March 03,2015

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Wyden Releases Report Detailing Major Tax Avoidance Strategies

At Finance Hearing, Ranking Democrat Calls for Tax Reform that Levels the Playing Field for Middle-Class Americans

WASHINGTON –Senate Finance Committee Ranking Member Ron Wyden, D-Ore., today announced the release of a report detailing a number of strategies sophisticated taxpayers use to substantially lower their tax burden.

“Those without access to fancy tax planning tools shouldn’t feel like the tax system is rigged against them,” Wyden said.  “For people having a hard time or just making their way as best they can, it must feel like the other guy’s climb up the economic ladder is easier than theirs. The U.S. tax code needs to be fixed to help more Americans succeed and build a stronger economy.”

While the vast majority of taxpayers can neither defer paying taxes nor minimize the amounts they do pay, and generally have to ride the ups and downs of the market on their investments, certain taxpayers tailor their investments to lock in gains (or losses), manipulate the timing of any taxes paid and minimize the amount of tax that does get paid. This creates serious tax wins for those who know how to use these tax avoidance strategies, and it is all perfectly legal. 

Wyden’s report highlights six major avoidance strategies used by many taxpayers to cut the taxes they owe dramatically (through access to sophisticated tax planning), often paying effective rates lower than those who earn a regular paycheck.  It also offers policy and regulatory recommendations by Wyden’s staff on what should be done to remedy the situation and reduce the tax avoidance by tens of billions of dollars over the next decade while making the tax code more fair and efficient.

The six major strategies identified include:

  1. Using collars to avoid paying capital gains taxes
  2. Using wash sales to time the recognition of capital income
  3. Using derivatives to convert ordinary income to capital gains or convert capital losses to ordinary losses
  4. Using derivatives to avoidconstructive ownership rulesfor partnership interests
  5. Using basket options to convert short-term gains into long-term gains
  6. Avoiding income taxes by deferring compensation

The report, “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions,” benefited from contributions by the Joint Committee on Taxation (JCT) and outside experts at the request of Wyden and his staff. The full report can be found here.

Wyden’s full opening statement from today’s hearing can be found here.