How Do H-1Bs avoid paying taxes?

Date: Thursday, August 15, 2002 8:18 PM

*** H-1B NEWSLETTER ***

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In the 4/30/2002 newsletter "Do H-1Bs Pay Social Security Taxes?"
Totalization was discussed. These international agreements allow H-1Bs from
select countries to avoid paying Social Security taxes. The largest numbers
of H-1Bs come from countries that don't have Totalization agreements but
they still manage to avoid paying taxes - even income tax.

Donald L. Barlett and James B. Steele are renowned for their investigative
reporting and they have solved the puzzle of how H-1Bs avoid all taxes. They
used the bodyshops TATA and Syntel as case examples but this would be
applicable to all of the bodyshops.

Here is how the tax dodge works. This example uses India but of course it
would work in any country.

* A company in India (in this case Leading Edge) hires someone that will
become an H-1B.
* Leading edge subcontracts them to a bodyshop like TATA or Syntel.
* TATA gets them a job at an American company.
* Leading edge deposits the pay check directly into the employees Indian
bank account.
* The H-1B is given a living allowance that is free of all U.S. taxes.
* TATA also supplies them with housing so a minimum amount of money is
transferred to the US.

The irony of this legal tax avoidance is that the H-1B is entitled to
services that are funded by the taxes American workers are paying. As an
example they are entitled to send their kids to our schools if they get a
family visa and they use our city parks, roads, and other infrastucture.

This is a win-win situation for the H-1B and the bodyshop because this tax
free status allows them to underbid any US citizen that's saddled with
Social Security and income taxes. Once this tax dodge is understood it's
easy to understand why foreign owned bodyshops are dominating the H-1B labor
market in the US. H-1Bs that avoid taxes can work for less than a US citizen
so that gives them a huge advantage in the job market.

These money transfers are unfortunately legal but even if fraud is involved
they have little chance of getting caught. The IRS concedes that they don't
know how to track foreign workers. The IRS problems are understandable
because the DOL and the INS don't have databases to track them.

I have deleted most of this article to highlight the H-1B material. I highly
recommend going to the site to read the rest of it.

http://www.twbookmark.com/books/46/0316811351/chapter_excerpt10250.html

The Great American Tax Dodge
by Donald L. Barlett and James B. Steele

The Tax Cheat Next Door

$1 Million a Month and No Tax Return

Scenes from the new America:

•A Fortune 500 company hires a computer programmer from India to work on a
specific task for a fixed period of time. The programmer is employed by a
consulting firm that specializes in placement of foreign workers. The
programmer receives a tax-free paycheck – no withholding for U.S. income
tax, Social Security or Medicare taxes, state or local taxes.

[snipped text]

Invisible Workers and Untaxed Profits

None of this is to suggest that you need establish a mysterious offshore
link and work for companies based in tax havens to avoid paying U.S. income
tax. Truth to tell, many people in the computer field, especially
programmers and systems analysts at the largest companies in America – from
Chrysler Corporation to the Baby Bells, from Bank of America to Unisys – pay
not a penny in income or Social Security taxes.

How can this be? Consulting and contracting firms recruit so-called
temporary workers in other countries, especially India, and bring them to
the United States under a special visa called H-1B. They farm out these
foreign programmers to large U.S. companies that do not want to add
permanent employees to their payrolls or to replace higher-paid American
workers whose jobs have been eliminated. Still other clients are state
governments that contract out computer work.

During the 1990s, nearly 1 million foreign computer technicians came to the
United States to work for a maximum of six years under this program, and
then, in theory, return home. Most decided to stay. If some members of
Congress – and computer and software companies like Microsoft, Intel, and
Hewlett-Packard – get their way, the ranks of the foreign workers will swell
to 2 million this decade.

The reason: Computer companies are lobbying lawmakers to raise the cap
limiting the number of such visas to 200,000 a year. Under existing law, the
cap was slated to fall from a high of 115,000 in year 2000 to 65,000 in
2002. Fortune 500 companies complain they cannot find enough qualified
American workers to fill openings. Critics charge the companies want to
drive down wages by hiring cheap foreign labor. A computer industry magazine
finds this perfectly acceptable: "Companies have a fiduciary responsibility
to keep labor costs low. If U.S. technology companies cannot find highly
trained, highly motivated American employees at a competitive cost, then a
shortage does exist. And if companies say they want to hire more skilled
foreign workers because those workers are cheaper, we should believe them –
and increase the number of visas issued."42

In addition to their willingness to work for lower salaries – as much as
$25,000 lower – many foreign recruits, at least when they first come to this
country, enjoy another advantage over American workers competing for the
same jobs: They don’t pay U.S. taxes.

