What the Just-Released 2013 IRS Whistleblower Office Annual Report Means for Future Tax Whistleblowers

April 6, 2014

The just-released FY 2013 IRS Whistleblower Office Annual Report reveals clues to what the future holds for tax whistleblowers.

Steve Whitlock, Director of the IRS Whistleblower Office, gave a preview last Fall. Listening to an audience react enthusiastically to his SEC counterpart Sean McKessy discuss awarding more than $14 million to a whistleblower, Whitlock wryly observed that the IRS had "only" awarded $50 million to whistleblowers in FY 2013.

To those who follow the IRS Whistleblower Program closely, Whitlock's comment was a rare moment to take a bow of sorts. It was a brutal year in which Whitlock's boss, Acting Commissioner Steve Miller, lost his job as the IRS faced attacks that it had politicized reviews of organizations claiming tax-exempt status. Although the Whistleblower Office played no role in that controversy, Sen. Grassley and others also scorned the IRS and Treasury for obstructing Congress' mandate to establish a robust whistleblower program.

The 2013 Whistleblower Office Report has provoked similar criticism, in part because the $50 million paid to whistleblowers in 2013 was less than half the amount paid in 2012. Yet, in 2012, $104 million went to a single whistleblower, former UBS banker Bradley Birkenfeld, in an historic claim that produced a massive recovery for the IRS.

IRS agents who worked the UBS case long ago told me they abhorred the idea of paying Birkenfeld an award because of his misdeeds that led to his felony conviction, and yet Whitlock refused to succumb to great pressure to deny Birkenfeld an award. Instead, he applied the law as written by Congress--which is evidence that Whitlock is not the problem.

The Report reveals that the IRS has paid only nine claims under the "new" whistleblower statute enacted in December 2006. The IRS can do much better, as Sen. Grassley regularly reminds the Service. Obstruction and delay by persons outside the Whistleblower Office appear the reasons more whistleblower awards have not yet been paid.

The danger for future tax whistleblowers--at which the 2013 Report hints--is that new IRS regulations to be released in 2014 will effectively contradict and undermine the tax whistleblower statute. As we have testified before the IRS, it appears that some within Treasury, Chief Counsel, and the IRS have already sought to impede development of the whistleblower program that Sen. Grassley believed Congress was creating in 2006. The Report mentions in passing earlier examples such as refusing to pay awards on criminal fines, and adding a two year delay to essentially every claim..

I remain optimistic that, with someone like Director Whitlock who has shown the backbone and principle to follow the law in difficult decisions, the IRS Whistleblower Program will be successful. To overcome the obstructionists, that success may yet require Congress to act decisively to ensure that IRS Whistleblower Program is allowed to follow the tried and true path of the False Claims Act.

The False Claims Act, the nation's leading whistleblower law long championed by Sen. Grassley, has been immensely effective in combatting fraud through encouraging and rewarding whistleblowers. The new IRS Whistleblower regulations to be announced will likely sound the alarm to Sen. Grassley once more to take action.

Liechtenstein Bank Secrecy Gives Way in $23.8 Million IRS Settlement That Exposes US Tax Evaders

July 30, 2013

Another shoe dropped for offshore tax evaders today, in an encouraging sign for the IRS Whistleblower Office.

A Liechtenstein bank avoided prosecution by agreeing to turn over files on 200 U.S. customers and to pay $23.8 million for assisting U.S. taxpayers in opening and maintaining undeclared bank accounts from 2001 through 2011.

Liechtensteinische Landesbank AG (LLB-Vaduz) helped a significant number of U.S. taxpayers hide these offshore accounts, evade U.S. taxes, and file false tax returns with the IRS, according to today's announcement.

The Justice Department praised the bank's cooperation including its support for a 2012 change to Liechtenstein law that allowed DOJ to obtain the bank's files of non-compliant U.S. taxpayers.

The government's press release may be found here.

Offshore bank secrecy is giving way slowly, but surely--as long as the U.S enforcement effort continues. Although the government's announcement does not state whether a tax whistleblower was involved, whistleblowers are uniquely able to ferret out such tax evasion.

This case--like the UBS case--shows the just-being-tapped promise of the IRS Whistleblower Program.

Court Allows N.Y. Tax Whistleblower Case To Proceed Against Sprint-Nextel Corporation

July 10, 2013

When New York amended its state False Claims Act in 2010, it broke new ground by including tax whistleblower cases. New York's decision to attract tax whistleblowers bore fruit when the NY Supreme Court recently ruled that New York's $100 million tax whistleblower case against Sprint-Nextel Corp. may proceed.

If successful, this case may net New York three times the more than $100 million in unpaid taxes that the state alleges Sprint has failed to pay its state and local governments. It may also bring the whistleblower 15%-25% of what the state recovers.

The N.Y. Supreme Court first rejected Sprint's arguments that the N.Y. Tax Law did not require payment of the sales tax in question. The Court allowed the case to proceed.

Sprint was successful in limiting the time in question to March 31, 2008 forward, but now faces discovery and a potential trial over allegations that include whether Sprint knowingly made "false records or statements" and repeatedly engaged in "fraudulent or illegal activity."

Continue reading "Court Allows N.Y. Tax Whistleblower Case To Proceed Against Sprint-Nextel Corporation " »

Amid Attacks on the IRS, Recognition of the Best of the IRS Whistleblower Office

June 10, 2013

Now is the time to tell the story of Bob Gardner. Bob retires this week after 37 years of service with the IRS, most recently with the IRS Whistleblower Office.

Bob understands that public service is a noble calling for so many in our government. He epitomizes all that is good in fairly administering our internal revenue laws.

When IRS Whistleblower Office Director Steve Whitlock began hiring for the first "tax whistleblower" office that Congress had authorized in late 2006, Bob Gardner was one of his most important finds. Bob has a wealth of knowledge and perspective on tax issues, built through broad experience as an IRS revenue agent, and then in positions in what is now the IRS Large Business and International Division.

I met Bob when the new IRS Whistleblower Program was in its infancy in 2007. With grace and humor, Bob was always willing to share his experience and knowledge about how the new whistleblower program would operate--well before any "guidance" was announced.

Bob cares about people. Bob has regularly returned calls from me at night, even on federal holidays. Emails from him before 6:00 a.m. were common.

More than once I deliberately called his office on weekends so as not to bother him with non-urgent messages, only to have Bob answer the phone in his office. He had great responsibilities with the Whistleblower Office, but never seemed too busy to try to help with any question or problem.

His co-workers praise Bob as approaching each facet of his work with integrity and fairness. "What is the right thing to do" is his guiding principle, just as it is with every one of the best public servants. The answer is not always favorable to any individual client, but we can ask for nothing more from those who serve in government.

To Steve Whitlock's credit, Bob's approach is shared by the other professionals in the Whistleblower Office. They have worked hard to implement Congress's direction that the first meaningful tax whistleblower program be successful.

We whistleblower attorneys--and the IRS Whistleblower Office--will miss Bob's deep institutional knowledge.

More broadly, you true IRS professionals who may be discouraged by the current attacks on the IRS should recognize that those who know the heart that you put into your work admire and appreciate you. Any responsible American knows that you serve a vital function in our government. If tax cheats avoid paying their fair share, the rest of us must pay more to make up their share.

Bob, we applaud your service to the American public.

Reforming the IRS--and Why We Need a Functioning IRS That Follows the Law

June 5, 2013

Could the IRS and Treasury Department have done a worse job in how they have handled the alleged "targeting" of conservative groups that applied for tax-exempt status before the 2012 elections?

My criticism starts--but does not end--with any IRS personnel who singled out "Tea Party" and similar groups for extra scrutiny based on their political affiliations. Any such acts cannot be tolerated..

But less noticed is what was being done--or not done--since at least mid-2012 by the Treasury Inspector General for Tax Administration ("TIGTA").

The Senate Finance Committee's official "timeline" states that, in May 2012, "TIGTA briefs [IRS] Commissioner Shulman on the targeting by the IRS of tea party applications for 501(c)(4) status."

So the Inspector General's Office knew, at least six months before the 2012 elections, that "targeting" of these applicants had occurred? If TIGTA told Commissioner Shulman that it was auditing the problem, why did it take TIGTA another year to issue its May 2013 report?

And did Commissioner Shulman, a Bush appointee with no reason to "hide" any "targeting" of conservative groups, rely on the Inspector General's staff to gather evidence and take appropriate action? Shouldn't TIGTA have acted expeditiously? TIGTA's other FY 2013 reports reveal nothing so pressing that it should have taken it another year.to complete its work.

Continue reading "Reforming the IRS--and Why We Need a Functioning IRS That Follows the Law" »

IRS & SEC Whistleblower Directors Join False Claims Act Officials for Conference on Whistleblower Issues

March 23, 2013

This week in a rare occurrence, the heads of the IRS and SEC Whistleblower programs and federal and state False Clams Act officials participated in one conference to discuss prosecuting and defending whistleblower cases.

Our firm has organized this "Whistleblower Law Symposium" since 2007 to explore developments in the growing number of federal and state whistleblower laws that seek to stop fraud against taxpayer funds.

"Sequestration" threatened to keep some major speakers from participating because of travel restrictions. The solution was "beaming in" Sean McKessey, Director of the SEC's Office of the Whistleblower, and Steve Whitlock, Director of the IRS Whistleblower Office, to join our panelists by videoconference.

The conference began with an overview I provided of the country's major whistleblower law, the False Claims Act. Its successes since 1986 inspired Congress to create both the new IRS Whistleblower Program in 2006, and the new SEC Whistleblower Program in the 2010 Dodd-Frank Act.

An excellent discussion of the False Claims Act in health care followed, led by Rick Shackelford of King & Spalding, LLP. Rick was joined by my former partner John E. Floyd of Bondurant, Mixson & Elmore, LLP; Daniel P. Griffin of Miller & Martin, PLLC; and Marlon Wilbanks of Wilbanks & Bridges, LLP.

