ProPublica – Reporting Highlights

• Tax Dodge: Most working Americans have to pay Medicare taxes, but some of the richest figures on Wall Street have found a way to opt out, a ProPublica investigation found.
• Accidental Loophole: Nearly 50 years ago, Congress tried to fix one financial abuse but unwittingly created an obscure loophole that these billionaires exploit to avoid Medicare taxes.
• Battling Abuse: The IRS only recently got tough on people it viewed as abusing the loophole, but it is unclear if the agency will be able to end the practice.
• But high-priced tax advisers, wielding a once-obscure bit of the tax code, found a way to make that obligation vanish. By carefully channeling profits through a company in a way that invokes that obscure provision, even a Steve Cohen, with a tax return showing he received hundreds of millions in profits from his hedge fund, can exempt that income from Medicare tax.

Over the past three years, ProPublica has mined the tax records of the rich to detail the many ways they avoid taxes. We’ve focused on basic structural features of the U.S. system that advantage them. We’ve uncovered maneuvers of questionable legality that seem to have escaped the notice of the IRS. The Medicare tax loophole occupies a gray area. The IRS definitely knows about it, but it’s unclear if the agency will be able to stop it. The potential of the loophole first surfaced in the 1990s, and the IRS soon expressed the view that active business owners shouldn’t be allowed to exploit it. It was only in recent years, however, that the agency got tough. Today, the IRS continues to battle what it considers a serious abuse, waging a rare, long-shot campaign to prevent some of the nation’s wealthiest citizens from using the loophole. [h/t Pete Weiss]