Visit most any large American company and you will find two people working
on the same computer project. One is a permanent company employee who pays
taxes through withholding. The other a temporary employee who enjoys the
kind of payday that more than 100 million American workers can only dream
about – a full paycheck with zero deductions.

Because they are employed by the consulting firm that recruited them, many
of these foreign workers are paid either in cash or by check – and no money
is withheld for U.S. income tax, Social Security, Medicare, state, or local
taxes. What’s more, they often live in rent-free apartments with free meals,
all courtesy of the consulting firm that hired them. Still others receive a
paycheck that is banked in India, and, while they’re living and working in
this country, they’re paid an "allowance" that is also free of all U.S.
taxes.

This widespread practice came to light during a little-noticed civil lawsuit
in which one consulting firm accused another of raiding its employees from
India. The legal action was filed by Tata Consultancy Services, a division
of Tata Sons Ltd., of Bombay, against Syntel Inc. of Detroit in U.S.
District Court in Detroit in 1990. The dispute dragged on for years, during
which time numerous Tata and Syntel employees, most of whom had come to the
United States from India on temporary visas, testified about the tax-free
life of foreign programmers.

Among those questioned was Sujatha Subramanian, a female programmer from
India, who, like others, was brought to the United States by Tata but later
left to join Syntel. Technically, she was employed by a company in India
called Leading Edge, which subcontracted her to Syntel, which assigned her
to computer projects at Ford and Chrysler. She received a paycheck from
Leading Edge that was deposited in rupees in a bank in India and she
received a living allowance from Syntel in U.S. dollars. The following
exchange is with a Tata lawyer.

Attorney:What other kind of benefits are you receiving?

Subramanian:None from Syntel.

Attorney:None? Do you get your cost of living allowance from them?

Subramanian:Yes. And I’m covered by health, covered for health and medical.
. . .

Attorney:Do you pay taxes here in the United States?

Subramanian:No.

Attorney:Only in India?

Subramanian:Yes. . . .43

In one of the cruel ironies that run through the American tax and labor
systems, foreign workers who pay little or no U.S. taxes receive health care
coverage through the contractors that place them, while millions of American
workers in jobs with even lower wages pay taxes but have no health care
benefits. Their employers do not provide coverage, and individual policies
are too expensive. Yet the taxes they pay go in part to pay for the health
care coverage of the poorest of Americans who qualify for Medicaid.

Another programmer, Rengaswamy Mohan, who was contracted out to work for
Deloitte Touche in Florida, spoke candidly about his tax and employment
status and the interwoven relationships between Syntel and other consulting
firms in India. While working in the United States, Mohan received a
paycheck from an Indian firm, Mascon, which was deposited in a bank in
India, while Syntel gave him a living allowance. When asked during a
deposition whether taxes were withheld from the monthly check of $2,270,
Mohan replied:

"No. Actually, I was told that these were all the expenses and I was sitting
as a consultant from India."44

And a nice place to sit it is, the tax-free life in America. But Mohan also
enjoyed another fringe benefit. He received a finder’s fee for referring
another programmer to Syntel.

Attorney:How much did you get?

Mohan:I don’t remember, but, you know, I get like, so long as she is in this
[Deloitte Touche] project, 50 cents an hour.

Attorney:Fifty cents an hour for each hour she works on this project?

Mohan:Yes.

Attorney:. . . For how long? Is that forever? As long as she keeps working –

Mohan:So long as she is in this project.

Attorney:That’s a good deal.45

A really good deal, considering the programmer was his wife.

None of this is to suggest that every Syntel programmer pays no taxes. Some
eventually go on the company payroll and are treated like other permanent
workers – taxes are withheld from their paychecks. But court records show
that for many, such is not the case. In this, Syntel is not alone.

In 1998, an Indian programmer in Chicago, worried that he might lose his bid
for American citizenship, wrote a letter to the U.S. Department of Labor
expressing concern over his off-the-books income.