Another panel then analyzed Georgia’s New 2012 “Taxpayer Protection False Claims Act, a 2012 state False Claims Act that I helped draft. This law encompasses all spending by state, county, municipal, and other local governments in Georgia. Nels Peterson, who as Georgia's Solicitor General is charged with overseeing the implementation of the new statute, explained the framework of the law.

Because the new state FCA applies to fraud against local governments as well, we also heard how the Act might be used by cities and counties. Mary Carole Cooney, former Atlanta Deputy City Attorney, and Bill Linkous, former Dekalb County Attorney, provided their perspectives on how the new whistleblower law might expose fraud in various areas of local government spending.

SEC Whistleblower Chief Sean McKessey then joined us electronically to discuss the most pressing issues in bringing (and defending) SEC Whistleblower claims.

Continue reading "IRS & SEC Whistleblower Directors Join False Claims Act Officials for Conference on Whistleblower Issues" »

As IRS Commissioner Steps Down Today, How the Next IRS Commissioner Can Immediately Help Address the "Fiscal Cliff" by Expanding the IRS Whistleblower Program

November 9, 2012

Today marks the end of IRS Commissioner Doug Shulman's tenure, just as President Obama and Congressional leaders shift to addressing the looming "fiscal cliff." Rather than disrupt the process of narrowing the deficit, Shulman's departure could actually assist it--in an important way that does not depend on raising tax rates.

The timing is perfect for a new IRS leader to back fully a bipartisan effort long advocated by Republican Sen. Chuck Grassley (R-Iowa) to tackle the "tax gap"--the more than $300 billion owed but not paid by tax cheats each year. Grassley seeks to expand the IRS Whistleblower Program to fulfill the promise of changes to the tax whistleblower law that Grassley sponsored almost six years ago.

Grassley should enlist as a ready ally President Obama, whose Justice Department is about to announce a record year of fraud recoveries in False Claims Act cases brought by whistleblowers. Grassley also has been the driving force behind that highly successful law since at least 1986.

Although the IRS has assembled highly skilled professionals to staff its Whistleblower Office led by Director Steve Whitlock, Grassley's efforts have been stymied by bureaucratic resistance among others in the IRS. Those naysayers create endless obstacles to attracting whistleblowers--even though the Treasury Inspector General has determined that whistleblower information is essentially twice as effective as other sources for uncovering tax violations.

The Justice Department has learned over the past quarter century that working closely with "insider" whistleblowers and their counsel is the key to unravelling significant fraud schemes. In contrast, too many in the IRS refuse to learn from the DOJ's experience and to heed Congress' directive to expand the use of whistleblowers. For example, after convincing Grassley's staff in 2006 that they could and would work closely with whistleblowers, the IRS Chief Counsel's Office over almost six years has refused to approve even a single agreement with a whistleblower to allow that cooperation.

Continue reading "As IRS Commissioner Steps Down Today, How the Next IRS Commissioner Can Immediately Help Address the "Fiscal Cliff" by Expanding the IRS Whistleblower Program" »

Release of Incarcerated UBS Whistleblower Birkenfeld Shifts IRS Whistleblower Debate to New Round of Issues

August 1, 2012

In presenting programs on how to protect whistleblowers from criminal and civil liability, we have watched in amazement as UBS whistleblower Bradley Birkenfeld got himself incarcerated for a felony conviction--despite apparently being one of the most valuable IRS whistleblowers ever.

Today's announcement of Birkenfeld's release after serving almost 30 months of a 40 month prison sentence--reportedly based on "good time" credits accrued, not some change of heart by the Justice Department lawyers who prosecuted him--comes amidst blistering criticism by Sen. Chuck Grassley of impediments that some IRS officials have created to the functioning of the IRS Whistleblower program. Grassley was so frustrated that he refused to allow nominations of two persons for Assistant Secretary of the Treasury positions to proceed until July 30, after his arm-twisting for information about the tax whistleblower program had made some headway.

Now that Birkenfeld has been released, attention will shift to his claim to receive what he contends is his lawful percentage of the huge sums that the IRS is reaping based on his disclosures about UBS and US taxpayers. Based on my discussions with IRS criminal agents, they will howl if Birkenfeld receives any reward of significance.

Some believe that Birkenfeld's "holding back" cost the IRS dearly in its investigation of a former Birkenfeld/UBS client. They will argue, "Why reward a convicted felon?"

On the opposite extreme, some persons who advocate for whistleblowers have loudly condemned the entire prosecution of Birkenfeld. Those arguments have struck me as short-sighted. They ignore the principle that there is a rule of law that must apply to all of us, including whistleblowers.

Based on our review of available Birkenfeld court filings and transcripts, he apparently violated the cardinal rule that a whistleblower cannot "hold back" information about his own alleged misdeeds in his "cooperation" with the government. This is not a novel theory, but a long-settled principle.

To obtain a "pass" for one's own felonious conduct, one must tell it all. (Read Birkenfeld's sentencing transcript to see how he failed to dispute then the essential facts relied on by the government). Rather than frighten potential whistleblowers, whistleblower attorneys should encourage them to learn the facts by pointing out Birkenfeld's apparent errors--and show how easily those errors can usually be avoided.

Except for those who have a financial interest in representing Birkenfeld, I do not see how whistleblower advocates would fail to appreciate how failing to prosecute Birkenfeld under these circumstances would have been even more damaging to the cause of whistleblowers generally.

Given that he apparently flouted this cardinal rule and thus allegedly misled prosecutors, his serious misconduct cannot be ignored. Opponents of compensating whistleblowers for revealing fraud would use an unchastened and unprosecuted Birkenfeld as "red meat" to try to undermine--if not repeal--the IRS whistleblower law.

Continue reading "Release of Incarcerated UBS Whistleblower Birkenfeld Shifts IRS Whistleblower Debate to New Round of Issues" »

IRS Misses Golden Opportunity in Refusing to Modify Tax Whistleblower Rule

February 21, 2012

In a controversial decision today, the IRS squandered an opportunity to help close the tax gap by attracting more whistleblowers with significant information about large tax schemes. The public will suffer as a result.

Stubbornly, the IRS rejected calls for a common sense approach to rewarding tax whistleblowers, as it refused to modify a proposed rule that narrowly defines the categories of cases that should justify awards to whistleblowers.

At issue is what Congress meant by the term "collected proceeds"--an undefined phrase in the 2006 tax whistleblower law. This law unquestionably sought to expand the number and variety of whistleblower claims presented to the IRS.

As my colleague Richard Rubin and I pointed out in comments to the IRS, Senator Grassley modeled changes to this tax whistleblower law on the dramatically successful False Claims Act, the nation's major whistleblower law. That law has returned some $30 billion to the Treasury by rewarding whistleblowers who help unearth fraud against taxpayers, and helps deter future fraud.

Today, Senator Grassley saw that some in the IRS want to undermine his efforts and ignore Congress's plain intent--essentially supplanting Congress's role as lawmaker. The IRS announcement has insisted on a narrow reading of that phrase. It rejected the commonsense notion that any whistleblower who can help provide a "net benefit to the Treasury" should be rewarded.

To illustrate, although the IRS' own past guidance reveals that it formerly paid rewards based on criminal fines, it now has declared criminal fines off-limits from whistleblower rewards. The IRS also has refused to recognize all benefits provided in preventing improper use of net operating losses (NOLs), as well as a variety of other future benefits to the Treasury.

When Congress in 1986 amended the nation's major whistleblower law that helped inspire the new IRS Whistleblower Program, the False Claims Act, it took a few years before the Department of Justice realized just how essential encouraging and rewarding whistleblowers is to enforcement of the law.

We wish a speedy learning curve for the IRS. With a tax gap of more than $350 billion annually in owed but unpaid U.S. taxes, the public needs the IRS to heed Senator Grassley's words--that whistleblowers are to be welcomed--because the public sorely needs them.

IRS Whistleblower Claims Explored at Heckerling Institute, the Leading Conference for Estate & Trust Lawyers and Estate Planners

January 16, 2012

The University of Miami's Heckerling Institute last week brought together the nation's leading estate planners, including attorneys, trust officers, accountants, insurance advisors, and wealth management professionals. For the first time, these estate planning professionals delved into how estate and gift tax issues are the subjects of many IRS Whistleblower claims.

This program was organized by Marty Basson, who recently retired from the IRS Whistleblower Office and hung out his shingle (now providing a wealth of knowledge to the private bar), after a distinguished career as the IRS authority on estate and gift tax issues.

Marty has long served on the Heckerling Institute faculty at the University of Miami. Marty is also a charter member of the IRS Estate and Gift Tax National Advisory Panel, a select group of IRS attorneys who assist in forming nationwide policy decisions in the estate and gift tax area.

Marty asked me to join him and Dawn Applebaum of the IRS Whistleblower Office for a Heckerling panel discussion last week on the IRS Whistleblower Program in the estate and gift tax arena. While a few professionals in attendance had already filed IRS Whistleblower claims, the vast majority had not.

Heckerling provided a first class forum to address many of the "hot" issues in the tax whistleblower program. I was honored to join Marty and Dawn as the private whistleblower attorney who provided the perspective of whistleblowers in the IRS Whistleblower Program.

Once Congress created the new IRS Whistleblower Program in December 2006, the IRS Whistleblower Office was unsure whether it would receive many estate tax and gift tax claims. It received far more estate and gift tax claims than anticipated.

Consider a typical case of a divorced couple who both know that a parent has hidden accounts offshore. When that parent dies, the estranged spouse knows that the offshore accounts will not likely appear on the estate tax return. Such information about tax evasion is very useful to the Service, so that honest taxpayers do not bear more than our fair share of the burden.

Our Heckerling discussion covered many, many aspects of the IRS Whistleblower Program in a spirited discussion that ran out of time. Marty was suddenly free to express his own observations, not simply the official position of the IRS.

Among the topics were recent Tax Court opinions on protecting the confidentiality of whistleblowers and of taxpayer information in appeals, and the protections of taxpayer information in proposed new Tax Court Rule 345.

I was asked to discuss steps to protect whistleblowers from criminal and civil liability, which has been an important issue in past presentations after UBS whistleblower Bradley Birkenfeld found himself prosecuted for a federal offense. Marty also asked me to discuss the view of numerous tax whistleblowers as their claims progress through the process.

