French Tax Officials To Start Digging Through Social Media Posts For Expensive Cars It Thinks You Can't Afford

from the faking-it-til-you-make-it-possibly-a-tax-code-violation dept

In a weird announcement threatening the commencement of pointless government monitoring, a French official says tax cheats will now be outed by their own selfies. (via Reason)

France’s tax administrators will start searching through social media accounts in early 2019, a pilot project in the fight against tax avoidance, Budget Minister Gerald Darmanin told weekly business TV show Capital.

[...]

"(The fiscal administration) will be able to see that if you have numerous pictures of yourself with a luxury car while you don’t have the means to own one, then maybe your cousin or your girlfriend has lent it to you... or maybe not," Darmanin said.

I guess French tax collectors will be scrolling through social media profiles with lists of tax dodgers and a keen appraiser's eye. There may be several reasons people have expensive items showcased on social media, and not all of them will have anything to do with ill-gotten net gains. A very common internet pastime is presenting your life as more exciting, dynamic, and filled with material goods than it actually is. Photoshop may be involved. Some of what tax officials come across will be evidence of nothing more than self-esteem issues.

However, this statement may not actually reflect what French tax officials have in mind. This may just be an inelegant (and partially inaccurate) depiction of the program being put in place. It appears this social media monitoring will follow the UK's lead, which doesn't have much to do with scanning social media posts for inexplicable luxury cars. If the French are on the UK Plan, as this article suggests, auditors will bury themselves in mountains of data and hope the algorithm sorts the cheats from the dreamers.

Here's what Her Majesty's Revenue and Customs [HMRC] is doing to track down tax fraudsters:

Tax authorities plan to increase the amount of data Her Majesty Revenue and Customs (HMRC) hold and can analyze. They’ve done this by extending their legal right to gather data from merchant service providers and data aggregators, including those that are based outside of the UK. This is a crucial step, as many Tax Avoidance schemes use businesses and trusts based overseas. They also now have the power to hold an online market place liable if a trader sells goods in the UK without paying tax on it.

Secondly, there will be data gathering and monitoring of certain high-risk groups. These include previous tax evasion and avoidance offenders, who will have data gathered on them for several years after they are convicted. Certain affluent individuals will also be monitored as they have been identified as a high-risk group because those with overseas business assets or connections are at a greater risk of offending.

The monitoring includes social media, but it's only a small part of the data haul.

The UK's HM Revenue & Customs (HMRC) will "observe, monitor, record and retain internet data" which is available to everyone, including blogs and social networking sites where no privacy settings have been applied, it has specifically confirmed in an update to its guidance on criminal investigations for tax offences.

Having a public account means the public -- and the government -- can see everything you post. That includes stuff it may try to use against you -- in this case, expensive items the government feels you can't afford.

And, lest we think we're any better than our European counterparts, the IRS has been doing the same thing in the States for years. And it's possibly been breaking the law the whole time.

The Internal Revenue Service is breaking several laws by mining large data sets and combing through social media posts in its search for people to audit, a Washington State University professor says.

Kimberly Houser, a clinical assistant professor of business law, in WSU’s Carson College of Business, said the IRS is breaking federal privacy law that says citizens should be:

– Informed when the government is collecting data on them.

– Given the chance to review and correct the information.

Such policies are required by the fair information practices incorporated into the Privacy Act of 1974.

The ACLU also argues the IRS's collection of communications violates the Electronic Communications Privacy Act and skirts warrant requirements. The IRS has agreed to stop gathering emails but made no promises about text messages and social media posts.

Of course, the IRS doesn't need a warrant to collect publicly-viewable posts. Text messages, however, definitely aren't public. But it isn't really clear the IRS is collecting these without a warrant. The IRS does have Stingray devices capable of intercepting text messages, but if it has done so, nothing about this use of cell tower spoofers has made it into the public domain. More likely, the IRS has interpreted the ECPA "abandonment" rule -- which allows the government to collect email older than 180 days without a warrant (treating it as abandoned physical mail) -- to cover text messages and social media posts.

Basically, what the French government is threatening to do is something several other governments already do. It's just that none have announced it quite this badly. Trawling social media posts for inexplicable wealth may trap a few tax cheats, but it's far more likely to produce false positives and piles of mostly-useless data for investigators to dig through.