Employed by a computer consulting firm in Chicago and farmed out to
Ameritech, the programmer explained that when he came to this country he had
been compelled to become part of a complex scheme by the consulting firm to
evade taxes. He was not clear on all the elements that made up the fraud,
but a key component was that his pay came partly in cash:

They told me that in this way neither they have to pay taxes nor I have to
pay taxes on that amount. When I objected it, they told me that most of the
other employees are paid in similar way. I asked my couple of colleagues . .
. everyone communicated that they are paid in same way. Part of the payment
[almost 30 percent of the salary] they receive is not taxable and paid to
them every month. Now I realize that this practice . . . is illegal. I don’t
want to be part of this system, but presently I do not have any
alternatives.46

Where, you might ask, is the IRS in all of this? The answer is: Nowhere.
"Immigration is a big problem for IRS," confided a former high-level
Treasury Department official. "It doesn’t know how to track foreign
workers."47

If Congress has guaranteed that the IRS is incapable of finding people who
physically exist, whether they be foreign workers or the Wildensteins of the
world, then what are the chances the agency will detect paper profits?
Virtually none.

[snipped text]

The Perfect Tax Return: Always a Refund

While tax dodging among investors is rampant, fraud within another part of
the population is even more widespread. That would be the fastest-growing
segment of the U.S. economy: the self-employed.

Historically, this group has been a major source of taxpayer fraud and
error. Studies have shown "they are less compliant" than other taxpayer
groups, and that they "appear to be intentionally non-compliant more often"
than taxpayers who receive a weekly paycheck.48

What accounts for this reputation? Many of these businesses are operated on
a cash basis – nail salons, beauty salons, restaurants, mom-and-pop grocery
stores, landscapers, child care providers, antiques dealers, independent
auto repair shops, plumbing and heating contractors, truckers, painters, and
electricians. In addition to depending on cash, these businesses are subject
to fewer requirements for information returns, such as the 1099 notices that
banks must submit to the IRS reporting interest payments. Also, there’s
usually no withholding in these or scores of other occupations and
professions, such as lawyers, accountants, computer programmers, physicians,
and nurses. Again, no paper trail.

That’s why one study carried out in the late 1980s – and which has never
been updated – found that even back then the self-employed did not report 25
percent of their income. Evasion and avoidance across the board have
escalated since then. In 1994, another study found that fewer than half the
self-employed paid the Social Security and Medicare taxes owed.

Let’s put this in more personal terms. Suppose the self-employed now report
60 percent of their income, a charitable assumption. Multiply your annual
income, say $45,000, which you receive in a weekly paycheck with taxes
already deducted, by 60 percent. That comes out to $27,000, which you enter
on your Form 1040. With the stroke of a pen, $18,000 of your income
disappeared from the taxman’s view. The savings: $1,377 in Social Security
and Medicare taxes and $2,400 in income tax, thereby providing an extra
$3,777 in spending money.

While fraud has always existed in this area, the volume and scope have been
shooting up. One reason is the emergence of involuntary self-employed
people, like the computer workers at large companies who are replaced by the
nontaxpaying foreign computer workers. These displaced workers, who once
paid taxes, are forced to go out on their own. They rent themselves out,
doing the same work but for less money and no health care or other fringe
benefits. These embittered former corporate employees often feel no special
obligation to prepare an accurate tax return.

This is especially true when they see the effect their independent status
has on their tax bill. It goes up. Remember the health care worker who pays
total taxes at a higher rate than the president of the United States? Her
largest tax bill is for Social Security and Medicare. She must pay both the
employer’s and employee’s share, which adds up to 15.3 percent of her
income. Add to that the federal income tax and state and local taxes.

Not surprisingly, the self-employed are keeping a larger share of their
income for themselves than in the past. A Los Angeles economic development
official says, "It used to be ‘a dollar for the IRS, three dollars [in
unreported income] for me.’ Now it’s ‘a dollar for the IRS and eight for me.
’"

[snipped text]

Let us review. Tax preparers who craft phony returns for others and don’t
bother to file themselves. Self-employed persons who write off their
personal expenses or deduct their hobby losses from their income. Concealed
capital gains from the sale of stocks. Immigrant workers who live tax free.
Independent businesspeople whose living expenses are paid for by offshore
corporations. Poor people – and some not so poor – who collect earned income
tax credit refund checks to which they are not entitled. Rich people who
file returns and don’t pay taxes. Rich people who don’t even file.

As for the IRS cracking down on these schemes, there’s not much chance,
given the agency’s current level of funding. That’s really good news for
those who are engaged in the latest mass tax-dodging craze: stashing money
and assets in secret accounts in the tax havens of the world – beyond the
reach of the IRS.

Copyright © 2000 by Donald L. Barlett and James B. Steele

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