Continue reading "IRS Whistleblower Claims Explored at Heckerling Institute, the Leading Conference for Estate & Trust Lawyers and Estate Planners" »

How Whistleblowers in Qui Tam, IRS, and SEC Whistleblower Cases Must Protect Email Communications

December 18, 2011

At the Healthcare Fraud Institute this past week, I was asked to address what steps whistleblowers should take to ensure confidentiality of emails with their lawyers. Although qui tam cases under the False Claims Act were the focus of our discussion, the same principles apply to tax whistleblowers and SEC whistleblowers.

Potential whistleblowers should never use their company's email system, or any email account shared with or accessible to another person, for communicating with their attorney or for gathering information or evidence to report to the government.

Although the law encourages whistleblowers to report fraud, whistleblowers can create unnecessary problems for themselves by not following this rule.

First, emails between whistleblowers and their attorneys are privileged and confidential, but the privilege can disappear and be waived if the communication is disclosed to others.

Second, qui tam whistleblower cases under the False Claims Act are filed with a court order "sealing" the case from public view, while the government investigates. If an email accidentally exposes the case, the whistleblower may have violated the court's "seal" order.

Third, alerting a defendant company that the whistleblower has reported the company's fraud to the government is almost certain to provoke retaliation against an employee who is a whistleblower. Immediate suspension or firing often follows. Although the False Claims Act and the SEC and CFTC whistleblower laws create remedies for retaliation, those remedies take time to achieve. They will not pay the whistleblower's mortgage next month--or this year.

We advise all of our clients that they must protect the confidentiality of their emails. Many people do not realize that emails sent from a company's computer system usually leave some record, even if the employee is accessing a personal Gmail account.

Continue reading "How Whistleblowers in Qui Tam, IRS, and SEC Whistleblower Cases Must Protect Email Communications" »

2011 IRS Whistleblower Boot Camp Hears of Deputy Commissioner Steve Miller's "Desire for the Whistleblower Program to Grow"

November 20, 2011

At this past week's third annual "IRS Whistleblower Boot Camp," Deputy IRS Commissioner for Service and Enforcement Steven T. Miller spoke of his "desire for the whistleblower program to grow." A major announcement was that he would "push for" the IRS to begin using the expertise of whistleblowers who can help the IRS interpret information obtained in its audits..

In his remarks, Deputy Commissioner Miller described "offshore" tax abuses as a key area. He commented that whistleblower submissions have a "unique place" in "breaking bank secrecy."

With budget reductions, the IRS is looking for ways to "leverage" its efforts. According to Miller, whistleblower submissions in at least three areas can help:

1. Promotion of abusive tax shelters known to potential whistleblowers

2. Tax violations in which sophisticated information technology systems pose a barrier to the IRS, unless a whistleblower can explain them

3. Inadequate information reporting that is required of third parties, and that whistleblowers can address

When it "makes sense" for the IRS to use the whistleblower's expertise, Miller said he would encourage use of disclosure agreements with whistleblowers authorized under section 6103(n) of the Internal Revenue Code, which governs disclosure of taxpayer information. Examples he gave include review of information received in response to the Service's information document requests, or explanation of information technology issues known to the whistleblower.

Sen. Chuck Grassley recently urged the IRS to make better use of expertise and resources that whistleblowers and their lawyers can provide, as the Justice Department does in False Claims Act cases.

This year's IRS Whistleblower Boot Camp also included many other senior IRS officials. Whistleblower Office Director Steve Whitlock and his office's Special Counsel Debra Bowe were major participants.

Once again, the Office of Chief Counsel's Senior Counsel Tom Kane participated and was again very generous with his time, both during and after the program. He addressed various litigation issues that arise in whistleblower matters. Senior Program Analysts Dawn Applebaum and Kathy Onken also provided a great deal of knowledge and insight into how the program is operating.

The most fascinating issues to me were those involving the international and offshore efforts of the IRS, the subject of the session I moderated. On this panel, joining IRS Whistleblower Office director Steve Whitlock and Senior Analyst Dawn Applebaum were Toni Weirauch, Deputy Director of International Crimes in the IRS Criminal Investigation Division; and Donna Prestia of the new Global High Wealth Division. The attendees gained an appreciation of the considerations of representing whistleblowers who may be foreign nationals gathering evidence in ways that comport with U.S. law, but that may be contrary to other countries' bank secrecy laws.

My colleagues Erika Kelton, Paul Scott, Linda Stengle, and Margaret (Peggy) Finnerty deserve thanks for their excellent presentations as well.

Continue reading "2011 IRS Whistleblower Boot Camp Hears of Deputy Commissioner Steve Miller's "Desire for the Whistleblower Program to Grow"" »

Next IRS Whistleblower Boot Camp: Offshore and International Tax Whistleblower Issues and Latest Developments

October 27, 2011

Each year's "IRS Whistleblower Boot Camp" brings together senior officials of the IRS Whistleblower Office and tax whistleblower attorneys to explore the latest developments in the IRS Whistleblower Program. This year's Boot Camp is November 15, 2011 in Washington.

Of special interest this year is that Deputy IRS Commissioner for Services and Enforcement Steven T. Miller will participate for the first time. Other IRS officials participating include (in order of appearance):

--Stephen Whitlock, Director of the IRS Whistleblower Office
--Debra Bowe, Special Counsel to the Director of the IRS Whistleblower Office
--Thomas Kane, Senior Counsel, IRS Office of Chief Counsel
--Dawn Applebaum, Senior Program Analyst, IRS Whistleblower Office
--Kathy Onken, Senior Program Analyst, IRS Whistleblower Office

Once again, I am looking forward to leading a panel discussion, this time on International and Offshore Issues. Panelists will include Steve Whitlock, Director of the IRS Whistleblower Office; Dawn Applebaum of the Whistleblower Office; and a representative of the IRS Criminal Investigative Division with expertise in international and offshore tax cases.

Other sessions will discuss new developments, including the debate over the IRS "collected proceeds" regulation that was the subject of the May 11, 2011 public hearing; litigation issues; and "hot topics." My friends and colleagues Erika Kelton, Paul Scott, Linda Stengle, and Margaret Finnerty will also moderate panel discussions or serve as panelists.

Does Deputy Commissioner Miller's involvement signal that the IRS as a whole is increasingly recognizing the vast benefits of encouraging tax whistleblowers to come forward?

Anyone interested in closing the "tax gap" should hope so. We certainly welcome his participation in this effort to educate attorneys further about the "best practices" in pursuing IRS Whistleblower claims.

Qui Tam Whistleblower Cases, and the New Financial Whistleblower Programs by the SEC, CFTC, and IRS To Be Discussed at Whistleblower law Symposium

September 26, 2011

Every two years, attorneys prosecuting or defending qui tam whistleblower cases under the False Claims Act and other whistleblower laws gather for the Whistleblower Law Symposium.

We have written much about “qui tam” whistleblower cases under the False Claims Act. Since last year’s passage of the Dodd-Frank law, whistleblowers who help expose (1) violations of the securities laws or (2) commercial bribery of foreign government officials, now can receive rewards of 10-30% of money sanctions imposed under the new SEC Whistleblower Program. The new IRS Whistleblower program pays whistleblowers 15-30% of amounts recovered. These cases also help stop fraud against taxpayers and investors.

On October 21, an unusual group of national experts on these claims will gather for the Whistleblower Law Symposium, which our firm organizes every two years. Not only do we have senior attorneys from the Department of Justice and experienced whistleblower lawyers discussing qui tam cases, but the Director of the IRS Whistleblower Office Steve Whitlock will participate and explain the tax whistleblower program. Senior SEC attorneys also have stated that they wish to be part of our seminar to discuss the new SEC Whistleblower Program, and are seeking approval to participate.

This conference is broader in scope than any whistleblower law conference in the country of which I am aware, as we have a national faculty of lawyers on both sides of these cases, as well as some of the top government officials involved.

Registration is still open for those who want to register online here:

Please feel free to call or email me with any questions. The Agenda is below.

Continue reading "Qui Tam Whistleblower Cases, and the New Financial Whistleblower Programs by the SEC, CFTC, and IRS To Be Discussed at Whistleblower law Symposium" »

GAO Report Released on IRS Whistleblower Program: Raising--But Not Answering--the Fundamental Questions of What the Tax Whistleblower Program Needs to Be Most Effective

September 9, 2011

The promising new IRS Whistleblower Program that Congress authorized in December 2006 is the subject of a long-anticipated GAO Report released this morning.

Disappointingly, the report raised, but did not attempt to answer, fundamental questions that will determine whether the IRS realizes the full potential of the new program in helping close the "tax gap"--or settles for a fraction of what it can accomplish.

Inspired by the dramatic successes of the False Claims Act in combating fraud against the government through rewarding whistleblowers, Sen. Charles Grassley spearheaded the effort to create the first meaningful IRS Whistleblower Program in 2006.

Relying on data showing that whistleblower information had already proved extremely effective for the IRS (four cents invested produced one dollar in recoveries), Congress doubled reward percentages and made awards mandatory for whistleblowers. A small but impressive staff came together to run the program through the first IRS Whistleblower Office, led by Director Steve Whitlock.

Unfortunately, some in the IRS resisted implementing Congress' direction that the IRS expand the number and types of whistleblower claims that the IRS pursues, and are instead creating obstacles and delays that never existed before. Thus, Congress prompted GAO to inquire.

I was one of several attorneys whom GAO contacted, at the IRS Whistleblower Office's suggestion, to discuss these issues. I spent considerable time in more than one interview discussing what has made the False Claims Act so successful, and how the IRS can achieve similar success. We shared our written comments to the IRS at its recent hearing on the IRS Whistleblower rules.

The essential elements of any successful whistleblower program start with predictable and meaningful rewards to whistleblowers that are not left to the government's discretion. In addition, the success of the False Claims Act is in its "public-private partnership" model, which allows the government to leverage its scarce resources by working hand-in-hand with whistleblowers and their attorneys to address fraud. These principles translate to the IRS whistleblower claims process under existing law, and if needed Congress can tweak the privacy statute (26 U.S.C. section 6103) and still preserve appropriate taxpayer privacy.

