Cheating of America: How Tax Avoidance and Evasion by the Super Rich Are Costing the Country Billions and What You Can Do about It

Overview

Each year millions of income-earning adults and corporations do not pay their fair share of federal income taxes — whether legally (tax avoidance), illegally (tax evasion), or through shady means (tax "avoision"), and their numbers are rising dramatically. In this explosive book, Charles Lewis, founder and executive director of the Center for Public Integrity, and Bill Allison, a former researcher at the Philadelphia Inquirer finger these culprits.

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Overview

Each year millions of income-earning adults and corporations do not pay their fair share of federal income taxes — whether legally (tax avoidance), illegally (tax evasion), or through shady means (tax "avoision"), and their numbers are rising dramatically. In this explosive book, Charles Lewis, founder and executive director of the Center for Public Integrity, and Bill Allison, a former researcher at the Philadelphia Inquirer finger these culprits.

Super-rich individuals and corporations alike are increasingly using offshore channels to hide money from the IRS, which seems to have given up on trying to catch them. Meanwhile, the rest of the population suffers. The IRS recently reported that 2,680 filers with incomes of $200,000 or more claimed they owed no taxes, up from 612 in the mid-eighties, and 85 in 1977. While audits of these wealthy taxpayers have plummeted, audits of those earning less than $25,000 per year have risen. Not only that, but in 1997 only 2.3 percent of returns filed by the richest Americans were reviewed.

With The Cheating of America, Lewis and Allison aim to unmask those who are stiffing Uncle Sam, as well as the system that permits their activities. They reveal how blue-chip U.S. corporations take advantage of dubious shelters or move their taxable profits offshore. Frequently these same companies have also availed themselves of cheaper labor overseas, laying off thousands of American workers. Some estimates show that more than a trillion dollars are salted away in offshore bank accounts, beyond the reach of the Internal Revenue Service.

Lewis and Allison provide a richly detailed and colorful overview of the key players — federal legislators, the IRS, New York banks, foreign "tax havens" — and the cottage industry that teaches aspiring dodgers how to cheat successfully. At the heart of the book are case studies of some of the most brazen individuals and corporations, including the "Benedict Arnold Billionaires" who have expatriated from the United States in order to reduce or eliminate their tax burden.

With explosive investigative revelations and the authority of the Center for Public Integrity behind it, The Cheating of America will further educate all those who "pay their fair share" while the financial elite dodge their responsibility to society. Sure to enlighten and outrage, The Cheating of America is a must-read for every citizen.

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Editorial Reviews

David Cay Johnston
As it says in Ecclesiates, there is nothing new under the sun. There are, however, always new stories, and the ones told in The Cheating of America were chosen to make your blood boil. They are the tales of the rich and powerful who granted themselves tax relief and found themselves in battle with the IRS. Their schemes are available to anyone willing to dig through the mountain of paperwork at United States Tax Court and other government offices in search of nuggets of fact.

Through a lot of hard work, the authors and their team expose loopholes big enough for the late Larry Hillbloom to fly his DHL Worldwide Express right through.

