A Tax Expert Takes a Closer Look At Romney’s Tax Returns

Tax Notes has seen fit to put an informative article by Lee Sheppard about Mitt Romney’s tax returns outside its paywall. This piece shows that questions about what might lurk in the returns that Romney has withheld has diverted attention from some dodgy tax issues in the filings he has provided.

The public has gotten understandably unhappy about the $3 million Swiss bank account he held. Sheppard points out that it was common for people like Romney not to report it at all, and the release of older returns would reveal whether he had complied before the US crackdown. Her comment:

Swiss bank account. Issue: Did Romney report it properly?

A Romney grantor trust had a $3 million Swiss bank account at UBS that the trustee closed in 2010. Romney’s campaign said that the account was disclosed on foreign bank account reports and that U.S. tax was paid on the interest from it…

Nondisclosure was common among rich people before the 2010 enactment of the Foreign Account Tax Compliance Act. The penalty for failure to file an FBAR was bupkes, and the agency in charge of enforcing the law, Treasury’s Financial Crimes Enforcement Network, had no interest in enforcing it. Very few FBARs were filed before 2010. At about 200,000 filings annually, the rate of FBAR compliance was estimated to be less than 20 percent before the IRS crackdown.

Another issue which the media has flagged is the monster size of Romney’s IRA. The tax expert’s view:

IRAs. Issue: Can profits interests or special classes of shares in private equity target companies be contributed to IRAs?

Romney has a gigantic IRA, which may hold as much as $100 million in assets. We do not know what it contains. We can only speculate. Given the applicable contribution limits, it is hard to see how the IRA got so big, even if Bain deals were hugely profitable. Regardless of what is in the IRA, serious valuation and self-dealing questions are raised.

A detailed discussion follows, and it’s hard to see how this IRA is kosher.

The article discusses nine additional troubling aspects of the Romney returns that have been put on view, and they are instructive and pointed. For instance, finance people always refer to the manage participation in fund profits as a “carried interest”. But as Sheppard stresses, the IRS calls that a “profits interest” and they have specific valuation rules. And she is clearly not happy with how the popular press missed the real issue with Bain’s use of Cayman Islands investment vehicles:

Private equity. Issue: Cayman residence of funds.

The places where some of Bain Capital’s numerous private equity funds are organized — Bermuda and the Cayman Islands — are tax havens. The widespread use of tax and banking havens by large U.S. multinationals and investment funds as an escape hatch from U.S. tax, banking, and securities laws, while offensive, is tolerated and even encouraged by U.S. law and administrative practice.

Mainstream newspapers howl that Romney has assets in the Caymans, but the reality is worse. Bain Capital invests in the United States and other countries, including China, but it organizes its funds in the Caymans to keep investor lists secret while availing itself of British corporate law. Every other investment fund does the same thing.

The practical effect of Cayman registration is that if investors were of a mind to lie to their home governments about the existence of or income from their Bain investments, the secrecy of investor lists makes it easier to do so. As the Romney campaign pointed out, all these investors still owe tax to their home governments (including the U.S. government) on their Bain income.

She flags the Marriott tax shelter as improper, some treatments as particularly questionable, such as the intramarital/intrafamily transfers and the notorious show horse:

Ann Romney’s Olympic horse. Issue: Is Rafalca a business?

Probably not. Before the Romneys can claim any passive loss deduction for Ann Romney’s share of Rafalca’s expenses, the LLC that owns the horse, Rob Rom Enterprises, has to be engaged in a trade or business. For that, it has to satisfy the hobby loss rule for horses, which has a rebuttable presumption of a business if there is a profit in two out of seven years (section 183(c)). Rob Rom has owned Rafalca for six years.

Rafalca’s rider said she would be bred when her show career was over. That may be a stretch, because the horse is 15 and has been in strenuous competition for 11 years. If she could produce a foal or two, it would have to be sold for $500,000 or more.