GAO's report touches on these fundamental questions, but leaves them unanswered. Instead, it focuses on what its title suggests: "TAX WHISTLEBLOWERS:
Incomplete Data Hinders IRS's Ability to Manage Claim Processing Time and Enhance External Communication."

With no offense to the report's authors at GAO, better data collection by the IRS Whistleblower Office will not determine whether the next big tax fraud scheme remains undetected, or is exposed by a whistleblower. These fundamental principles underlying any successful whistleblower program must be incorporated, so that the IRS Whistleblower Office is empowered to do its job most effectively.

Whistleblower Lawyer and IRS Whistleblower Office Staff to Speak at 2012 Heckerling Institute on Estate Planning

August 23, 2011

The new IRS Whistleblower Program for tax whistleblowers will be featured for the first time at the nation's leading conference for estate planners, the Heckerling Institute on Estate Planning.

The Heckerling Institute is known as the country's "leading conference for estate planners, including attorneys, trust officers, accountants, insurance advisors, and wealth management professionals." This is the 46th Annual Institute, named after late Professor Philip E. Heckerling, founder of the University of Miami Law School’s Estate Planning Institute. The conference will take place from January 9-13, 2012.

The IRS Whistleblower Program will be the topic of a special session, "Anyone Can Whistle--What You Should Know About the Newly Revised IRS Whistleblower Program."

For years, Martin E. Basson, who is an Attorney-Advisor/Senior Analyst for the IRS National Whistleblower Office, has chaired a program for the Institute. I will join Marty and the IRS Whistleblower Office's Dawn M. Applebaum, for what I understand is the Institute's first program discussing the new IRS Whistleblower Program.

Marty Basson is known as the IRS Whistleblower Office's expert on estate and gift tax issues. Dawn Applebaum, a Management Analyst with the Whistleblower Office, has been excellent in other programs such as the Whistleblower Law Symposium and the IRS Whistleblower Boot Camp. I will be the tax whistleblower attorney on the panel, as we discuss this "developing area of tax practice, and the practical realities of developing and pursuing tax whistleblower claims."

Tax whistleblowers are making increasing use of the IRS Whistleblower Program to address tax fraud, tax evasion, and other violations of tax law. The estate tax area is fertile ground for these tax whistleblower claims, so this program should be especially interesting.

Former Credit Suisse Officials Indicted For Assisting U.S. Taxpayers Evade Taxes Since 1953

July 21, 2011

The IRS emphasis on international and offshore tax violations continues. Today, the government made clear that U.S. prosecutions for cross-border tax evasion did not end with the 2009 landmark UBS settlement, which followed a tax whistleblower's approaching U.S officials.

The Justice Department announced today that three more former Credit Suisse bankers have been indicted for helping U.S. taxpayers evade U.S. taxes.

Credit Suisse has been under U.S. scrutiny for at least the past year. Today's indictments of three former officials bring to seven the number of Credit Suisse bankers charged thus far.

Indicted today were Markus Walder, the former head of North America Offshore Banking and a former senior Credit Suisse official; Susanne D. Rüegg Meier, a former manager; Andreas Bachmann, a former banker at a subsidiary of Credit Suisse; and Josef Dorig, the founder of a Swiss trust company that worked with Credit Suisse.

According to DOJ's announcement, the bank's managers and bankers "engaged in illegal cross-border banking that was designed to assist U.S. customers evade their income taxes by opening and maintaining secret bank accounts at the bank and other Swiss banks. As of the fall of 2008, the international bank maintained thousands of secret accounts for U.S. customers with as much as $3 billion in total assets under management in those accounts. The conspiracy dates back to 1953 and involved two generations of U.S. tax evaders including U.S. customers who inherited secret accounts at the international bank."

The government also alleged that the defendants provided "unlicensed and unregistered banking services to U.S. customers with undeclared accounts." They allegedly concealed their wrongdoing by making false statements and providing misleading information to the Federal Reserve Bank of New York and the IRS.

The indictments are part of a broader U.S. investigation into various Swiss and other foreign banks. They reportedly include HSBC; Julius Baer; and Basler Kantonalbank. Significantly, the Credit Suisse investigation has resulted in more indictments than the UBS investigation.

Tax evasion using international and offshore accounts will continue to be a focus of the IRS's efforts, especially now that the IRS Whistleblower Program is bringing in more and more information about these violations.

Tax Whistleblower Attorneys At IRS Hearing Urge Treasury and IRS to Be True to Congress's Intent in Expanding the IRS Whistleblower Program

May 12, 2011

As has been reported today in Tax Notes and CCH, my colleague Richard Rubin and I addressed the IRS at its hearing yesterday on the proposed IRS Whistleblower rules. We were able to speak for roughly one-third of the hearing.

The government panelists were (1) the Department of Treasury's Alexandra Minkovich, an attorney-advisor in the Office of Tax Policy; (2) Stephen A. Whitlock, the Director of the IRS Whistleblower Office; (3) Thomas J. Kane, Senior Level Counsel at the IRS Office of Associate Chief Counsel (Procedure and Administration); and (4) Kirsten N. Witter, Chief, Ethics and General Government Law Branch, Office of Associate Chief Counsel (General Legal Services).

We focused on fundamentals. We urged that Treasury and the IRS must stay true to the intent of Congress to expand the number and types of IRS whistleblower claims that the IRS receives and pursues, and that merit awards to whistleblowers.

I argued that, from the outside, it appears that some in the IRS may be determined to undermine and thwart the the creation of the broad new tax whistleblower program that Congress has plainly ordered. Instead, major rules and policies proposed to date are in many ways more restrictive than those under the "old" program, which cannot be the result Congress intended.

Those restrictions and policies also create needless obstacles--such as a proposed two year delay that did not exist under the "old" system--that will discourage IRS whistleblower claims. The public will suffer as a result, becuase many unlawful tax schemes will go undetected without whistleblowers exposing them.

We argued for a straightforward rule that fulfills Congress's intent that any whistleblower claims providing a financial benefit to the Treasury should merit a whistleblower reward. Predictability of rewards is essential to attracting whistleblowers, especially those with information about the largest and most complex tax schemes.

Excerpts of an unofficial transcript of the hearing are reprinted below:

Continue reading "Tax Whistleblower Attorneys At IRS Hearing Urge Treasury and IRS to Be True to Congress's Intent in Expanding the IRS Whistleblower Program" »

IRS Whistleblower Rules Hearing on May 11 Attracts Global Attention

May 3, 2011

A frequent question I receive is whether non-US citizens can receive rewards under the IRS Whistleblower Program. There is no limitation to US citizens, and persons around the world are eligible to participate in the IRS Whistleblower Program, regardless of citizenship.

Perhaps this is one reason why the May 11 hearing in DC on the IRS Whistleblower rules has attracted attention far and wide, from the India Times, to the American Banking and Market News, to the Northside Neighbor. We will keep you posted on what happens at the hearing.

New IRS Whistleblower Rules Still Need Substantial Changes

April 18, 2011

Since tax returns were due today, it was fitting that today was the deadline for comments on an important proposed new regulation for tax whistleblower claims.

We have submitted formal comments today to the IRS excerpted below, and have asked to speak to the IRS to urge important changes on May 11 in Washington. We thought it important to explain the history of Congress's 2006 changes to the IRS whistleblower law--and emphasize that its clear intent was to attract a greater number and variety of tax whistleblower claims.

We believe the IRS needs to remain true to that principle, and thus amend its proposed regulation to reward any whistleblower who creates a financial benefit to the Treasury. That principle will dramatically simplify--and enhance--the IRS Whistleblwoer rules. We have also advocated to end needless delays in the program.

Exceprpts of our formal comments to the IRS are reprinted below:

Continue reading "New IRS Whistleblower Rules Still Need Substantial Changes" »

First Reported IRS Whistleblower Award Is Made--Finally!

April 8, 2011

The floodgates may be opening for the IRS Whistleblower program for tax whistleblowers, which we have written about since its birth in late 2006.Today, a law firm announced that its client received yesterday a $4.5 million award after filing a Form 211 reporting tax violations by a financial services firm.

The IRS Whistleblower Office cannot comment, as whistleblower information is protected by section 6103 of the the Internal Revenue Code. The whistleblower has elected to remain confidential, as the IRS rules allow.

The first announced award comes four years, three months, and eighteen days after Congress created the first meaningful rewards to tax whistleblowers in December 2006.

Although whistleblowers (and whistleblower attorneys) have grown impatient, many cases will take at least that long, as the IRS must screen the claims, assign them to the appropriate IRS operating division (such as Large Business & International), conduct the audit or examination from start to finish, and return the file to the IRS Whistleblower Office for an award determination.

(You can read about the process in our prior postings here. Avoidable delays caused by counterproductive rules are another question that we will be addressing very soon, in public comments on the IRS Whistleblower rules.)

Overall, the IRS Whistleblower Program is an example of smart government, at its best, thanks in large part to Senator Charles Grassley. It was inspired by the dramatic successes of the nation's major fraud-fighting whistleblower law, the False Claims Act, which has recovered more than $25 billion for U.S. taxpayers since 1986, and has paid more than $2.7 billion to whistleblowers.

Ironically, this announcement comes on the eve of the federal government "shutdown" that seems imminent. Those who wish to promote honest taxpayers' interests--and minimize the tax burden on all of us--would be wise to give the IRS Whistleblower Program all of the resources it needs to stop tax cheats.

Coincidentally, this threatened shutdown has forced postponement of the 3rd Annual "IRS Whistleblower Boot Camp" in Washington this coming week, about which we have written. The Boot Camp will return--bigger and better--now that whistleblowers are being rewarded.

Congratulations to Eric Young on this result for his client!

International and Offshore Tax Whistleblower Issues Among Topics for Next IRS Whistleblower Boot Camp

March 29, 2011

We have written about the first two highly successful "IRS Whistleblower Boot Camps" in 2009 and 2010, at which the IRS Whistleblower Office and whistleblower lawyers gathered to discuss the latest developments in pursuing tax whistleblower cases. It is sponsored by Taxpayers Against Fraud.