While the book focuses on the way the law, and the IRS's budget and rules, are weighted in favor of rich tax evaders, there are also a few stories of big-time losers in the game of moving symbols around a piece of paper to make tax bills vanish.
The Washington Monthly
Publishers Weekly - Publisher's Weekly
Probing everything from smart legal maneuvers to outright tax fraud by the wealthy, this fascinating, highly readable survey explores the tax code's haphazard evolution since 1913, and how it has favored rich individuals and large corporations over average taxpayers. Citing IRS Commissioner Charles Rossotti, who testified in 1998 that tax evasion costs the federal government $195 billion annually, Lewis and Allison et al. (The Buying of the President) note that almost 1,000 families earning more than $200,000 paid no income tax in 1995 and that corporate income taxes, which made up 28% of federal tax revenue in 1956, now are only 10%. Familiar ploys like hiding money in offshore trusts, tax shelters and nonprofit fronts figure in these sensational tales, but people like movie producer Saul Zaentzwho stashed profits from One Flew over the Cuckoo's Nest offshore and later settled the IRS claim for $26 million with a payment of $1.5 millionloom larger. Despite stiff competition, Joseph and Pamella Ross inspire the most outrage for fleeing in 1986 from a grand jury investigation of Joseph Ross's tax evasion on the government contracts that made his fortune. The couple's elaborate travels and disguises bear astonishing witness to how far some people will go to avoid paying the taxman. As these tales of privilege and chutzpah set readers' blood to boil, the authors judiciously urge their audience to demand fair tax treatment from lawmakers. What the rich don't pay, the rest of us do, they remind us. Little guys everywhere will read this book with righteous indignation. (May) Copyright 2001 Cahners Business Information.
Library Journal
If you believe in tax fairness, then the latest effort from the nonprofit, nonpartisan Center for Public Integrity will raise your blood pressure. This title details egregious examples of tax fraud and avoidance in order to raise public awareness of tax inequities. Lewis and Allison make a strong case. In 1995, the last year for which full data are available, over 1200 corporations with a net worth of a quarter billion dollars or more claimed no income tax. Twelve of the 14 chapters focus on specific schemes, such as real estate shelters, bogus trusts, shell corporations, expatriation, or phony charitable donations. The authors state that these actions cost each honest taxpayer an additional $1600 per year. Here, as in other books on tax equity, the IRS does not distinguish itself in its general unwillingness to take on big tax cheats and in auditing middle-class earners more frequently than the rich. Surprisingly, the authors make few specific recommendations to end the abuses, as opposed to Donald L Barlett and James B. Steele in The Great American Tax Dodge (LJ 7/00). If you only have room for one, the Bartlett and Steele volume is better. Suitable for public libraries and academic libraries with tax or journalism programs. [Previewed in Prepub Alert, LJ 1/01.] Patrick J. Brunet, Western Wisconsin Tech Coll. Copyright 2001 Cahners Business Information.
Kirkus Reviews
A hard-hitting, dismaying investigation of how the wealthiest individuals and largest corporations in the US use legal and illegal means to reduce or eliminate their taxes-and thereby stiff everyone else. As of 1998, taxpayer noncompliance cost the federal government an estimated $195 billion annually. This account of how this massive tax chiseling came to be perpetrated was painstakingly researched by Lewis (The Buying of the President 2000, not reviewed), former Philadelphia Inquirer researcher Allison, and several of their associates from the nonprofit Center for Public Integrity. While admitting that Americans so distrust the IRS that they are unwilling to provide it with manpower adequate for conducting investigations, the authors make the compelling point that, without fair tax administration, the gap between rich and poor will only widen. The numbers alone tell a staggering story: Taxes paid by corporations on profits reported to the IRS declined from 26 percent to 20 percent between 1990 and 1997. At the same time, IRS officials admit that the agency targets the poor and middle-class disproportionately for audits because, unlike the rich, they are unlikely to engage in protracted, expensive legal sieges. Running to more than 17,000 pages in some editions, the Internal Revenue Code offers a labyrinth of net operating losses, offshore trusts, and real-estate shelters. Lewis and his associates use case studies to highlight these and other ingenious dodges crafted by accountants and tax attorneys. For instance, Joe Conforte, owner of a notorious Nevada bordello, insisted that his prostitutes were not employees but independent contractors-a claim later employed successfullybyMicrosoft, Xerox, and other corporations in shaving costs for Social Security, health insurance, and pensions. Assiduous tax schemers have even forsaken American citizenship or control of their companies to avoid paying the piper. Short on policy recommendations for stopping these outrages, but long on details sure to stoke the debate about American tax equity.
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Product Details

  • ISBN-13: 9780380976829
  • Publisher: HarperCollins Publishers
  • Publication date: 3/1/2001
  • Edition description: 1 ED
  • Pages: 320
  • Product dimensions: 6.12 (w) x 9.25 (h) x 1.05 (d)

Meet the Author

Charles Lewis is the founder and executive director of the Center for Public Integrity, a nonprofit, nonpartisan research organization focusing on ethics and public service issues. He has recently been awarded the 1998 McArthur "Genius" grant.

The Center For Public Integrity is the non-profit, nonpartisan watchdog organization that produced The Buying of the President in 1996 and The Buying of the Congress in 1998.

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Read an Excerpt

Chapter One



No More Than a Living



Jane Morgan is the kind of person upon whom the voluntary tax system depends. Conscientious, organized, and honest to a fault, Morgan faithfully filled out her income tax returns year after year, declaring her earnings, her deductions, and how much she owed in taxes. Like many other middle income taxpayers the Center contacted who had run-ins with the Internal Revenue Service, she was reluctant to speak on the record; her name has been changed to protect her privacy.

A self-employed consultant, Morgan has had contracts with universities and the federal government. To supplement her consulting income, she's worked as a substitute teacher in her local public school system. Like many who are determined to be their own bosses, she's never gotten rich from her efforts, but she has made a living selling her expertise to a wide variety of clients. Unlike an employee of a company who expects a weekly or biweekly paycheck, Morgan's compensation comes at irregular intervals. When she's paid for a long-term project, times are good. During other months, however, she's sometimes forced to dip into assets to pay her bills.

In 1996, while preparing her 1995 return, she was confused by the instructions explaining the penalties for early withdrawals from an Individual Retirement Account. On page 16 of the instruction book the Internal Revenue Service mailed to taxpayers, she read the following passage: "Caution: You may have to pay an additional tax if (1) you received an early distribution from your IRA and the total distribution was not rolled over or (2) you received a distribution inexcess of $150,000 or (3) you were born before July 1 st, 1924, and received less than the minimum required distribution. See instructions for line 51 for details."

Morgan, who was in her early fifties at the time, had in fact taken a distribution from her IRA in 1995. "1 knew I was supposed to declare it on my income tax that year and I did not know how I was supposed to file it," she said. "And so I called the IRS. I do my own taxes. "

Morgan wasn't alone. Every year in the months leading up to April 15, IRS employees answer phones to help taxpayers decipher the complicated jargon in the Service's instruction booklets and the myriad forms that accompany them.

