Legislators Begin Massive Crackdown on Tax Loopholes

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Hedge funds can earn billions—sometimes, they can even earn billions for an individual, as is the case for hedge fund manager, John Paulson. But Senator Carl Levin made it clear at a Senate committee hearing last week that there is one entity that is not profiting from hedge funds. That entity is the U.S. government.

Senate committee members argued that hedge funds were skirting billions in taxes through the use of a financial product known as a basket options. The IRS warned banks about selling basket options to hedge funds back in 2010—but not everyone took heed. In fact, scandal-prone Barclays Bank continued selling the product through 2013.

Though the Senate subcommittee does not have the power to penalize companies like Barclays, some experts speculate that the recent hearing will be seen as a catalyst for stricter enforcement of tax law. Attorney Joe Garza predicted in a recent statement, “Policy makers will want to tighten up the language surrounding stock ownership and long-term capital gains. Their goal will be to prevent financial institutions from playing with those definitions.”

That would mean we are only at the beginning of a tightly controlled era that would include more crackdowns on foreign bank accounts and more scrutiny for hedge funds, big banks, and corporations. Garza believes that once that happens, investors will begin using much more traditional means of maximizing their profits.

That is especially bound to happen if legislators are successful in putting a halt to corporate tax inversions. U.S. Treasury Secretary, Jacob L. Lew recently argued in the Washington Post that by moving headquarters overseas in order to save on taxes, corporations are allowing far too much tax burden to fall to small businesses and individuals. If Lew is correct, getting rid of “inefficiencies and special-interest loopholes,” will allow the U.S. to impose an overall lower tax rate.