The Third Annual IRS Whistleblower Boot Camp will be held on April 12 in Washington, D.C.

Because the IRS has increasingingly focused on international and offshore tax issues, I will be moderating the panel discussion on "International and Offshore Tax Whistleblower Issues."

Joining me on this panel will be Robert Gardner, IRS Whistleblower Office Senior Program Manager; Donna Hainsbury, Director of the new IRS Global High Wealth Division; and Julio LaRosa, Deputy Director, International Crimes, of the IRS Criminal Investigative Division.

This will be another meaningful opportunity to work with IRS Whistleblower Office Director Steve Whitlock, his staff, and other IRS personnel to discuss the latest developments in the first meaningful IRS Whistleblower program.

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Whistleblower Lawyer Blog Co-Author Michael A. Sullivan (left) moderates a 2009 IRS Whistleblower Boot Camp panel discussion with IRS Whistleblower Office Director Steve Whitlock (right).

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For more information about the 2011 IRS Whistleblwoer Boot Camp, feel free to email me here.

Continue reading "International and Offshore Tax Whistleblower Issues Among Topics for Next IRS Whistleblower Boot Camp" »

IRS Whistleblower Rules For Disclosure of Tax Return Information to Whistleblowers and Their Attorneys

March 14, 2011

The IRS announced today final regulations for sharing of tax return information with IRS whistleblowers and their lawyers, as the IRS pursues tax whistleblower claims.

Under these regulations, officers and employees of the Treasury Department may disclose tax return information to whistleblowers and, if applicable, their legal representatives, in connection with written contracts for services. (See our updated comments on why this rule and IRS practice should change dramatically, as the procedure has never been used.)

In theory, that sharing of information should follow the highly successful model used by the Justice Department in leveraging its resources by using the knowledge and expertise of whistleblowers in pursuing whistleblower cases under the False Claims Act. When information is shared, the whistleblowers and their lawyers have often helped maximize the government's recovery.

In practice, however, this IRS rule is misguided and should be overhauled.

The regulation memorializes the position that sharing of return information will be "infrequent." In practice, however, “infrequent” seems to have meant rarely, if ever. In fact, Tax Notes has confirmed that--four years into the new IRS Whistleblower Program--the IRS has not yet approved use of this procedure in any claim.

Senator Grassley, I hope you are listening. It seems the powers that be at the IRS (not the Whistleblower Office) do not wish to take advantage of the knowledge and expertise of whistleblowers and their lawyers.

The public will suffer as a result, as honest taxpayers continue to pick up the tab for tax cheats.

The full text is linked here.

Offshore Alert Conference: Protecting Whistleblowers from Criminal and Civil Liability

March 8, 2011

Of interest to whistleblowers reporting fraud under the False Claims Act, the IRS Whistleblower Program, or the brand new SEC Whistleblower and CFTC Whistleblower Programs is an upcoming presentation, "Avoiding the Mistakes of the UBS/Birkenfeld Case: Protecting Whistleblowers from Criminal and Civil Liability."

This discussion is part of a fascinating gathering this April in South Beach--the OffshoreAlert Conference. As the brochure promises:

Where else could tax collectors mingle with tax minimizers, asset tracers with asset protectors, regulators with the regulated, whistleblowers with their former employers and crooks with prosecutors?

How to protect whistleblowers from criminal and civil liability was a topic my panel discussed at the 2010 IRS Whistleblower Boot Camp in Washington. Because we had the IRS Chief Counsel's Office participating in that discussion, we were unable to discuss directly what went wrong for Birkenfeld as he brought important information about tax evasion to the attention of the IRS, but ended up serving a prison sentence of 40 months. (We have written previously about Birkenfeld's errors revealed in the court record.)

At the OffshoreAlert Conference discussion this year, I will moderate the panel discussion about what can be done to protect whistleblowers from criminal and civil exposure. Joining me are former Justice Department official and former General Counsel of the U.S. Department of Homeland Security Joe D. Whitley; former prosecutor and now whistleblower attorney Marc Raspanti; and federal and international tax attorney Richard Rubin.

The program description is reprinted below:

Continue reading "Offshore Alert Conference: Protecting Whistleblowers from Criminal and Civil Liability" »

New IRS Offshore Account Disclosure Program Takes Shape

January 29, 2011

As the IRS continues its increasing focus on international tax issues, a new IRS offshore disclosure program announced in December continues to take shape. While the IRS has not made public a full description of the program, details have emerged in comments of IRS officials over the past weeks.

Using the 2009 IRS voluntary disclosure program as a template, the IRS is apparently tweaking the approach that generated approximately 15,000 disclosures in the 2009 effort.

The IRS Criminal Investigative Division ("CI")--already quite busy with UBS account holders identified through the Swiss bank's Deferred Prosecution Agreement with the U.S.--was the "entry point" for the 2009 disclosure program. CI reportedly will retain that role, but will centralize the process in its Philadelphia office.

Most interesting was the comment this week by IRS spokesman Frank Keith that the new disclosure program will not be as "generous" to taxpayers as the 2009 IRS voluntary disclosure program. That comment surprises some international tax practitioners with clients who felt that the 2009 program was not "generous" enough--and decided not to disclose their offshore accounts as a result.

Nonetheless, IRS scrutiny of offshore accounts has exploded in recent years, with the 2009 voluntary disclosure program, the UBS settlement, the "re-alignment" of what is now the IRS Large Business and International Division, and the other IRS international tax initiatives we have followed. "CI has never had as many banks under investigation or access to as much information about international financial transactions as it does now," according to Tax Notes' summary of comments by Leslie DeMarco, Special Agent in Charge of CI's Los Angeles field office.

Those using offshore accounts to evade taxes may think twice about bypassing this new program. The IRS Whistleblower Program has generated many disclosures by whistleblowers with detailed knowledge of offshore tax abuses--so taxpayers' offshore accounts may be revealed to the IRS either way.

Long-Awaited IRS Whistleblower Rule "Fix" Is Released for Comment

January 14, 2011

We have written previously about Senator Grassley's pointed criticisms of aspects of the IRS whistleblower rules proposed in June 2010. The IRS's delay in finalizing those rules is a principal reason why the IRS has not yet paid whistleblowers who have come forward since the December 2006 creation of the new IRS Whistleblower Program.

Today, the IRS took a large step to correct one major flaw that Grassley urged be corrected: re-writing a bizarre rule that would deny rewards to valuable whistleblowers who prevent improper refunds, or reduce a credit balance by a taxpayer. From what we can tell, that nonsensical rule was not the creation of the IRS Whistleblower Office, but of others within the IRS.

The IRS today announced a new IRS whistleblower rule to correct that anomaly, to be published for comment in the Federal Register.

Specifically, in a June 21, 2010 letter to Treasury Secretary Tim Geitner, Grassley challenged the IRS to write a sensible rule to correct this result:


In addition to the IRS posting the new [Internal Revenue Manual] provisions without public comment, there are many substantive concerns within the IRM. For example, the new definition of "collected proceeds" is particularly troubling because it seems to limit the payment of awards to whistleblowers only in those instances where the IRS receives cash payment from a taxpayer. . . . The denial of a whistleblower award where the whistleblower's information leads to the denial of a claim for refund seems to create a perverse incentive for the whistleblower to wait until the IRS has paid an improper refund. In addition, the IRM says that satisfaction of a taxpayer's liabilities by reducing a credit balance is not within the scope of collected proceeds so the whistleblower would receive no award.

The new proposed rule attempts at least a partial fix. It provides that rewards may now be paid on "amounts collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided."

Today's proposed rule does nothing to address Grassley's other criticisms of the June 2010 proposed rules.

Continue reading "Long-Awaited IRS Whistleblower Rule "Fix" Is Released for Comment" »

Activities of IRS Large Business and International Division Earn Its Commissioner Recognition As "Tax Person of the Year"

January 4, 2011

Citing many developments in the IRS Large Business and International Division in 2010, Tax Analysts this week named IRS LB&I Commissioner Heather Maloy as its "Tax Person of the Year."

Among those developments that we have followed previously are the international focus of the restructured LB&I division (formerly known as the Large and Mid-Size Business Division (LMSB)), and the creation of the new Global High Wealth Industry Group within LB&I. That group within LB&I is already is working some very significant IRS Whistleblower cases.

Also mentioned by Tax Notes was one of my favorite IRS professionals who assisted the new IRS Whistleblower Program in its infancy, Stuart Mann:

Continue reading "Activities of IRS Large Business and International Division Earn Its Commissioner Recognition As "Tax Person of the Year"" »

IRS Whistleblower Claims Reporting Tax Evasion and "Overlooked" Returns

December 12, 2010

Tax whistleblowers using the new IRS Whistleblower Program have reported many instances of tax evasion involving domestic and foreign corporations, partnerships, and trusts, in addition to abusive offshore transactions about which we have written previously. These tax whistleblowers will allow the IRS to reduce the more than $300 billion "tax gap"--the difference between what tax cheats owe, but refuse to pay.

Tax evasion generally entails taxpayers understating taxes in the returns they file. In many cases evasion also entails taxpayers failing to file returns, especially information returns (as opposed to tax returns).

For example, partnership returns (Form 1065) are information returns and as such do not report tax payable. Cases of partnership tax evasion sometimes arise where filing Form 1065 is “overlooked." In many of these cases, the partners continue to file their own income tax returns, which typically understate taxable income and tax payable, as there are no K-1’s to report.

Another partnership information return frequently overlooked is Form 8275. This form should generally be filed where partners have made partnership contributions, and received partnership distributions, within a two year period. Failing to file 8275’s typically results in an underpayment of tax where the disguised sale rules operate to treat the contribution and distribution as a sale.

Cancellation Of Debt (“COD”) is another area where non-filing of information returns (generally Form 1099-C) often results in an underpayment of tax, particularly in relation to non-institutional debt.

The problem of overlooked returns is not limited to income tax. Another return that is frequently overlooked is Form 709. This form should be filed by individuals who gift property that does not qualify for exclusion from gift tax.