Moreover, the prize money in dressage competitions doesn’t come close to covering the roughly $120,000 per year for Rafalca’s upkeep and transportation from California to European competitions. So it is unlikely she would ever make a profit for her owners

I encourage you read the article in full. It is very accessible and informative. In closing, Sheppard observes:

It is often said that the rich get rich and stay rich by watching every penny. Romney certainly fits that description. He looks for every tax angle, to a degree that is unbecoming in someone who would be the executive in command of the administrative apparatus that enforces the tax law.

And that is what is so bizarre about Romney on this issue and many others. He’s not a Perot, who entered politics abruptly and therefore could be expected to have some trouble in making the transition from corporate life to being on the public stage. But Romney is an archetypal member of the 0.1%. He is so far removed from ordinary Americans that he can’t grok what proper behavior is even if he were to try.

Print Friendly, PDF & Email


  1. jake chase

    Well, the entire purpose of the Income Tax is to make certain the inherited rich stay rich, so this carping about Romney’s returns is a bit disingenuous. Taxes are simply not imposed on the super rich. If they were the Internal Revenue Code could be two pages long instead of 10,000+. All those other pages exist to create the loopholes which Romney and the rest are busy exploiting 24-7 while working people are crushed by the millstones of rent, taxes and interest.

    Romney like Bush I and Bush II is nothing more or less than a dimwit plutocrat cartoon character. It is unlikely that he has the ingenuity to evade taxes, and this job is generally handed off to lawyers and accountants who spend their days and nights dreaming of sophisticated dodges for the benefit of their wealthy clients and live high themselves on a small percentage of the savings. The tax system is just as corrupt as the banking system and the corporate legal system and every other system with which we have been systematically swindled by our captive Congress. I fear that posts like this one betray a high degree of naivete and not much more than that.

    1. Maximilien

      “….while working people are crushed by the millstones of rent, taxes and interest.”

      ‘Twas ever thus. Here’s a quote from Gibbon’s Decline and Fall of the Roman Empire (I read and can recommend the abridged version):

      “The obscure millions of a great empire have much less to dread from the cruelty than from the avarice of their masters; and their humble happiness is principally affected by the grievance of excessive taxes, which, gently pressing on the wealthy, descend with accelerated weight on the meaner and more indigent classes of society.”

  2. ambrit

    What is ludicrous in the extreme is the spectacle of the political establishment openly promoting what is at the least financial criminality. In “the Olde Days” the elites had the sense of shame to guide them towards pious hypocracy. Right now I’d settle for a Teddy Roosevelt in the White House, much less a Franklin Roosevelt.

    1. Maximilien

      I’d settle for ANY past President up to and including Carter.

      As for contemporary people, I don’t want Pete the Politician. Give me Bob the Baker, Ken the Carpenter, or Nancy the Nurse. I’m sure any of them would be able to dress up real nice, read prepared speeches, give rehearsed answers to vetted questions, and sign their name on new legislation. And (surprise!) they might just REFUSE to endorse the kind of pernicious legislation that the current President seems so fond of.

      As many have said, anyone who WANTS to be President should be immediately disqualified.

  3. Tim

    Not to be nasty but did you Yves, file your FBAR from when you were living in Australia because just about nobody did. Its 10,000 in aggregate and included super annuation, insurance, even prepaid and grocery store cards. (I agree its totally different for someone living in Australia as you were to have to file an FBAR vs someone living in the US with accounts in Australia or Switzerland to have to file however, the government doesn’t take the same view at least until a few weeks ago).

    1. Tim

      The statute of limitations is six years so I don’t think you have anything to worry about. I believe there was announcement a few weeks ago for people who have lived outside the US within the last six years can back file without penalty although you run the risk of getting audited if anything is “fishy”.

    2. Bill the Psychologist

      Good try at a switcheroo Tim, make Yves’ taxes the subject rather than Romney’s like a good troll.

      1. Tim

        I only bring up a very valid situation. Most people who are required to don’t file the FBAR. There are plenty of other issues with Romney’s taxes that can be discussed. Bringing FBAR without context about the filing or lack therof is not a particular bright idea in my mind if you are trying to win an argument.

