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Tax Complexity is the Real Culprit in G.E. Tax Story

2 min readBy: Scott Hodge

The big news in the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. world today is the New York Times article on how General Electric successfully uses tax planning to minimize its tax burden. (Found here) According to the article, G.E. "reported worldwide profits of $14.2 billion, and said $5.1 billion of the total income came from its operations in the United States."

Here comes the sensational part…"Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion."

If the point of the article was to make G.E.'s tax department sound like the accounts at Enron, it succeeded. While I have no more personal knowledge of G.E.'s tax practices than what I can glean from its 10-K, if G.E. was doing something improper or pushing the tax envelope, then surely the IRS agents who are permanently on-site auditing G.E.'s tax returns would have caught something.

This is fact that is often missed when these sensational tax stories are published – every Fortune 500 company has IRS agents on-site, five days a week, 52 weeks a year, auditing their tax returns. While most Americans are subjected to an IRS auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. maybe once in a lifetime, large companies are constantly being audited. (For more information see here).

Companies are required to make office space available to the IRS agents and give them access to their financial systems. Providing coffee is optional, however. (I know if I had an IRS agent living in my guest room I probably would have been pretty cautious while filling out my tax return this year.)

Most people are also unaware that any tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. that is more than $2 million must be cleared by the staff of Congress's Joint Committee on Taxation. Committee staff can adjust these refunds if they feel it is unwarranted. (For more information see here). So whatever G.E. didn't pay or got as a refund, was audited by the IRS and approved by Congressional staff.

The real culprit in this story is tax complexity. A few years ago, G.E. made news after they filed a 24,000 page tax return. It's no wonder that the Volker Commission estimated that U.S. companies spend more than $40 billion each year complying with the tax system. What a waste. Such stories should be further impetus for fundamental tax reform and simplifying the tax code.