On the international side, taxpayer interests in foreign companies should often be information reported on Form 5471. Where taxpayers have interests in foreign companies that hold interests in other foreign companies, multiple 5471’s may need to be filed to reflect second tier or higher tier interests. Failing to file 5471’s typically results in an underpayment of tax where foreign company income is required to be included in US income, for example under the Subpart F rules.

Continue reading "IRS Whistleblower Claims Reporting Tax Evasion and "Overlooked" Returns" »

Shouldn't the IRS Pay Tax Whistleblowers Who Help Prevent Fraudulent Refunds?

August 18, 2010

When IRS whistleblowers save U.S taxpayers money, they deserve the rewards that lawmakers such as Sen. Chuck Grassley fought to establish. In 2006 his efforts resulted in the first meaningful IRS Whistleblower program ever, which is attracting many tax whistleblowers with significant evidence.

We have discussed previously the many positive aspects of the long-awaited IRS Whistleblower procedures published in June--and one illogical, self-defeating feature. Some in the IRS--and apparently not the IRS Whistleblower Office--thought whistleblowers should not be rewarded when they report tax violations that prevent a tax refund, or reduce a credit balance. (See, e.g., IRM 25.2.2.1(7)). The Washington Post's David Hilzenrath has reported on this anomaly.

Sen. Grassley acted swiftly to protect the IRS Whistleblower program. In a June 21, 2010 letter to Treasury Secretary Tim Geitner, Grassley forcefully urged that a more sensible rule replace this new IRM oddity:

In addition to the IRS posting the new IRM provisions without public comment, there are many substantive concerns within the IRM. For example, the new definition of"collected proceeds" is particularly troubling because it seems to limit the payment of awards to whistleblowers only in those instances where the IRS receives cash payment from a taxpayer. An IRS spokesperson, in response to an inquiry from the media, stated that the IRS is bound by the written statute. Yet, this was never raised with me or my staff. The denial of a whistleblower award where the whistleblower's information leads to the denial of a claim for refund seems to create a perverse incentive for the whistleblower to wait until the IRS has paid an improper refund. In addition, the IRM says that satisfaction of a taxpayer's liabilities by reducing a credit balance is not within the scope of collected proceeds so the whistleblower would receive no award.

The IRS position is even inconsistent with its prior rule on paying rewards.

The IRS should listen to Sen. Grassley and modify this nonsensical rule. Billions in taxpayer funds can be saved by whistleblowers who help prevent bogus refunds, or reduce a tax cheat's credit balance. Grassley has more knowledge of what makes an effective whistleblower program to protect taxpayer funds than perhaps anyone in government.

We (and our whistleblower clients) look forward to reason prevailing at the IRS, and a change in this interpretation of "collected proceeds."

International Tax Evasion Targeted by IRS Move to Revamp Its Large Business Division

August 5, 2010

To battle offshore tax abuses and other international tax fraud and tax evasion, the IRS has announced that it is "realigning" and renaming its Large and Mid-Size Business (LMSB) division. To reflect its new emphasis, it will known as the "Large Business and International" division (LB&I).

As more transactions cross international borders, and more corporations and wealthy individuals use offshore tax havens and foreign low tax jurisdictions to avoid their tax obligations, the IRS is smart to focus more of its enforcement efforts in this way.

Based on our experience with tax whistleblowers, it is clear that the IRS Whistleblower Program is already seeing increasing numbers of tax whistleblower claims dealing with offshore tax abuses and other international tax issues.

The new IRS international unit will include a "transfer pricing" director, as well as a chief economist, who will oversee the IRS’s economic positions pertaining to transfer pricing.

(Transfer pricing, in ordinary language, involves a multinational company's reallocating income or expenses between related entities in different countries with different tax rates to reduce taxes, by artificially increasing or decreasing the price one business entity charges another for goods, services, or intangibles. Transfer pricing cases can be good IRS Whistleblower claims.)

This action is the latest IRS step to address international tax evasion, including the investigation of the misuse of offshore accounts and foreign entities by U.S. taxpayers. Last fall, the IRS introduced a Global High Wealth Industry unit to improve monitoring of tax compliance by high income individuals, and their related enterprises.

Time will tell if the IRS succeeds in its stated goal "to create a more centralized organization dedicated to improving international tax compliance.”

The IRS announcement is reprinted below:

Continue reading "International Tax Evasion Targeted by IRS Move to Revamp Its Large Business Division" »

Offshore Tax Havens Face Increasing Scrutiny, With IRS Whistleblowers Assisting

August 4, 2010

"Offshore" accounts are an increasing priority of IRS enforcement, aided by the new IRS Whistleblower Program. The Offshore World has changed and will never be the same again. The traditional tax haven assurance of secrecy and anonymity won't necessarily work any more.

The US has concluded Tax Information Exchange Agreements (TIEA’s) with a number of Offshore jurisdictions. Although the TIEA’s fall short of comprehensive Double Tax Treaties, they allow the IRS to obtain tax information about entities and accounts in Offshore jurisdictions under certain circumstances.

In many cases, these agreements allow the jurisdiction to forego financial secrecy laws when faced with a specific information request from the IRS. In most cases, the exchange of information potentially covers civil as well as criminal investigations by the IRS.

So far the US has concluded TIEA’s with a number of jurisdictions including Gibraltar, Lichtenstein, Isle of Man, Aruba, Antigua and Barbuda, Cayman Islands, Guernsey, Jersey, Bahamas, British Virgin Islands, Monaco, Bermuda, Barbados, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica and Netherlands Antilles.

In recent years the US has tended to regard any country or jurisdiction that offers undue secrecy to investors as being equivalent to Offshore.

In terms of the “Tax Havens Abuse Act,” U.S. draft legislation has existed since 2007, which lists 34 jurisdictions as secrecy jurisdictions. Included in the list are jurisdictions not traditionally regarded as Offshore, including Switzerland and Singapore, as well as Malta, Cyprus, Luxembourg and Hong Kong.

Tax whistleblowers--including persons with knowledge of offshore tax schemes--will be increasingly important to the IRS effort to recover from those who engage in tax fraud and tax evasion. Honest citizens will appreciate whistleblowers' efforts to recover from those who refuse to pay their fair share of taxes, especially with the current U.S."tax gap" of several hundred billion dollars each year owed but not collected.

New IRS Procedures for Whistleblowers Should Encourage More Significant IRS Whistleblower Claims

July 1, 2010

This morning's Washington Post quotes me, among others, in criticizing one aspect of the new procedures for IRS whistleblowers recently published in the Internal Revenue Manual. That one glaring defect aside, the new IRM procedures are welcome news that should encourage more IRS whistleblowers to come forward.

Today's Post article by David Hilzenrath on the IRS whistleblower procedures makes the following point, among others:

"There's apparently an institutional resistance to rewarding whistleblowers that will take some time to dissipate," said Michael A. Sullivan of the law firm Finch McCranie, who represents whistleblowers. "Counterproductive rules such as this one may be a result of that resistance," he said.

When information from whistleblowers helps the IRS recover unpaid taxes, the informants are entitled to as much as 30 percent of the proceeds. However, the new manual explains that the tipster is out of luck if, instead of yielding a payment to the IRS, the tip stops a refund or reduces a credit.

That rule, which we understood was already the view of some at the IRS, makes no sense. If two whistleblowers each can save the Treasury $100 million or $1 billion, there is no reason why one should be rewarded and the other one not rewarded, simply because one whistleblower's information thwarts an improper claim for a refund. Instead, each should be rewarded for saving taxpayer funds.

The Tax Court will likely correct this absurd result, but why not set up the procedures sensibly in the first instance?

From my dealings with the IRS Whistleblower Office representatives, they are not the source of this problem. They are sensible and capable professionals who want to see the IRS Whistleblower program work, and it should work to reduce the federal deficit by collecting from tax cheats.

Encouraging whistleblowers to come forward with meaningful information is essential to that effort. Overall, the new IRM procedures should encourage whistleblowers to submit claims, as we tell our clients who increasingly report sophisticated tax schemes that can cost taxpayers billions of dollars.

Among the real "plusses" in the new procedures is a long-needed mechanism for the IRS to share information with the whistleblower and whistleblower's attorney about the claim. IRS Whistleblower Office Director Steve Whitlock has long spoken of the need to do so, and the Whistleblower Office has delivered with these new procedures.

Other common sense improvements in this IRM revision are its approvals of using information that the whistleblower and the whistleblower's lawyer can provide in ongoing multiple interviews. This is the approach that has worked so well with qui tam whistleblower cases under the False Claims Act.

Furthermore, the criteria by which the Whistleblower Office will make awards are not spelled out, and in a thoughtful manner that shows careful consideration by the Whistleblower Office staff.

The 'institutional resistance" is already crumbling, in the face of what makes sense. Tax whistleblowers are now welcome, and will come forward in increasing numbers.

And, unless Senator Grassley someone gets rid of it first, we look forward to challenging and overturning in Tax Court the nonsensical rule criticized above.

New IRS Whistleblower Claim Procedures for Determining Awards to Whistleblowers Announced

June 16, 2010

Today the long-awaited IRS Whistleblower Office procedures for determining awards to tax whistleblowers were announced in an update to the Internal Revenue Manual.