Filed Under: france, social media, taxes, uk

African Countries Shooting Themselves In The Digital Foot By Imposing Taxes And Levies On Internet Use

from the how-not-to-do-it dept

Techdirt has written a number of stories recently about unfortunate developments taking place in the African digital world. The Alliance for Affordable Internet (A4AI ) site has usefully pulled together what's been happening across the continent -- and it doesn't look good:

A4AI's recent mobile broadband pricing update shows that Africans face the highest cost to connect to the internet -- just 1GB of mobile data costs the average user in Africa nearly 9% of their monthly income, while their counterparts in the Asia-Pacific region pay one-fifth of that price (around 1.5% of monthly income). Despite this already high cost to connect, we're seeing a worrying trend of governments across Africa imposing a variety of taxes on some of the most popular internet applications and services.

The article goes on to list the following examples.

Uganda

imposes a daily fee of UGX 200 ($0.05) to access social media sites and many common Internet-based messaging and voice applications, as well as a tax on mobile money transactions.

Zambia

has announced it will levy a 30 ngwee ($0.03) daily tax on social network use.

Tanzania

requires bloggers to pay a government license fee roughly equivalent to the average annual income for the country.

Kenya

aims to impose additional taxation on the Internet, with proposed levies on telecommunications and on mobile money transfers.

Benin

imposed a 5 CFCA ($0.01) per megabyte fee to access social media sites, messaging, and Voice-over-IP applications, causing a 250% increase in the price for 1GB of mobile data.

The article explains that the last of these was rescinded within days because of public pressure, while Kenya's tax is currently on hold thanks to a court order. Nonetheless, there is a clear tendency among some African governments to see the Internet as a handy new source of tax income. That's clearly a very short-sighted move. At a time when the digital world in Africa is advancing rapidly, with innovation hubs and startups appearing all over the continent, making it more expensive and thus harder for ordinary people to access the Internet threatens to throttle this growth. Whatever the short-term benefits from the moves listed above, countries imposing taxes and levies of whatever kind risk cutting their citizens off from the exciting digital future being forged elsewhere in Africa. As the A4AI post rightly says:

Africa, with the largest digital divide of any geographic region, has the greatest untapped potential with regards to improving affordable access and meaningful use of the internet. With affordable internet access, African economies can grow sustainably and inclusively.

Sadly, in certain African countries, that seems unlikely to happen.

Follow me @glynmoody on Twitter or identi.ca, and +glynmoody on Google+

Filed Under: africa, benin, censorship, fees, internet, internet access, kenya, levies, social media, tanzania, taxes, uganda, zambia

The Supreme Court Makes A Federal Case Out Of South Dakota's Inability To Collect Taxes From Its Residents And Thus A Big Mess

from the aereo-for-ecommerce dept

In some ways the Supreme Court's decision last week in South Dakota v. Wayfair may seem like a small thing: it simply overturned an earlier decision, Quill Corp v. North Dakota, which had concluded that states could not impose requirements to collect sales tax on businesses with no physical presence in the state. But in dispensing with that rule, the decision invited broader effects that may not be so small, thanks to the alarming reasoning the Court used to justify it.

The Court was prompted to reverse its earlier decision – something that the Supreme Court does but rarely, thanks to the principle of stare decisis that ordinarily discourages the Court from messing with an earlier precedent – for a few reasons. In particular it was concerned that Internet businesses without a physical presence in the state had an advantage over those with one [p.12-13], and it accepted South Dakota's claims that it was losing out on millions of dollars in sales tax revenue when South Dakotans bought things from out-of-state Internet businesses who were not collecting the sales taxes that normally would have been owed [p.2].

These assumptions, if true, would raise reasonable policy concerns. But even if they were valid worries, it doesn't follow that the Supreme Court should be the organ of government to address them, especially not when its doing so threatens to create additional policy concerns of its own.

First, South Dakota may be heavily dependent on sales tax to generate revenue, but that's its choice. If consumption taxes turn out to be an inadequate way of filling its coffers, it could choose to impose other forms of taxation, like an income tax, as many other states have. It is not dependent on the United States Supreme Court to help it balance its budget.

Second, like other states, South Dakota requires its residents to independently submit to the state the sales tax that would have been collected, had they bought their goods from an Internet business with a physical presence there. ("If for some reason the sales tax is not remitted by the seller, then instate consumers are separately responsible for paying a use tax at the same rate." [p.2]). The Court may have been correct in observing that enforcing these sorts of payment requirements may be difficult [p.2], but just because it is difficult does not mean that it should fall to the United States Supreme Court to relieve the state of its enforcement burden – especially not an enforcement burden against parties over whom the state already had undisputed jurisdictional reach. This case essentially seems to boil down to South Dakota complaining, "We can't make our residents, who are clearly subject to our laws, pay their taxes, so please make sure that out-of-state residents, who are not clearly subject to our laws, do instead." And the court was amenable to this plea. [p.13]

As for whether the physical presence rule truly gave an advantage to out-of-state businesses, if the state could manage to get its residents to pay the taxes they owe the answer would be no, since any price advantage an out-of-state business could offer would have been negated by the subsequent payment obligation. But the problem with the Supreme Court having now changed the rule is that it's placed its thumb firmly on the other side of the scale and disadvantaged out-of-state businesses in favor of those with a physical presence.