        1. Stan Musical

          Yeah I once put a nick in the door of the car next to mine in a parking lot, the proctective strips just didn’t line up! And I just drove away, though I should have left a note with my number, or maybe $10 to cover the cost of a small bottle of touch-up paint.

          This other guy plowed into a full school bus with his 18 wheeler, causing it to explode, and drove away unscathed.

          But it’s the same damn thing, dontchaknow!

    3. Yves Smith Post author

      Yes, I complied with the law. Scrupulously, I might add.

      The reporting threshold is $10,000 in a single foreign bank account. I had 2 accounts, one business, one personal. I kept the total of BOTH below that level the entire time, never breached it even a single day.

      So don’t get sanctimonious with me.

      Funny, I was told that filing that report, which is what I wanted to avoid, was an audit red flag, that was my motivation for avoiding it, since once you get audited, you are more likely to be audited regularly. But Romney has apparently never been audited. Would love to know what sexual favors were exchanged for that to happen. Or are political figures audited less than normal people because it might be seen as political retaliation of some sort?

      1. Tim

        I am not trying to be sanctamonious its just I know of someone living in New Zealand who was not at all high income get hit with big six figure fines over FBAR. He is himself is quite curious given his own experience what exactly is in the content of Romney’s returns given he when hearing about the FBAR requirement voluntary approached the IRS and got hit for a 150,000+ penalty due to selling his residence in New Zealand. I will have him come over here and comment on his situation.

      2. Kunst

        As proof that he had paid all the taxes required by law, Romney said to Muir that he had been audited in the past.

        The Romney campaign did not respond Monday to questions about when, specifically, the audit took place.

        “The audit did not result in a fine or penalty. Mitt Romney has fully complied with U.S. law and he has paid 100 percent of what he has owed,” said Ryan Williams, a campaign spokesman.

        Brad Malt, the trustee who handles Romney’s personal finances has said there was an audit that took place more than a decade ago.

        “Governor Romney has not been audited by the IRS in the last 10 years,” Malt said in January.


        Note that it does not say that he did not pay additional taxes or interest as a result of the audit.

      3. Just Me


        Regarding your comment about your 2 accounts in Australia. For clarity, it is not a per account $10K threshold, but rather an ‘aggregate’ $10K that triggers the FBAR requirement. So, if both of your accounts added together ever exceed $10K USD you were required to file the FBAR. If you had not done so, in theory, in the 2009 OVDP, you were required to join and confess up to your failures and pay a penalty equal to 20% of your offshore holdings. If you were living overseas, and happened to own a home, that had any minor rental income, than the value of the home also was used in the calculation of the penalties. Under the current VD programs, it is all assets, period, and not just bank accounts.

        Now, I really do not recommend that you should have done so, as those that did, came to find out that the IRS allowed no discretion and would have treated you as if you were a willful tax cheat living in New York, and moving money off shore to hide it from the IRS.

        So, Tim’s understanding of the FBAR requirements and penalties for failure is correct.

        1. Tim

          As to my original comment as of a few weeks ago supposedly they have announced procedures for people living outside the US and ONLY living outside the US to backfile these forms without “penalty.” However, I suspect you are quite right that having to file these forms increases the chance of getting audited. Someone moving from the US to Australia lets say with a moderate amount of assets actually has a bit a catch 22 with regards to the ATO(Australian Tax Office) and IRS. If you go over 10,000 and have to file and FBAR you increase your chance or an IRS audit however, if you stay under 10,000 on Australian accounts and leave anything over back in the US you have to declare that to ATO and run the risk of future ATO audits.(Remember to many countries Australia included the US is actually in many ways a tax haven) so having money in the US as an Australian resident can be a red flag to ATO. The exception I would tend to think to this would be to maximize assets in an IRA and 401k which are protected by the US Australia Tax Treaty. The other option of course is to expatriate which in fact until 2004 was mandatory to take up AUS citizenship(as AUS did not allow dual nationality). The ATO I suspect is also somewhat “generous” to new “immigrants” to Australia in terms of foreign souce income reporting vis a vis the US buts that a whole nother can of worms.