The new provisions for IRS Whistleblower claims address many details of how tax whistleblower claims will be handled. The full provisions are reprinted below:

Part 25. Special Topics
Chapter 2. Information and Whistleblower Awards
Section 2. Whistleblower Awards

25.2.2 Whistleblower Awards
25.2.2.1 Overview: Authority and Policy
25.2.2.2 General
25.2.2.3 Submission of Information for Award under Sections 7623(a) or (b)
25.2.2.4 Initial Review of the Form 211 by the Whistleblower Office
25.2.2.5 Grounds for Not Processing Claims for Award
25.2.2.6 Processing of the Form 211 7623(a) Claim for Award
25.2.2.7 Processing of the Form 211 7623(b) Claim for Award
25.2.2.8 Whistleblower Award Administrative Proceeding
25.2.2.9 Award Computation
25.2.2.10 Appeal Rights under section 7623(b)
25.2.2.11 Confidentiality of the Whistleblower
25.2.2.12 Funding Awards
25.2.2.13 Award Payment Procedures
25.2.2.14 Annual Report to Congress
Exhibit 25.2.2-1 1891 Letter
Exhibit 25.2.2-2 Rejection Letter – 1010 Letter
Exhibit 25.2.2-3 Acknowledgement Letter – Whistleblower Office
Exhibit 25.2.2-4 Debriefing Checksheet
Exhibit 25.2.2-5 Rejection Letter from the Whistleblower Office
Exhibit 25.2.2-6 Memorandum from Steven T. Miller, February 17, 2010
Exhibit 25.2.2-7 Sample Notice of Opportunity to Comment Letter
Exhibit 25.2.2-8 Sample Summary Award Report
Exhibit 25.2.2-9 Award Recommendation-Opportunity to Comment
Exhibit 25.2.2-10 Confidentiality Agreement
Exhibit 25.2.2-11 Sample Preliminary Award Report
Exhibit 25.2.2-12 Sample Determination Letter
Exhibit 25.2.2-13 Award Calculation Computation Guidelines

Continue reading "New IRS Whistleblower Claim Procedures for Determining Awards to Whistleblowers Announced" »

Offshore Tax Violations: Sen. Grassley Calls For Accounting of Use of UBS Information Provided by Tax Whistleblower

June 8, 2010

Offshore tax evasion is a great priority for the IRS, and thus also the IRS Whistleblower Program.

Today, the leading advocate for robust whistleblower laws has called for the Treasury Department and the IRS to account for their use of information provided by the "UBS whistleblower," Bradley Birkenfeld.

Sen. Chuck Grassley issued a press release today summarizing his letter to Treasury Secretary Tim Geithner and IRS Commissioner Douglas Shulman. Grassley commented on Swiss legislators' move today to "unravel a U.S.-Swiss treaty that would allow for the disclosure of more client information to allow U.S. officials to review cases for potential enforcement of U.S. tax laws."

"The action by Swiss legislators today to try to unravel an international treaty emphasizes the need for U.S. authorities to exhaust the information they have on U.S. taxpayers who use offshore accounts to evade taxes,” Grassley said. “Honest taxpayers deserve to know what's happened with what could be very valuable leads, and if it's nothing, they deserve to know why. It's a matter of tax fairness and law enforcement. And the IRS shouldn't wait for international agreements to fall into place when tax evaders can be identified through other appropriate tools.”

Grassley did not advocate for the UBS whistleblower's release from federal prison, however, but focused on the government's use of the information he provided. (See prior discussions of the UBS whistleblower's case here).

Grassley, more than anyone, is responsible for passage of the December 2006 legislation that created the first meaningful IRS Whistleblower Program. The promising new IRS Whistleblower Program was inspired by the great successes of the nation's primary whistleblower statute for exposing fraud, the False Claims Act.

Sen. Grassley's announcement and letter today are reprinted below:

Continue reading "Offshore Tax Violations: Sen. Grassley Calls For Accounting of Use of UBS Information Provided by Tax Whistleblower" »

Offshore Tax Evasion Scheme to Defraud IRS Alleged in Indictment of Miami Beach Developers

May 27, 2010

A high priority for IRS Whistleblower cases is the abuse of offshore "tax havens" or offshore financial centers to conceal income from the IRS that is subject to U.S. taxation. Over drinks in Miami Beach recently with IRS agents who worked the massive UBS matter, I discussed some of the recent announced cases the IRS has made involving offshore abuses.

Using shell corporations and "nominee" entities established in the Cayman Islands, Switzerland, or a host of other countries that market "secrecy," those looking to conceal income from the IRS, or assets from potential creditors, have made offshore tax havens a booming business.

An interesting example of allegations of offshore tax violations was described in the Justice Department's announcement yesterday of the indictment of two Miami Beach hotel developers. Mauricio Cohen Assor and his son, Leon Cohen-Levy. They were charged with conspiring to defraud the United States and filing false tax returns. The government alleged as follows:

According to court documents, the two men and their co-conspirators used nominees and shell companies formed in tax haven jurisdictions, including the Bahamas, the British Virgin Islands, Panama, Liechtenstein and Switzerland to conceal their assets and income from the IRS. In order to further conceal their assets and income from the IRS, court documents state the men also provided false and forged documents to banks, opened bank accounts in the name of nominees, titled their personal residences and luxury vehicles in the name of shell companies, filed false and fraudulent tax returns, failed to file other tax returns, suborned perjury in a civil matter pending before the New York Supreme Court by directing individuals to testify falsely under oath, and induced other individuals to make false statements to federal law enforcement agents.

Both defendants are permanent resident aliens who, in 2000, received approximately $33 million from the sale of the New York Flatotel, according to the government. They transferred the proceeds using various Swiss bank accounts in the names of foreign nominee entities, including at least one "bearer share" corporation.

When bearer shares are used, the corporation's records do not list its owners, as the owners are whoever has physical possession of the stock certificates. As IRS Special Agent Scott Johnson testified by affidavit, "[b]earer share corporations are often used to hide the true ownership of assets because ownership records are not maintained and nominee officers and directors are often used to control the affairs of the corporation.'

Later, the defendants allegedly transferred the funds to accounts of nominee companies at that bank's New York location, and later to the escrow account of a Florida attorney. The government also alleged that defendants used the money to "fund a luxury lifestyle for themselves and for their family members."

Offshore tax abuse remains a great priority of the IRS, and thus is a major focus of many IRS Whistleblower claims. The new IRS Whistleblower Program recognizes that whistleblowers have an enforceable right to 15-30% of what the IRS recovers based on information whistleblowers provide.

The government's full press release is below:

Continue reading "Offshore Tax Evasion Scheme to Defraud IRS Alleged in Indictment of Miami Beach Developers" »

More Details of UBS Whistleblower Birkenfeld's Prosecution Explained in Washington Post

May 15, 2010

The Sunday, May 15, 2010 Washington Post will include more details on a perplexing question we have written about: how did UBS whistleblower Bradley Birkenfeld get himself prosecuted for a felony, and earn a prison sentence, while he sought to become an IRS whistleblower?

The story by David S. Hilzenrath explains more of the "dance" between Birkenfeld and prosecutors as he apparently partially told the government what he knew about wrongdoing at UBS.

Birkenfeld blew an opportunity to avoid prosecution for his own crimes when he failed to disclose them to the government, according to his sentencing transcript.

An obvious fact most critics of his prosecution seem to miss is that neither Birkenfeld nor his attorneys disputed the prosecutor's statements at his sentencing that Birkenfeld probably would have avoided any prosecution had he simply told the whole truth to prosecutors. His later protests ring hollow because--when it mattered most--he failed to dispute the damning evidence that demanded his prosecution.

By concealing his own wrongdoing, Birkenfeld apparently also allowed his former client Igor Olenicoff to escape a prison term when the government negotiated probation for him.

I represent many IRS whistleblowers--some with knowledge of tax violations larger than the more than $700 million that UBS agreed to pay the IRS--and yet I remain baffled why Birkenfeld simply did not disclose his own wrongdoing up front.

As the prosecutor acknowledged, Birkenfeld could probably have walked away a free man--and a considerably richer man with the IRS whistleblower rewards--had he simply told the whole truth.

Then again, in his "60 Minutes" interview Birkenfeld had no good explanation why he was carrying diamonds into the country in a toothpaste tube--even as he tried to convince the world of points he refused to make at his own sentencing.

Those facts say something about the credibility of his protests that the "sky is falling" for IRS whistleblowers. It is not falling, at least for the honest IRS whistleblowers willing to tell the whole truth. IRS whistleblowers who tell the truth need not fear, simply because Birkenfeld had the bad judgment to withhold the truth.

Should SEC Whistleblowers Have Right to Share in Recoveries That They Cause?

May 4, 2010

Congress is at a crossroads in deciding whether there will be a meaningful SEC Whistleblower Program--for the first time.

At this morning's Offshore Alert conference in Miami, we heard from the SEC Chair's Senior Advisor Stephen Cohen on this subject, as well as insight from IRS Whistleblower Office Director Steve Whitlock on how the IRS Whistleblower Program is now designed to encourage whistleblower claims.

As we have observed previously about the bills that would create an SEC Whistleblower program, past experience shows that an enforceable right to a meaningful reward is essential to cause whistleblowers to come forward.

The SEC apparently resists guaranteeing whistleblowers a minimum percentage of dollars recovered, as evidenced by the House version of the bill that lacks this feature. The SEC’s Steve Cohen explained that the SEC does not wish to commit funds that might otherwise go to harmed investors. He nonetheless contended that the SEC’s proposal may be better for whistleblowers because it pays from a special fund designated for this purpose, based on sanctions imposed, not collected.

Compare the experiences of the Justice Department and the IRS, however. When each had whistleblower statutes that provided no meaningful right to a reward, whistleblower claims were small and few. We have written extensively about the dramatic successes of the False Claims Act since its rewards increased to meaningful levels in 1986.

Likewise, IRS Whistleblower Office Director Steve Whitlock described again today how large whistleblower claims have exploded since December 2006, when Congress doubled rewards to whistleblowers to 15-30%, and created an enforceable right to those rewards.

History proves that most whistleblowers simply will remain silent, without a right to meaningful rewards. The SEC will be dividing a small pie unless Congress again embraces this principle.

To protect investors, those with information about fraud must have every incentive to speak up--as early as possible--and to be heard. The Madoff debacle proved that point.

In our experience in representing whistleblowers in the financial industry, the Senate’s version of the SEC whistleblower changes is highly preferable. It creates a right to awards of 10-30%.

There are still glaring deficiencies, such as the provisions excluding auditors who have tried unsuccessfully to call attention to fraud within the organizations and auditing firms involved. It will be an interesting next few weeks as Congress debates the final result.