In terms of sales tax collection, in and of itself it's no small task. States rarely have one tax rate applicable to the whole state, or to all types of goods. True, as the Court notes, South Dakota "is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement."

This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability. [p.23]

Such an agreement may certainly aid in minimizing compliance costs. So might the reasonably-priced software that the Court glibly assumes may eventually "make it easier for small businesses to cope with these problems." [p.21]. But in the here and now, compliance is still not so simple. This decision will still reach the other 30 states that have not adopted the Streamlined Sales and Use Tax Agreement, and figuring out how to comply will be more feasible for some businesses than others. Larger companies, for instance, will have more resources to manage complex compliance requirements. Companies large enough, or local enough, to have a presence in these states will also be more familiar with the state and its compliance requirements generally, since they will need to comply with the state's other laws as well.

Which leads to a more significant question raised by this decision, whose holding won't be confined to sales tax collection: what about these other state laws? Per the logic of the decision, can states impose other compliance obligations on Internet businesses, in addition to tax collection ones? As we've seen in recent discussions around Section 230, including in the cases involving Airbnb/Homeaway and Armslist, states love to apply local law to the Internet. In fact, even before the Internet states liked to impose local law whenever they could. The "long-arm" reach of states to impose their regulatory power on out-of-state parties has traditionally been limited by the requirement that the foreign party at least have some minimum contact with the state before they can be exposed to its jurisdiction. Which is why the physical presence rule made sense: being physically there suggested there was a significant enough contact between the party being regulated and the state doing the regulating. It also seemed more fair: in-state companies will also likely have in-state employees able to wield political pressure on the state government if the laws it passes to apply to their employers starts threatening their employment. Whereas out-of-state companies have no such political leverage to wield over the regulators they are nonetheless beholden to.

What the Court seems to be saying now is that lesser contact with a state than physical presence may be sufficient to establish minimum contact. In and of itself, such an assertion may not be controversial, and if the decision's rationale had been focused on those indicia it might not be so disquieting. In terms of the South Dakota taxation law itself, the law does incorporate some limitations so that it won't apply to Internet businesses with only incidental connections to South Dakota.

The Act applies only to sellers that, on an annual basis, deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State."[p.3]

But the Court is not specific as to what sort of lesser contact will be sufficient to subject an Internet business to state jurisdiction for taxation or otherwise, and it is going to be really expensive for out-of-state Internet businesses to find out.

Furthermore, the hostility that the Court showed to these out-of-state businesses is worrying. First, it is unjustifiably dismissive to the utility of the physical presence requirement.

The argument, moreover, that the physical presence rule is clear and easy to apply is unsound. Attempts to apply the physical presence rule to online retail sales are proving unworkable. States are already confronting the complexities of defining physical presence in the Cyber Age. For example, Massachusetts proposed a regulation that would have defined physical presence to include making apps available to be downloaded by in-state residents and placing cookies on in-state residents’ web browsers. Ohio recently adopted a similar standard. Some States have enacted so-called “click through” nexus statutes, which define nexus to include out-of-state sellers that contract with in-state residents who refer customers for compensation. Others still, like Colorado, have imposed notice and reporting requirements on out-of-state retailers that fall just short of actually collecting and remitting the tax. Statutes of this sort are likely to embroil courts in technical and arbitrary disputes about what counts as physical presence. [p. 19-20]

Of course, far from impugning the physical presence rule, these examples demonstrate the wisdom of it, because in all the examples described any dispute that might arise would arise because the states are trying to target businesses that aren't actually physically present in their states.

In fact, in general the Court seems to have an uneasy notion of what constitutes physical presence by an Internet business:

For example, a company with a website accessible in South Dakota may be said to have a physical presence in the State via the customers’ computers. A website may leave cookies saved to the customers’ hard drives, or customers may download the company’s app onto their phones. Or a company may lease data storage that is permanently, or even occasionally, located in South Dakota. Cf. United States v. Microsoft Corp., 584 U. S. ___ (2018). [p.15]

The Court also cannot imagine how limiting a company's physical presence might be of value to it:

But the administrative costs of compliance, especially in the modern economy with its Internet technology, are largely unrelated to whether a company happens to have a physical presence in a State. For example, a business with one salesperson in each State must collect sales taxes in every jurisdiction in which goods are delivered; but a business with 500 salespersons in one central location and a website accessible in every State need not collect sales taxes on otherwise identical nationwide sales. [p. 12]

