Remember the LA Times story, “the fisherman and the tax man” (5/30/10) about fishermen seeking, and being denied, disaster relief after the BP oil spill? "I worked for an uncle last year who paid me in cash. The BP guy wanted my tax statements, but how can I pay taxes if everything I earned was in cash?"
How did the IRS answer that question? Did it examine boat owner records, find any reporting violations, any evidence of worker misclassification, the focus of the White House Task Force on the Middle Class that same year? No. The story isn’t that some bayou deck hands don’t pay taxes, the real story is that the IRS doesn’t enforce the tax laws in the fishing industry.
The tax laws specific to fishermen (IRC § 3121(b)(20) and 6050A) were enacted in 1976, six years after the Supreme Court ruled that captains and crew were employees of the vessel owners. The IRS went to work assessing back taxes and the boat owners went to work on Congress to help them escape their employment tax debts. Originally designed to help the small-boat fisherman, the bill Congress passed effected fishermen on vessels with up to10 crew - just about the entire fleet - by changing their tax status to that of self-employed if they received only a share of the catch and if the amount of that share depended solely on the amount of the catch. The amount and the percentage of the catch paid out to the crew was to be reported to the IRS on a 1099-F.
That same year the Magnuson Fishery Conservation and Management Act granted American fishermen the exclusive right to fish within 200 miles of our shores. Overfishing by foreign vessels heavily subsidized by their governments was transferred to the expanded American fleet armed with their own government subsidies, tax breaks - including the new employment tax subsidy - and a favorable management regime. Fishery management councils made up of fishing industry representatives exempted from the federal criminal conflict of interest laws eventually concluded that eliminating the problem of “too many boats chasing too few fish” could be achieved by simply privatizing the public’s fish.
The mechanism for placing public wealth into private hands is the Catch Share, described by the National Oceanic and Atmospheric Administration (NOAA) as “a general term used in several fisheries management strategies, which include Limited Access Privilege Programs (LAPP) and individual fishing quotas (ITQ), that dedicate a secure share of fish to individual fishermen, cooperatives or fishing communities for their exclusive use.” Quotas are gifted to selected industry participants, and then on can be bought, sold, and leased. The first ITQ program debuted in the Mid-Atlantic Surf Clam/Quahog fisheries in1990. Two years later the government reported a significant loss of crew jobs and crew pay in those fisheries as fewer vessels concentrated quota and deducted the cost of the quota from the proceeds of the trip, reducing the crews’ share. In essence, “crews were working harder and earning less.” NOAA’s 2010 five year review of the Alaskan crab catch share plan reported, again, a significant loss in crew jobs (approximately 1000) , and that the remaining crew were working harder and earning less. A review of the Gulf’s red snapper program showed similar results. Figures recently released on the New England groundfishery sparked renewed calls for disaster relief for a fleet devastated by catch share management.
The 1992 mid-Atlantic ITQ review raised concerns over the manipulation of the quota leases to reduce tax liabilities and crew compensation and recommended the investigation of the tax issues involving the quota leasing schemes. Revisions to the Magnuson now mandate the collection of social and economic data to assess the impact of the various management schemes on the various players, yet in Alaska the data on crew compensation was deemed to be inaccurate. Apparently, according to NOAA, the boat owners who were supplying the information on crew compensation misinterpreted the questions. Again, the report raised concerns over the various quota leasing practices, such as owners leasing their initial quota - for which they did not pay - to their own vessels and crew.
To improve the accuracy of the collected economic data, the crew themselves came up with a novel idea - the submission of crew contracts and settlement sheets showing what was caught and how it was distributed. They presented their solution to Congress in 2010 at a Natural Resource Committee Hearing on catch shares. But when the boat owners - citing a deep concern for the privacy rights of their crew - flatly refused to submit settlement sheets, the proposal died.
The simplest way to find out who is reaping the benefits of a privatized fishery is to get the IRS to fork over the data from the 1099-Fs. The amount received and the percentage of the total that amount represents, as anyone with a passing acquaintance with middle school algebra knows, would give the government the economic data to make a proper analysis of the economic and distributional impact of its privatization regimes. Unfortunately, the IRS no longer collects that information, although the law requiring the collection of that information has not changed.
In the early 1990s as part of its Compliance 2000 project the IRS conducted a review of tax compliance in the Alaskan fisheries. Dubbing the 1976 tax legislation “a recipe for nonfiling,” the IRS claimed that exemption from withholding was “devastating” to tax compliance as boat owners routinely failed to file the required reporting form on behalf of their crew. The IRS claims that its attempts to address the impact of ITQs on tax compliance and enforcement with the National Marine Fisheries Services, charged with implementing ITQ programs, were rebuffed. The IRS also recommended the repeal of the tax laws but refuses to divulge behind whose door that recommendations died.
As a result of the Alaskan audit, the IRS created an audit technique guide requiring settlement sheets to be used to insure proper income reporting and to determine the employment tax status of the crew. Now we get to the real reason boat owners don’t want the grisly details of crewmen’s compensation exposed - boat owners treat all crewmen as self-employed, but very few if any pay their crew according to the conditions set in law. The owners evade their employment tax obligations, and charge the crew for any and all expenses, including pay-offs to fishery management councilors disguised as trade association dues or simply a percentage of the gross revenues swiped off the top for no documented purpose, and the quota costs. The crew’s share is based on what’s left after the owners appropriate their deductions, and that share is definitely not based solely on the amount of the catch.
A July 16, 2012 audit report of the IRS by the Treasury Inspector General for Tax Administration found that IRS management was more interested in processing applications for Individual Taxpayer Identification Numbers than in detecting fraud to the point that it eliminated the processes for detecting the fraudulent applications, costing the taxpayers potentially billions of dollars in erroneous refunds. In the fishing industry, the IRS has eliminated the review of the 1099Fs, eliminating the possibility of detecting tax fraud, aiding the continuing process of overcapitalization, privatization, and countless illegal transactions necessary to deliver public assets into private hands. When confronted with proof that a crewman was paid as an employee, the IRS refuses to investigate the boat owner or hold him accountable for employment taxes, but continues pursuing the crewman for self-employment taxes, making the IRS and Department of Labor initiative on ending worker misclassification laughable.
Touted as a market-based solution to the problem of overfishing, catch shares require the market distortion of employment tax fraud to feed the new class of leeches created by the catch share system. Catch shares are nothing more than legalized theft of the crewmen’s wages and jobs, and the IRS is nothing more than the bagman.