:15 AM on 03/24/2012

Can a U.S. Supreme Court decision be “nullified?” Can a law passed by Congress be declared unconstitutional by a court?

The Supreme Court’s decision was based on the premise that “Congress cannot impose a duty or tax upon personal property, or upon income arising either from rents of real estate or from personal property, including invested personal property, bonds, stocks, and investments of all kinds, except by apportioning the sum to be so raised among the States according to population, it practically decides that, without an amendment of the Constitution — two-thirds of both Houses of Congress and three-fourths of the States concurring — such property and incomes can never be made to contribute to the support of the national government.”

The 16th Amendment reads:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
It reportedly took more than three years for three-quarters of the states to ratify the amendment to the Constitution. However, there are numerous reports that the amendment was never ratified by enough states for it to have passed. Then-Secretary of State Philander Knox declared the amendment ratified on February 15, 1913 even though he might have possessed evidence that some states had changed the proposed language, creating many different versions of the amendment put forth by Congress.

[max pain]

11:55 PM on 03/23/2012

On May 21, 1895, the U.S. Supreme Court ruled that a direct tax on personal income was unconstitutional as a result of the case of Pollock v. Farmers‘ Loan and Trust Company. The lawsuit had been precipitated by the 1894 Income Tax Act. The Supreme Court’s 5-4 decision stated that a “direct tax” on the “income of real and of personal property” was “unconstitutional and void.”

The Wilson-Gorman Tariff Act, also passed in 1894, sought to lower tariffs, which were the major source of revenue for the federal government at the time, and impose a 2% tax on incomes which surpassed $4,000 annually. However, over 600 amendments were added to the original bill, which reportedly diluted its intended effect.

Wikipedia reports that the Supreme Court’s decision of 1895 was later “nullified” “by Amendment XVI to the US Constitution.”? Another report states that “…in 1894 Congress enacted a flat rate Federal income tax, which was ruled unconstitutional in 1895 by the U.S. Supreme Court because it was a direct tax not apportioned according to the population of each state. The 16th amendment, ratified in 1913, removed this objection by allowing the Federal government to tax the income of individuals without regard to the population of each State.”

[max pain]

11:53 PM on 03/23/2012

Paragraph 29 caused the tax to be declared unconstitutional

[mashtoe]

07:49 AM on 03/22/2012

Believe it when I see it.

[dlp7202]

04:40 AM on 03/22/2012

"No civilized nation state treats it's poor and vulnerable the way America does. American society is built on the premise that only the strong survive. That ethos carries forward to the strongest among us who become rich with corporations."
[fred53]

I have to agree with this assessment.

A society that values its citizens based solely on the amount of money they can earn and/or accumulate at the expense of the rest of society is not civilized at all.

I think that it is also appropriate to note the percentage of Americans that our society imprisons; the fact that we still have the death penalty when almost every other civilized society on earth has found other ways to deal with capital crime; and the fact that too many of our citizens are extremely polarized in social, religious, and political thought that has resulted in way too many families being afraid, angry, and feeling hopeless.

Too many Americans are filled with hatred of their fellow man, being consumed with the philosophy of "me, me, and only me" ...

This is not American at all, but is where our country seems to be...and the rest of the world has noticed our decline in almost every aspect as a society.
Dave/

[supergenius02]

12:35 AM on 03/22/2012

Hope they start with Obama's good friend the CEO of GE and his company. How on Earth can a company that big pay zero dollars in federal income tax? Everyone here on this blog paid something but they didn't? And George Soros too.

[supersinglefather]

12:59 PM on 03/22/2012

This a problem of legislation, not w/ GE. Until the tax code is simplified, corps would be negligent to their shareholders not to take every advantage the system gives them.

[ldarkspark5]

10:14 PM on 03/21/2012

Has anyone ever consider how many people are in law enforcement. I bet the facts would be staggering it is all confidential. You don't have to have morals any longer only to kill on command. Any body ever figure out what we will do when the other side reaches uncontrollable proportions the day is fast approaching.

[castlemike]

06:03 PM on 03/21/2012

Sad Accountants and Lawyers who walk in the front door with pictures of SWAT repelling off a building in full combat gear.

[dlp7202]

04:05 AM on 03/22/2012

Mike,
Have you ever seen a more ridiculous headline and photo? Even for the "New" HuffPo, this one deserves some type of prize...or a dagger...or something!

Dave/

[castlemike]

12:54 PM on 03/22/2012

At least HP changed it from Three SWAT to One SWAT.

[Ed Baker]

04:45 PM on 03/21/2012

With these escalated enforcement costs - perhaps we should think about VAT.

[mashtoe]

07:51 AM on 03/22/2012

Absolutely. A tariff on imports is a much easier and efficient tax. End income taxes and instead tax imports.

[Ed Baker]

11:27 AM on 03/22/2012

VAT covers all goods, imported or domestic.

[medicontheedge]

04:35 PM on 03/21/2012

Well, at least they won't be storming some family's home because of a coupla bags of weed.

[Ginzu Mawa]

03:55 PM on 03/21/2012

they should ask Anonymous for help. this is a big data problem. arent the NSA and etc analyzing the finance industry as part of teh "anti-terrorism" effort? there is an epidemic of organized crime. if the feds started taking rule of law seriously there wouldnt be a need for Wikileaks, OWS and etc.

[spkninglsh]

12:42 PM on 03/21/2012

Lock and load.

[nypapajoe]

12:04 PM on 03/21/2012

I hope they start with the Republican lobbyist congress who are double dipping taking money from both the public and corporations but yet representing only the corporations and their rich owners to avoid paying taxes!

[Lindytindy]

11:58 AM on 03/21/2012

And the Easter Bunny is coming soon too.