Worse, to the extent that the Court can imagine why a 500-person company might choose not to have boots on the ground in every state where it might happen to have an online customer, it is inexplicably hostile:

In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology has advanced. [p. 13]

Later it in the decision the Court further describes Quill as allowing out-of-state companies to aid and abet customers in "evad[ing] a lawful tax that unfairly shifts to those consumers who buy from their competitors with a physical presence that satisfies Quill—even one warehouse or one salesperson—an increased share of the taxes." [p. 17]

What is concerning is that in using these pejorative assessments the Court is essentially declaring, "How dare you do something legal to avoid liability." Which is sadly an admonition we've heard the Court make before in trying to substantiate a questionable holding in another case: Aereo.

As the Court continues, the comparison with Aereo becomes even more apt:

"Distortions caused by the desire of businesses to avoid tax collection mean that the market may currently lack storefronts, distribution points, and employment centers that otherwise would be efficient or desirable." [p. 13]

In other words, the Court has concluded, "Our jurisdictional rule is deterring investment in the state, so therefore it's a bad rule."

This sort of contorted reasoning is exactly what happened in Aereo, where the Court looked at who was making money, unilaterally decided it was the wrong people, and then tied itself in knots to write new law, indifferent to how much settled precedent it displaced or the full extent of its likely effects, in order to justify reallocating the financial gains.

Then, as now, it was a decision predicated on a series of questionable assumptions. We can only hope that this latest result won't be as seriously catastrophic for online innovation as Aereo has been.

Filed Under: sales tax, scotus, south dakota, supreme court, taxes

AT&T Promises Your Broadband Will Suck Less...But Only If It Gets Another Massive Tax Cut

from the Charlie-Brown-and-the-football dept

One of the reasons for the U.S.' pricey and mediocre broadband is our historical habit of throwing oodles of tax breaks and subsidies for fiber optic networks at giant ISPs, then letting them tap dance over and around those obligations when it comes time to deliver. Verizon, for example, has gobbled up millions in subsidies and tax breaks from cities and states up and down the Eastern seaboard for fiber optic networks it fails to fully deploy. Given the stranglehold large ISPs have on federal and state regulators and lawmakers, efforts to hold these companies accountable for any of this have been decidedly mixed.

AT&T has similarly spent decades demanding all manner of regulatory concessions, tax breaks or subsidies in exchange for broadband upgrades that seem perpetually just around the next corner. Whether it's gunning for tax cuts and subsidies, or looking for approval of its latest megamerger, AT&T's an absolute master of the regulatory carrot and a stick game. Even if the carrot is entirely hallucinated, as we saw when AT&T threatened to curtail its already modest fiber optic deployment unless net neutrality was killed.

Ignoring the fact that AT&T has been making the same empty broadband deployment promises for the better part of the last decade, the company popped up this week to throw its support behind Trump's latest attempt at "tax reform." According to an AT&T statement, the company insisted that reducing the company's tax burden will result in all manner of new broadband investment:

"By immediately lowering the corporate tax rate to 20%, this bill will stimulate investment, job creation and economic growth in the United States,” said Randall Stephenson, AT&T Chairman and CEO.

"With a rate of 20% combined with provisions for full expensing of capital expenditures for the next five years, we’re prepared to increase our investment in the United States. If the House bill is signed into law, we’d commit to increase our domestic investment by $1 billion in the first year in which the new rates are in place. And research tells us that every $1 billion in capital invested in telecom creates about 7,000 good jobs for the middle class."

The problem, again, is that AT&T simply has no credibility when it comes to broadband deployment promises. The company has a long-standing history of promising greater broadband investment if it gets "X" (the death of net neutrality rules, the death of privacy rules, more subsidies), then either ignoring those promises outright, or fiddling with its deployment numbers to make it appear that it adhered to its own promises. Meanwhile, in the real world, AT&T remains under fire for failing to upgrade broadband in numerous urban areas that should have been upgraded to fiber decades ago.

AT&T has whined fairly incessantly about the U.S. tax rate being among the highest in the developed world. And while technically true, telecom providers in particular use all manner of loopholes to ensure they often pay a pittance in taxes. That includes using Reverse Morris Trusts to dodge all tax obligations as they sell off chunks of their networks they refuse to upgrade, efforts that have resulted in a few bankruptcies for smaller ISPs on the receiving end of this creative bookkeeping. The end result is often an effective tax rate of 0% for companies like Verizon.

History generally indicates that any additional tax cuts will be pocketed by telecom sector executives, not put back into the network. That's because we've built a system where we not only refuse to do anything about a lack of competition in the broadband sector, but actively reward companies that falsely promise the broadband we truly want is just around the next corner, but only if we're willing to give these companies everything under the sun.

