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With Paris Hilton in and out of jail and the iPhone in a store near you, it can be hard for tax law to hold the attention. The small number of tax policy questions that truly penetrate the public’s consciousness usually offer a healthy dose of spectacle to package the issue for mass consumption. In the domestic context, tax shelters and, more recently, the tax benefits enjoyed by the managers of the Blackstone Group and other private equity funds trigger a visceral response by highlighting the low tax bills often paid by the very wealthy. When globe-trotting financiers pay a lower rate of tax on their income than their secretaries, and the government doesn’t even raise an eyebrow, even the most even-tempered person can find himself screaming at his television. Still, dollar for dollar, neither issue represents more than the tip of a tax policy iceberg. Despite all the attention they receive, corporate tax shelters make up a measly $15 billion of the $350 billion in taxes that go unpaid every year. The government’s most potent weapon against tax cheats is decidedly not spectacular. As everyone knows, each year, taxpayers report the amount of income they earn from their jobs, businesses and investments. Less well understood is that tax authorities often receive the same information directly from third parties: employers, financial institutions and other sources. By comparing the two streams of information, the Internal Revenue Service can easily spot potential mistakes and dishonesty. Taxpayers who understand this system generally don’t even bother trying. Those who fail to report income that has already been reported to the IRS may find themselves sharing a jail cell with Survivor winner Richard Hatch (who apparently didn’t think the IRS would find out about his $1 million prize). Unfortunately, third-party information reporting has a limited reach. As a result, the government receives less information than it could and probably should. Domestically, the very modest recent initiative to provide the IRS with more information on capital gains earned by selling publicly traded stock (by mandating third-party reporting of “basis”) throws the enormous gaps in the current system into stark relief. However, the proposal lacks the sizzle of exposing a tax shelter and, as a result, has attracted far less attention. The domestic limits of information reporting are a drop in the bucket compared to the holes in U.S. tax authorities’ ability to acquire information about the foreign activities and income of U.S. taxpayers. Determined tax cheats have capitalized on authorities’ inability to acquire extraterritorial tax information by hiding money in tax havens. The amount of tax revenue lost to schemes involving tax havens (about $50 billion per year by most counts) suggests a truly breathtaking iceberg may be lurking just out of sight. Even when taxpayers don’t go to great lengths to hide their income, the lack of extraterritorial tax information available to U.S. tax authorities leaves taxpayers with a big advantage that they simply do not have at home. Improving access to extraterritorial tax information probably means abandoning the approach championed by the League of Nations 80 years ago that is still just about the only way that governments receive this information. The League’s barter system relies on the concept of reciprocal information exchange, which requires pairs of nations to reach agreement on the identical information that each will provide to the other. More than a half-century of reliance on this system has produced cross-border information exchanges that involve a vast amount of information about taxpayers that somehow manages to be essentially useless to authorities. As Mark Everson, then IRS commissioner, explained in 2006, the reports it receives “suffer from a number of deficiencies,” including a lack of crucial detail (such as U.S. taxpayer identification numbers), and the fact that they are often “in a foreign language and involve foreign currency” and “are not timely.” Finding a better way Barter systems never work very well. It is long past time to ask whether U.S. tax authorities would have more luck acquiring the information they need from other jurisdictions if they did not have to persuade each foreign country that it needs the same information from us. The United States could develop a wish list of information that tax authorities need to do their job and simply offer to pay cash to willing jurisdictions to compensate them for helping us. Alternatively, it might find a totally different approach (such as creating an intergovernmental data aggregator for tax information). It may be that even Steve Jobs couldn’t make acquiring tax information sensational, but if it is possible to improve the way governments receive information from one another, the billions of dollars in tax revenue generated might just be something we could all get excited about. Steven A. Dean is an associate professor of law at Brooklyn Law School.

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