        2. Yves Smith Post author

          Did you read what I said????? Reading comprehension fail. I never had enough in Oz to be subject to filing.

          I had 2 accounts in Oz, I kept the total of both under $10K. And I did not have any other assets in Oz. I didn’t buy real estate, kept my IRA in the US, etc. In fact, Oz taxes assets you bring into the county at 15%, or at least did back then, so there was a separate incentive not to. I rented a furnished apartment. I didn’t get local credit cards of any kind, used US cards and paid them from US accounts, considerably reducing the need to keep funds in Oz.

          Don’t try busting my chops over this. I was careful re compliance.

          1. Stan Musical

            Hi Yves,

            Mostly a lurker here, love your blog. This discussion, as I sarcastically indicated above, seems like, intentionally or not, a mis-direction from the issue at hand. Good on you for responding, but I think “dont’ get sanctimonious” would suffice :-).

            And the attention paid to this by Tim etc shows how deeply the system of taxing the working classes while letting the rich off, which was mentioned at the top, pervades our consciousness (and the law). Whether or not the gov’t would expend the energy to chase down those not in compliance with reporting, obviously a whole lot of people believe in this upside-down system.

            Until, I believe, 2009 one was considered residing in the US if one spent 183 days of the year here; it was then changed to 31 days. So if you are rich and offshore your money you’re fine, but if you work abroad yet come back for visits and spend more than 30 days here you’re a “resident” here and also a resident in the other country and thus double taxed.

            So rather than imply this system is at all just by engaging these people bugging us (former or current) expats about our compliance, I’d just reframe the issue, actually put it in perspective. Cheers.

  4. E Forster

    All this does is perpetuate the myth that income tax is generally a burden on income taxpayers, thus demanding public opprobrium for defaulters, but on the contrary income tax tends to be wholly an indirect tax on consumers, since they bear the ultimate burden of all taxes incurred in the supply chain. Governments prefer the use of income taxes to confuse the issue of who pays tax and when, but not least to conceal the huge burden that in reality entirely falls on consumers. Governments could avoid the problem of unreliable third party tax collectors, i.e. some notable income taxpayers, by taxing consumption directly. However, the cat would be out of the bag and Governments could no longer depend on fleecing unwitting consumers by the back door.

    1. bluntobj

      Actually, Income tax is a burden. If you look at the stats, you’ll see that most of the income from the wealthy is capital gains and dividends, which is taxed at half the rate of income at that level.

      Income tax falls on the people who work, and they take it in the shorts both ways, as consumers and as taxpayers.

      1. Maximilien

        What is seldom mentioned is the withholding tax on earned income which most wage slaves are subject to. This tax has the salutary effect (for businesses) of helping to keep workers poor and living from cheque to cheque until refund time. Businesses have found that cash-strapped workers tend to be more docile and agreeable to company demands—legal or otherwise.

        Note that the wealthy, however, are often exempt from withholding taxes, and are permitted to remit their taxes on what is almost an honor system. Gee, no wonder so many of them cheat….the government is incentivizing them to do so!

        1. Stan Musical

          And don’t forget the blindingly obvious Elephant in the Room point: 60% tax on income to a millionaire means no new Carrera GT this year. 20% tax on income to someone supporting a family on 40k a year means some kind of hardship they’d otherwise be free from.

          Maybe not letting MR off on this point will stir up some much-needed debate about tax rates since Reagan.

    2. liberal

      …since they bear the ultimate burden of all taxes incurred in the supply chain.

      That’s simply false. The tax incidence depends on relevant supply and demand elasticities. The claim that the incidence of the tax is 100% on the consumer in every situation is wrong, wrong, wrong.