Filed Under: broadband, investment, taxes
Companies: at&t

Majority Of Intuit's Lobbying Dollars Spent Trying To Stop IRS From Making It Easier To File Your Taxes

from the death-and-taxes dept

There has been an effort underway these past few years to make tax season less stressful, less complicated, and less expensive for a large swath of Americans. These efforts have produced plans to make tax season "return free" for many, with pre-populated tax forms prepared by the government that can either be signed if accurate, or ignored if not with a separate filing then being produced by the person in question. That is, since the IRS already should have most of the details on how much you earned from the companies that paid you, it can send you a pre-filled out tax return document, rather than forcing everyone to redo the same work with the same documents hoping that you don't make some mistake that will make the IRS man mad. Again, for those who want to go a different way, they can. But for those who find the IRS's pre-filled documents to be okay, it will make tax filing significantly less of an issue. If you live outside the US, this may sound strange to you, because much of the rest of the world alread does it this way. In a recent episode of Planet Money, the analogy is made that the way we do taxes in the US would be like if credit card companies sent you a "bill" that was a blank sheet of paper, expecting you to fill out all your charges over the past month, and if you got anything wrong, you'd be punished. On taxes, most of the rest of the world the taxes are more like your credit card bill. In the US, it's more like a blank sheet of paper. And, as in years past, some are finally trying to fix things in the US.

This plan has unfortunately run into the extreme distrust of all things government currently weaving its way through America and the gobs and gobs of money from Intuit and H&R Block that is making corporate use of that fear. The lobbying efforts of the tax prep industry has been a multi-year campaign (we've been writing about it since at least 2010) in which money is given to politicians essentially to have them work directly against the interest of their constituents on the subject of paying taxes into the government. It's absolutely bonkers (and partially helped along by anti-tax groups saying that anything that makes paying taxes easier should be stopped because taxes are bad).

But since bonkers is quickly becoming SOP in our government, these lobbying efforts have only ramped up recently, with an increase in dollars spent likely correcting for how simple technology is making tax preparation for most Americans.

Intuit spent more than $2 million lobbying last year, much of it spent on legislation that would permanently bar the government from offering taxpayers prefilled returns. H&R Block spent $3 million, also directing some of their efforts towards the bill. Among the 60 co-sponsors of the bipartisan bill: then congressman and now Health and Human Services Secretary Tom Price.

The bill, called the Free File Act of 2016, looks on the surface to be consumer-friendly. It makes permanent a public-private partnership in which 13 private tax preparation companies — called the “Free File Alliance” —have offered free online tax filings to lower- and middle-income families. The Free File Alliance include both Intuit and H&R Block. But the legislation would also permanently bar the IRS from offering its own free alternative.

There's something especially cynical about a law that is dressed up as a benefit to consumers by creating corporate partnerships making free tax filings available to the constituency, but which likewise prohibit the government from making the collection of its own tax dues more efficient at the same time. This is essentially a jobs program for the tax prep industry, one which that industry has taken to lying to the public through sock puppets in lieu of showing any kind of gratitude. That the industry now has cabinet-level representatives in its bullpen likely means things aren't going to get better for millions of American any time soon.

The reason the industry wants its free filing options codified into law in this way is so that it can upsell the public into paid tax services that it would otherwise not buy and likely doesn't actually need.

In an emailed statement the Free File Alliance’s executive director, Tim Hugo, said that the alliance does not automatically push paid products to those that use the Free File program but the taxpayer does “have the option of ‘opting in’ to receive additional information and offers from the tax preparation company they have selected.”

He said that the lack of awareness of the program is “unfortunate,” and placed blame on the IRS. While the tax agency previously had a large budget to advertise the Free File program, “today that budget is $0, making it difficult to reach the general public,” he said.

While it is indeed a crying shame that the IRS budget to pimp private businesses to the public has been reduced in this manner, it's arguable more of a shame that lobbying money has kept tax season more complicated and costly than necessary. That the industry is spending money to keep a voluntary option for the public beyond reach in favor of upselling that same public is all the more so.

Filed Under: free file, irs, lobbying, ready return, tax returns, taxes
Companies: h&r block, intuit

Coinbase User (Also, Class Action Lawyer) Files To Intervene In Case Where IRS Wants Info On All Coinbase Users

from the overreach dept

We've written a bit about how the IRS is trying to force Coinbase to hand over information on all its users, because it's discovered some evidence of at least one person using Bitcoin, via Coinbase, as a tax dodge. While the demand seems massively overbroad, so far the judge has allowed it to move forward. Coinbase has indicated that it will fight back on behalf of users, but nothing definitive has been done yet -- which has some Coinbase users feeling uncomfortable. At least one has now filed to intervene in the case, in order to seek to quash the summons.