In 1999, Form 1040, the basic tax return, had twenty separate lines for reporting income, eleven lines for reporting deductions, one line for reporting personal exemptions, nine lines for reporting tax credits, seven lines for reporting taxes owed, and five lines for reporting payments. There were another ten schedules, used to report business income, self-employment taxes, itemized deductions, capital gains, rental income, and farm income. The seventy-two-page instruction booklet that accompanied each tax return estimated that the total time needed to do just Form 1040 was nearly thirteen hours. The unlucky taxpayer who had to fill out every schedule (assuming such a taxpayer existed) would have required, on average, fifty-six hours and six minutes to complete all the paperwork. In addition to the schedules, there were sixteen more forms specifically referred to by the 1040, used to report moving expenses, to claim the child tax credit and the adoption tax credit, to declare foreign taxes paid, and to report "other gains or losses" not covered by the other forms.

Every taxpayer, no matter what his net worth or employment status, is required to accurately report all of his income on those forms. When the IRS or the Treasury Department describes the system as voluntary, this is what they mean: taxpayers voluntarily report all their income to the government. Of course, matters don't end there. The typical W-2 Form, which reports an employee's wage or salary income to the IRS, contains some variation of the following phrase: "This information is being furnished to the Internal Revenue Service." Form 1099, used to report interest on a savings account, dividend income, or payments made to an independent contractor, carries a similar warning. Each year, the IRS receives copies of roughly 1 billion documents, which it matches electronically, using the Social Security number on each form, to the more than 100 million tax returns submitted by individual and joint filers. The Service checks up on virtually everyone through what it calls the information returns program. If a filer of a Form 1040EZ tries to understate his income as detailed on his W-2, for example, the IRS will catch the understatement. If a filer of a 1040A omits his dividend income, the IRS receives word of it from his broker. If a filer of a regular 1040 doesn't report her interest income, the IRS is tipped off to that omission by her bank.

Even if one merely makes an honest mistake — anything from a math error that inadvertently understates income to forgetting to report the interest on a checking account — the IRS, if it catches the error, will charge the extra taxes plus interest. There may even be a penalty assessed, depending on the nature of the mistake and whether the Service believes there was an intent to pay less than what was owed.

Morgan ran into trouble with lines 15 (a) and 15 (b) on her 1040, on which taxpayers are supposed to declare any IRA distributions — that is, money they've received from their retirement accounts, along with any penalties (additional taxes for either withdrawing money before reaching age fifty-nine or for not withdrawing enough after turning seventy). "When it came to that portion I did not know how to do it," she said. "And I called the IRS and that's where the problem started."

About two years later, on January 17, 1998, Morgan received a letter from the IRS: $1,234 was owed to the government, it said, for taxes due in 1995.

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  • Anonymous

    Posted March 31, 2004

    Good book for Finance/Accounting Geeks

    I purchased the book just for author's chapter on billionaire George B. Kaiser of Tulsa, OK. This is a very interesting reading for anyone interested in business. If you aspire to learn about 'tax avoidance' this book is a sophisticated start.

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  • Anonymous

    Posted April 10, 2001

    The Hunt for Loopholes and Ways to Avoid IRS Notice

    This book is built around the IRS estimate that $190 billion in taxes is not being paid annually. This costs the average family over $1,500 a year in extra taxes to pay for what others don't pay, if the same amount of taxes were collected. The book details off-shore losses in tax havens, trusts designed to shift income, few audits of high-income taxpayers, special tax legislation in Congress, tax-loss carryforwards bought inexpensively, deduction timing methods, charitable trust operations, hiding money offshore, operating with cash, using untraceable Internet accounts, renouncing U.S. citizenship, investment banker- and auditor-led tax shelters, and tax protestor organizations. If you are not familiar with the methods people use to reduce taxes, this will be new information to you. If you are sophisticated about taxes, you will read mostly about cases that have received widespread publicity. The book builds from two faulty premises. First, that it is a civic duty to pay income taxes just as progressively as the face of the tax law suggests. Most people would agree that if there are legal ways to pay less, that people are entitled to use them. Much of what is condemned in this book is not even controversial in terms of its legality. Honest differences may occur in how these alternatives are applied. Second, that few people should be able to escape the IRS's reach. To do that, we would either have to use a much simpler tax system (like a sales tax) or audit almost all medium and large income taxpayers. That later alternative would require an enormous increase in the size of the IRS and reduce the pleasure of being an American. We would have a tax police state focused on everyone's tax life. I think that few would want to live with that, even if they were not a target in a given year. We've all read the horror stories of what happens now to some unlucky people who run afoul of the IRS. The book begins with an example of how a complex tax system can go wrong. A woman got a retirement fund distribution, and didn't know how to pay taxes on it. She called the IRS, got faulty advice, and then was hounded to pay up. The IRS mistake was no defense. So, the downside of the current system is that it can victimize those who do not know about taxes. This means we are headed towards a world in which almost everyone who pyas taxes has to employ tax professionals. I certainly agree with the authors that the egregious tax cheats should b

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