      1. E Forster

        You may argue otherwise, but the facts are well known to every business that remains solvent: the end customer’s money for goods and services rendered has to cover the accumulated costs of taxation associated with their supply, which also includes employees’ payroll taxes. When employees spend their take home pay on goods and services they are similarly subject, effectively, to an implicit consumption tax, hidden and unknown. In essence, employees have agreed to provide work in exchange for their actual take home pay and then make a heavy contribution to taxation when they spend it.
        The truth is that employees neither earn what they think nor are taxed what they think, and for all of us the more we spend the more tax we pay. No wonder that government spending gets out of control when few voters have any idea what they really pay in taxation.

  5. bluntobj

    Not sure that the rumored IRA balance is not possible. Clever use of the variety of IRA plans (SEPs included) would allow him to contribute the stock or partnership interests at his basis into the IRA. Then the value of the assets could be boosted with investment and other operational transactions. Add in some leverage in the IRA pool, plus asset accumulation during the dot-com bubble and the real estate bubble, and that $100m figure may be possible. And kosher.

    I don’t see why Romney is being crabbed for this, as this is standard practice for all elite D’s and R’s anyway. Plus, the advantages for the megawealthy are written into the tax code, in ways that we ordinary worker ant’s don’t see. David Cay Johnson has some excellent work on this subject, and is worth an amazon search. All very ordinary and legit, as per US Tax code.

    Which brings us to the true issue, which is that while there will be rumblings and noise about his tax returns, the opposition will not press to hard. Making moves in the stadium is one thing, but the last thing the elites in the owner’s box want is to wreck the stadium, because they (D’s and R’s both) use the same tax advantages to shelter their wealth.

    1. Wat Tyler

      So it’s OK because everyone does it ?

      That excuse didn’t work with my Mother 60 years ago and I don’t accept it now. I also don’t accept that both parties are equally to blame – that is the excuse R’s give when they cannot lie their way out of something. Conservatives are responsible for 90% of this mess but they have the money to sell big lies.

      I think the core issue in this campaign is that ,in the battle of values, tribalism always wins.


      1. bluntobj

        Er. What?


        Where did I say it’s ok? I said its all legit and as per tax code.

        Then I go on to mention that it’s set up that way solely for the purposes of the elites, and they won’t rock the boat enough to change it.

        Oh, and conservatives responsible for 90%? and because D’s do it to it excuses the R’s?

        Or that only R’s should be vilified for being corrupt elites? It’s like saying “this half of the apple is completely rotten, and this half is pristine!”

        Both parties are up in the owners box, walking away with the cash, while you are on the stadium screaming your support for the D team and shaking whatever color pom-poms the D’s are fielding this year.

        Please consider the possibility that the whole stadium is rigged to distract you from the fact that elites and plutocrats are farming you for cash, and the more fervent your support for your team the more accepting you will become for being tax and cash farmed, restricted, controlled, and used.

        Step outside the stadium and look at what a marvelous structure for control it is, and know that both sides want it kept that way.

  6. psychohistorian

    Laugh the global inherited rich out of control of our society.

    Social equity and fairness is a joke, right?

    1. Maximilien

      He won’t, you can be sure of that.

      In our lives there are two certainties: death and taxes. In Willard’s life there is only one—and it ain’t taxes.

    2. Kunst

      Not showing his tax returns looks bad. That can only mean that the returns themselves look even worse. He’s hoping that no one really cares. It’s going to be a long 3- months to the election.

  7. The Gizmo51

    I must admit that the mitt and ryan don’t hide the fact that they are only addressing the issues and concerns that will improve the lives of themselves and their fellow elites and couldn’t care less about anyone else.

  8. Jim D.

    My question about the Romney tax returns and the issues which have been raised about their contents is this: Does the administration know what is in the Romney tax returns for recent years, since his returns would have been filed with the IRS, which reports to the Treasury, which reports to the president. I am sure that there are ethical, and perhaps legal prohibitions against the Obama administration snooping into Romney’s tax returns. Nevertheless, could the administration know more than it is letting on about Romney’s tax filings because it has access to them through the IRS?