Now, where this gets slightly more interesting is the fact that the individual filing, Jeffrey K. Berns, is a managing partner of a class action law firm that has his name on the masthead. The firm does seem to be focusing on building up a reputation in the cryptocurrency world, with a blog dedicated to the topic and much of the firm's recent press relating to issues on cryptocurrencies. So it appears that some of the decision to intervene here may be a bit of brand building, as the firm seems to want to be the go-to player for legal issues dealing with cryptocurrencies. At the very least, that may raise some questions about the motivations behind the filing here -- but it does seem like some objections should be raised to allowing a grand fishing expedition by the IRS.

Filed Under: cryptocurrency, doj, irs, jeffrey berns, taxes
Companies: coinbase

Court Rubber Stamps IRS's Demand To Get All Coinbase User Data

from the um... dept

A couple weeks back, we wrote about a ridiculous and massively overbroad demand from the IRS that virtual currency exchange/online wallet host Coinbase turn over basically all info on basically all Coinbase users. They did this because they saw evidence of a single person using Bitcoin to avoid paying taxes. Coinbase expressed concern over this, but Judge Jacqueline Scott Corley didn't seem too concerned, and has granted the IRS's request by literally rubber stamping the DOJ's request. I know it's not all that uncommon for judges to accept "proposed orders" but it's still a bit disturbing to see it happen on something with potentially massive consequences. Coinbase has indicated that they're going to push back on this legally, but it's still quite unfortunate that the judge didn't seem all that concerned about this. While Coinbase says it expected the court to grant this order, and that "we look forward to opposing the DOJ's request in court," it's unfortunate how quick judges are to agree to these kinds of orders. Either way, this is going to be a case to follow.

Filed Under: bitcoin, cryptocurrency, data, doj, irs, privacy, taxes
Companies: coinbase

IRS Demands All Info On All Coinbase Customers

from the slow-down,-skippy dept

There have always been questions about the tax implications of cryptocurrencies like Bitcoin. A few years ago, the IRS came out with some guidelines, declaring cryptocurrencies to be property, rather than currency, and then taxed more like equity. But late last week, the IRS went to court to basically demand Coinbase turn over all info it has on everyone. Coinbase is one of, if not the, leading online cryptocurrency exchanges and places where many people store their cryptocurrency in an online wallet. It's a company that has bent over backwards to comply with the laws. But, no matter, the IRS basically thinks everyone who uses it is a tax cheat. Here's what the IRS demanded:

All records of account/wallet/vault activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, the names or other identifiers of counterparties to the transaction; requests or instructions to send or receive bitcoin; and, where counterparties transact through their own Coinbase accounts/wallets/vaults, all available information identifying the users of such accounts and their contact information.

Uh, yeah, that's not very limited. It's not limited at all. The IRS literally wants everything. Why? Because, according to the IRS, it's investigating one single tax cheat. In a declaration, IRS agent David Utzke, talks about a single tax cheat, and says this gives him a basis for requesting all info.

After using a traditional abusive offshore arrangement for approximately 5 years, Taxpayer 1 became fatigued with the effort required to manage his offshore accounts, attorneys, and applicable regulations, and discovered virtual currency while conducting internet research on the topic. Taxpayer 1 began testing the use of virtual currency and eventually abandoned the use of his offshore structure. Taxpayer 1 was able to use virtual currency to repatriate his assets without governmental detection.

For example, Taxpayer 1 originally worked with a foreign promoter who set up a controlled foreign shell company which diverted his income to a foreign brokerage account, then to a foreign bank account, and lastly back to Taxpayer 1 through the use of an automated teller machine (ATM). Once Taxpayer 1 abandoned the use of his offshore structure in favor of using virtual currency, the steps described above were the same until his income reached his foreign bank account. Once there, instead of repatriating his income from an ATM in the form of cash, Taxpayer 1 diverted his income to a bank which works with a virtual currency exchanger to convert his income to virtual currency. Once converted to virtual currency, Taxpayer 1’s income was placed into a virtual currency account until Taxpayer 1 used it to purchase goods and services. Taxpayer 1 failed to report this income to the IRS.

Utzke also mentions two other taxpayers, which were companies, not individuals, but which used Coinbase. He notes that others are laundering money and thus likely to be using cryptocurrencies. That may be true, but it seems like a pretty big stretch to argue that means Coinbase should cough up all details on all transactions.

In the IRS's memorandum of support, it insists that it's just trying to find all the tax cheats, so it should get to look at all the records.

Since 2009, the use of virtual currency has increased exponentially. Some users value the relatively high degree of anonymity associated with virtual currency transactions because only a transaction in virtual currency, such as buying goods or services, is public and not the identities of the parties to the transaction. Because of that, virtual currency transactions are subject to fewer third-party reporting requirements than transactions in conventional forms of payment. However, due to this anonymity and lack of third-party reporting, the IRS is concerned that U.S. taxpayers are underreporting taxable income from transactions in virtual currencies. Further, because the IRS considers virtual currencies to be property, United States taxpayers can realize a taxable gain from buying, selling, or trading in virtual currencies. There is a likelihood that United States taxpayers are failing to properly determine and report any taxable gain from such transactions.

.... The issuance of the summons is warranted here because (i) the summons relates to an ascertainable group or class of persons; (ii) there is a reasonable basis for believing these U.S. taxpayers failed to comply with internal revenue laws; and (iii) information sufficient to establish these U.S. taxpayers’ identities is not readily available to the IRS from other sources.

Coinbase posted a short blog post Friday evening expressing concern over this while exploring the issues:

Our customers may be aware that the U.S. government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase U.S. customers' records over a three year period. The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes.

Although Coinbase's general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government's request. Our customers’ privacy rights are important to us and our legal team is in the process of examining the government's petition. In its current form, we will oppose the government’s petition in court. We will continue to keep our customers informed on developments in this matter.

What happens here is going to be a big, big deal in the cryptocurrency world. The IRS had to know that this was going to get attention, and perhaps that's the intent. But this seems like a massive overreach.

Filed Under: bitcoin, cryptocurrency, irs, tax cheats, taxes
Companies: coinbase

Trump Campaign Threatens To Sue NY Times For Sharing His 1995 Tax Returns

from the that's-not-how-this-works dept

It's kind of amazing how quickly Donald Trump's lawyers seem to threaten any media outlet for publishing information about him that he doesn't like. The latest target is the NY Times which ran a big story over the weekend with some leaked pages of his 1995 tax returns, suggesting that the guy who repeatedly claims he's great at business, reported personal losses of $916 million. We'll leave the analyzing of the tax returns to those who do that sort of thing (though I will recommend reading this analysis, which suggests that it's likely a key part of the NYT article is wrong concerning Trump's ability to use those losses to avoid taxes for 18 years), but we did want to focus in on something more relevant to what we discuss here at Techdirt. The legal threat that the Trump campaign sent to the Times in response:

Separately, a lawyer for Mr. Trump, Marc E. Kasowitz, emailed a letter to The Times arguing that publication of the records is illegal because Mr. Trump has not authorized the disclosure of any of his tax returns. Mr. Kasowitz threatened "prompt initiation of appropriate legal action."

Unlike most of the nine other times (at least) during this campaign that Trump has threatened to sue a media property for their reporting, this one may at least have some tiny marginal legal basis -- though it's certainly not a slam dunk. What is true is that publishing someone's tax return without authorization is a federal crime.

But, it's not that simple. The NY Times would have a pretty strong First Amendment defense that what they're doing here is very much in the public interest. After all, Trump himself has made his tax returns (and his supposed acumen as a business man) an issue in this campaign by refusing to release them, despite every other major party candidate for President releasing tax returns going back decades (and even Trump himself mocked Mitt Romney for taking too long to release his own tax returns in 2012). So there's no argument here that this isn't newsworthy. It clearly is, and that certainly helps the NY Times's case. To me it seems like it should be a clear First Amendment win for the Times -- and plenty of others agree.

Plus, there's the fact that if Trump actually did sue, he'd have to admit the returns are really his and are accurate.

On top of that, Trump himself is regularly talking about getting information out there that hasn't been disclosed through authorized means. Remember, he's "joked" about asking hackers to release Hillary Clinton's emails. And just a few days ago, he tweeted for people to go searching for a former Miss Universe's sex tape in order to discredit her comments about how Trump had treated her.

Who knows if Trump is seriously going to pursue legal action -- in the past he's happily admitted to filing SLAPP lawsuits designed to cost whoever he sues money, even if he knows there's no chance of succeeding -- but if he does, it could become a pretty important First Amendment case... from someone who has already made it clear that he has no respect at all for the First Amendment.