    1. S. D. Jeffries

      What difference does it make whether the administration knows what’s in Romney’s tax returns? They couldn’t use anything they might know for the benefit of the president’s campaign unless Romney had disclosed it first. I don’t really care what might be found in an examination of his returns; I have already formed an impression of the kind of man he is – no core, no principles, no empathy, sympathy or compassion, self-righteous and condescending. Learning what’s in his returns is not likely to change my mind.

      But I do hate to see him slither out from under the obligation accepted by every other presidential candidate in this regard for decades, just because he thinks he can. It worked in his run for MA governor, though, so no one should be surprised that he feels entitled to the presidency without doing so.

      1. Jim D.

        You miss my point. If the Obama campaign knows what is in Romney’s tax returns, it will know how to use the tax issue to campaign for undecided voters for whom Romney’s tax payments could be relevant. Obama will need more voters than those of us who have already made up their minds.

  9. John



    when asked if Romney payed taxes:

    McCain says,

    “I am absolutely confident that he did NOT pay taxes.”

    Then he says, “I mean he did pay taxes”.

    OMG talk about Freudian slip of speaking the Truth

    Next comes the lie that Theresa Heinz taxes weren’t released in the 2004 presidential race. Was she running for president McCain? John Kerry’s taxes were released and I do believe they included the Heinz fortune unlike McCain’s taxes which don’t include his wife Cindy’s fortune.

    To sum it up, “We, the American people, are absolutely confident that Romney did NOT pay taxes.”

  10. Eddie Torres

    Back in 2006, Senator Carl Levin addressed a Permanent Subcommittee on Investigations Hearing, titled “Failure to Identify Company Owners Impedes Law Enforcement:”

    “The United States has been a leading advocate for transparency and openness. We have criticized offshore tax havens for their secrecy and lack of transparency, and pressed them to change their ways. But look what’s going on in our own backyard. The irony is that we don’t suffer from lack of transparency – there is just no information to disclose. And when other countries ask us for company owners and we have to stand red-faced and empty-handed, it undermines our credibility and our ability to go after offshore tax havens that help rob honest U.S. taxpayers.”

    I wonder if Bain is one of those unknown “company owners” Levin mentions.

    [ http://www.levin.senate.gov/newsroom/speeches/speech/statement-of-senator-carl-levin-at-the-permanent-subcommittee-on-investigations-hearing-ifailure-to-identify-company-owners-impedes-law-enforcement-i ]

  11. Mark Sprague

    I haven’t enjoyed a Republican ticket this much since Goldwater ran against LBJ. It is hard to believe that a presidential candidate’s motivations could be so transparent.

  12. Kunst

    Well, if Mitt doesn’t want to release his tax returns, how about if he just tells us the AGI and amount of tax paid for each of the last ten years or so? Just twenty bottom-line numbers, is that so hard?

    What is he hiding?

  13. Crazy Horse

    One of the many good things I’m looking forward to from the Romney/Ryan presidency is the new tax policy. Filing will be so much simpler. Under the category of “dependents” just enter the current population of the US. Under “tax liability” simply enter “same as Mitt.”

    One of the amusing things about Mitt’s “what tax returns?” defense is how out of date his avoidance tactics appear to be. Almost as if he had devised them himself. Swiss bank accounts, running the business out of the Caymans? The Cayman banking business consists of a handfull of modest buildings filled with post office boxes that pretend to be corporate headquarters. By contrast, Panama City is a hive of new 40 story office towers as befits the fourth largest banking center in the world. Mitt’s little Bain swindle hardly would qualify as an account for a junior officer of one of the leading Panamanian banks. Not when you are dealing with drug cartels who deliver truckloads of currency that they simply weigh rather than count, the fruits of Communism, Russian and Chinese style, or the off-the-books profits from the too-big-to-fail derivatives casinos on Wall Street.

Comments are closed.