Filed Under: donald trump, first amendment, lawsuit, tax returns, taxes, threats
Companies: ny times

Elizabeth Warren Introduces Bill To Make Tax Season Return-Free

from the intuit-ive-thinking dept

Yay, it's tax season again! As our American readers will know, this is the wonderful time of year when we scramble to get all of our taxes and deductions paperwork in order, take them to some storefront that looks like a military recruitment center, push all of those papers in front of someone that looks like they just graduated from college, and scream, "You figure it out!" For our foreign readers, I should explain that we do this because our tax code is more complicated than the plot of Game of Thrones, our tax authorities are every bit as ruthless as that same series, and we've collectively allowed our citizens' payment of due obligations to become a for-profit industry. But seriously, though, come to America. It's great. I swear.

Several times in the past, some members of our government have attempted to lessen the burden we bear to pay our taxes. It never seems to work because the industry that makes money off of this tax system -- the tax preparation people and software makers -- lobbies to keep filing free taxes a pain in the ass, directly scaring the public into thinking the government will over-charge them, and then indirectly and unethically having sockpuppets do the same. It's in this way that you have a free-to-file federal tax program that roughly two-thirds of the public would be perfectly qualified to use, instead only being used by 3% of the population. 'Merica!

Well, Elizabeth Warren and seven co-sponsors would like to change that by simply eliminating the need for returns entirely for a significant number of people.

On Wednesday, the Democratic senator introduced a bill with seven cosponsors, including Democratic presidential candidate Bernie Sanders, seeking to make significant reforms to the Internal Revenue Service (IRS). Under the bill, Americans with simple tax obligations would have the option not to complete a tax return at all, but to instead receive a pre-prepared return from the IRS with their liability or refund already calculated for them. The IRS already gets most employer and bank information on taxpayers’ obligations — such as W2s and interest earned — so all it would have to do is calculate what they would owe for them.

For others with more complex situations — those who want to itemize their deductions or with many dependents who have to provide more information — the bill would direct the IRS to develop a free, online preparation and filing service that would allow everyone to file directly with the government, rather than relying on third party filing services like TurboTax or H&R Block. And taxpayers would be able to download the tax information the IRS already has.

In other words, have the IRS, which will be evaluating these people's returns anyway, simply do all the math for most of the simple tax returns. We're not talking about returns that would legitimately make use of deductions; we're talking about very simple tax returns, which is what most people have filled out by tax preparers or tax software anyway. Now, this is usually where someone will make the obvious point: the government doesn't deserve to be entrusted with this math. And, hey, I take that point seriously. The government has certainly shown its capacity to lie and deceive. But so has the tax-prep industry. Intuit has been guilty of all kinds of underhanded attempts to keep people from being able to file for free. They are proven deceivers, too.

In addition to that, this bill is directly setting its sights on the cozy relationship the IRS has with the tax-prep industry, so anti-governmenters should really think about getting on board with this.

The bill would also prohibit the IRS from entering into agreements that would restrict its ability to provide such free, online services directly to taxpayers. The IRS has signed a number of binding agreements with the tax preparation industry over the years that blocks it from offering free services directly to taxpayers itself, saying that it will “not enter the tax preparation software and e-filing services marketplace” and “not compete” with private service providers. The IRS’ declarations that it won’t enter the tax preparation space fly in the face of what it’s been mandated to do. In 1998, Congress passed a bill requiring the Treasury Department to develop a “return-free” tax system by 2008 for those with simple obligations, computing what those people owe with information the IRS already has. Yet Warren’s office argues that the IRS has instead turned control of the process over to private tax preparation companies.

When a government institution rebukes its public duties in favor of corporate wishes, there's a word for that. And it's that corporate control that will be pushing back on Warren's bill. The tax-prep industry, after all, has spent nearly $30 million in lobbying Congress since the late nineties. We're all about to get a very real lesson on the effect of corporate lobbying on a Congress that is ostensibly designed to serve the public need. I suspect the results will be as instructive as they are ugly.

Part of the solution to this is, of course, a simplified tax code. But it's somewhat strange to see some in favor massive tax reform, including simplifying the tax code, come out against simplifying filing tax returns or eliminating returns entirely.

Yet some anti-tax groups that say they want a simpler tax code have fought against these efforts. Grover Norquist, founder of Americans for Tax Reform, has testified and advocated against a return-free system. Republican presidential candidate Ted Cruz has consistently called to abolish the IRS, rather than get on board with plans to direct the agency to make things easier for taxpayers.

Some of that sentiment is likely coming from a worry that a simplified filing system would lead many people to be less angered by the overall tax system, and thus less interested in more radical reform. And some is likely born of a deep-seeded mistrust of government in general and the IRS in particular. Which, again, I completely understand. But it would be wise for the listeners of those mouthpieces to truly understand what this legislation would accomplish, because it's largely built around eliminating returns for filers with returns so simple that charging to file them is downright silly.

Filed Under: elizabeth warren, irs, regulatory capture, tax returns, taxes
Companies: intuit