Continue reading "Should SEC Whistleblowers Have Right to Share in Recoveries That They Cause?" »

IRS Whistleblower Office Announces Important Changes, New Procedures for IRS Whistleblower Program

April 28, 2010

IRS Whistleblower Office Director Steve Whitlock announced important, long-awaited developments in the new IRS Whistleblower Program yesterday at the Second Annual "IRS Whistleblower Boot Camp" in Washington.

First, Director Whitlock finally announced how the IRS will share information that will allow whistleblowers to understand the Whistleblower Office's decisions about what awards are made to whistleblowers.

A year ago in my interview with the IRS Whistleblower Office Director, Mr. Whitlock discussed the need to solve the vexing question of how the IRS can share this information with whistleblowers and their attorneys, while also complying with legal requirements for confidentiality of taxpayer information under section 6103 of the Internal Revenue Code.

The new procedures described yesterday for what will happen with IRS Whistleblower claims--once the IRS has recovered money as a result of a whistleblower claim-- are as follows:

1. After the Whistleblower Office receives a report from the IRS Operating Division that handled the matter, the Whistleblower Office Analyst will review the files and recommend an award to the whistleblower.

2. That recommendation then will go to the Whistleblower Office Director for review and approval.

3. A summary of the award recommendation then will be provided to the whistleblower and the whistleblower's attorney for comment. That summary will identify:

(a) the amount of money collected by the IRS based on information provided by the whistleblower;

(b) the recommended award percentage to the whistleblower (15-30% of the funds recovered, unless an exception under the statute applies to lower the percentage);

(c) the factors considered by the IRS Whistleblower Office in reaching the recommended percentage;

(d) the recommended award amount; and

(e) the whistleblower's options upon learning of this recommendation.

In welcome news to whistleblower attorneys, the IRS Whistleblower office also will make available a "detailed" award recommendation to whistleblowers and their attorneys who sign a confidentiality agreement. The whistleblower and counsel then may review in person (but not copy) the documents in the IRS administrative file that are the basis of the award recommendation, and comment to the Director about the award. Violation of the confidentiality agreement will lead to reduction of the award.

The new procedures are to be published in the Internal Revenue Manual in June 2010, and later will be included in regulations, with an opportunity for notice and comment.

Continue reading "IRS Whistleblower Office Announces Important Changes, New Procedures for IRS Whistleblower Program" »

New IRS Whistleblower Program Developments Discussed This Week at "IRS Whistleblower Boot Camp"

April 25, 2010

On Tuesday, April 27, 2010, the Second Annual "IRS Whistleblower Boot Camp" will convene in Washington, D.C., sponsored by Taxpayers Against Fraud.

Representatives of the IRS Whistleblower Office will discuss the latest developments in the IRS Whistleblower Program, though which tax whistleblowers can receive up to 30% of recoveries by the IRS. Other IRS and DOJ representatives will take part as well, as they analyze what lawyers representing IRS whistleblowers should know in pursuing these claims.

Like last year's program, this one is a sell-out. I am looking forwarding once again to moderating a panel discussion, this time on "Protecting IRS Whistleblowers from Criminal and Civil Liability."

Among the important new developments to be discussed is the "clarification" issued in February 2010, on what contacts the IRS may have with whistleblowers (or "informants") who are current employees of taxpayers who are the subject of whistleblower claims. (The full notice is reprinted below.)

We expect there may be other major new developments to report at this year's IRS Whistleblower Boot Camp. We will update you upon returning from D.C. this week.

Continue reading "New IRS Whistleblower Program Developments Discussed This Week at "IRS Whistleblower Boot Camp"" »

Well Worth a Read: SEC Whistleblower Harry Markopolos' "No One Would Listen: A True Financial Thriller"

April 5, 2010

After meeting with the Department of Justice in Washington recently to discuss another whistleblower case, I picked up Harry Markopolos' recent book, "No One Would Listen: A True Financial Thriller." It is a fun and engrossing read, with humor that I did not expect to find in this subject.

We have written previously to applaud Harry Markopolos' work in figuring out Bernie Madoff's Ponzi scheme, and then in trying to get the SEC's attention for years. In an era when fraud is being exposed in so many industries through the courage of whistleblowers, his book shows just how paper-thin our government's resources can be in recognizing and stopping the next huge fraud scheme.

Neither I nor my law firm has any financial interest in recommending this book, and no one has asked me to mention it, but I do believe that any thinking person will enjoy it.


Continue reading "Well Worth a Read: SEC Whistleblower Harry Markopolos' "No One Would Listen: A True Financial Thriller"" »

IRS Whistleblower Program and Confidentiality of IRS Investigations of Whistleblower Claims

March 2, 2010

One of the most interesting and challenging issues in representing IRS whistleblowers is how this promising new IRS Whistleblower Program can co-exist with the limits Congress has imposed on disclosure of taxpayer information--which includes what the IRS does in pursuing claims brought by whistleblowers.

I wanted to pass along that Michelle M. Kwon, Assistant Professor of Law at Texas Tech Law School, has written a law review article about this subject. It discusses recommendations for allowing information to be shared more with whistleblowers by "relaxing" the restrictions of section 6103, "Confidentiality and disclosure of returns and return information."

As Professor Kwon writes:

There is a tension between protecting taxpayer privacy and effectively administering the enhanced IRS whistleblower program. Section 6103 generally would prohibit the IRS from disclosing to the whistleblower the status of the whistleblower’s claim, including whether the taxpayer is, has been, or will be under audit as a result of the whistleblower’s information, why a claim is rejected or denied, or the basis of any eventual award. Furthermore, when Congress enhanced the whistleblower law in 2006, it contemplated that the IRS may seek additional assistance from the whistleblower, presumably to help build a case against the delinquent taxpayer. The ability of the whistleblower to assist the IRS may be hampered, however, to the extent that Section 6103 prohibits the IRS from sharing confidential tax information with the whistleblower. Finally, the new law gives whistleblowers the right to appeal IRS award determinations to the Tax Court. But there are questions about how meaningful that appeal right can be given the restrictions imposed by Section 6103.

Issues concerning how section 6103 will impact IRS whistleblowers are among those to be addressed at the 2010 IRS Whistleblower Boot Camp, which will build on the successes of last year's inaugural IRS Whistleblower Boot Camp.

Next IRS Whistleblower Boot Camp Is Planned for April 2010

February 16, 2010

We have written about the highly successful 2009 IRS Whistleblower Boot Camp in Washington, D.C. The IRS Whistleblower Office gathered with attorneys representing whistleblowers for this conference to discuss in detail many of the issues that arise in representing IRS whistleblowers, persons who report tax fraud or tax noncompliance. This conference is sponsored by Taxpayers Against Fraud.

Planning for the 2010 IRS Whistleblower Boot Camp on April 27, 2010 in Washington is underway, and it should be at least as successful and informative as last year's.

Based on our experience in representing whistleblowers, the new IRS Whistleblower Program is off to a great start since Congress authorized the creation of the IRS Whistleblower Office in December 2006. As we have written about continuously in following the progress of the new program, the Whistleblower Office staff has been working diligently not only to set up procedures for handling claims, but also in processing the hundreds of submissions it has received.

Once the agenda is set for the 2010 IRS Whistleblower Boot Camp, we will say more about the details. At a time when deficits are exploding, the need to catch tax cheats is greater than ever.

IRS Whistleblower Office Prepares to Make Awards to IRS Whistleblowers Under New Program

January 26, 2010

Since Congress authorized new awards to IRS whistleblowers in December 2006, we have followed closely the progress of the new IRS Whistleblower Office led by Director Stephen Whitlock.

IRS Whistleblower Office Director Stephen Whitlock has just announced that the IRS Whistleblower Office is preparing to make award determinations on whistleblower claims submitted under the "new" rewards program.

The IRS Whistleblower Office (and no doubt the IRS Chief Counsel's Office) have been working on "guidance" for determining the amount of awards within the range authorized by law.

We have written extensively on many of the issues that have arisen and will arise in handling IRS Whistleblower claims. Recent multi-million dollar payments apparently relate to claims under the "old" program. Those payments are encouraging signs of the success of the new program, which authorizes a higher range of awards of 15-30% of the recovery by the IRS.

Tax Analysts reported on Director Whitlock's comments at the recent ABA meeting.

We are encouraged that the steady progress of the IRS Whistleblower Office continues, as this promises to be an extremely successful program to discourage tax cheats. Only meaningful rewards to whistleblowers will accomplish that goal.

Continue reading "IRS Whistleblower Office Prepares to Make Awards to IRS Whistleblowers Under New Program" »

Taxation of Qui Tam Whistleblower Awards by IRS Addressed by Tax Court

January 22, 2010

How does the IRS treat whistleblowers who receive awards under the False Claims Act's "qui tam" provisions, which allow private citizens who expose fraud to share in the government's recovery of money?

The Tax Court this week addressed that question. It held that awards to whistleblowers or "relators" are part of "gross income" and thus are taxable, but that the whistleblower nonetheless may deduct the attorney's fees paid as a miscellaneous itemized deduction.

Thus, no income taxes were owed on that portion of the whistleblower's award that was paid as attorney's fees to the whistleblower's attorney.

This result not only makes sense, but also is consistent with precedent. Since the whistleblower would have had no recovery but for the attorney's efforts, it would be unfair to conclude otherwise.

The case is ALBERT D. CAMPBELL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, decided January 21, 2010. It is reprinted below:

Continue reading "Taxation of Qui Tam Whistleblower Awards by IRS Addressed by Tax Court " »

IRS Whistleblower Rewards to Convicted UBS Whistleblower Birkenfeld? The Rule of Law Will Sort It Out.

November 28, 2009

In "Protecting Whistleblowers from Criminal Prosecution," we expressed our amazement at how UBS "whistleblower" Brad Birkenfeld got himself prosecuted for a federal felony while attempting to set himself up for rewards through the new IRS Whistleblower Program. Birkenfeld's case is highlighted in recent articles by Lynnley Browning in Friday's New York Times and by Martha Brannigan in Saturday's Miami Herald.

To attorneys with prosecution experience who represent whistleblowers, it is shocking that Birkenfeld apparently missed a clear opportunity to avoid prosecution altogether by simply "coming clean" and telling the whole truth about his own actions at the outset.

We have a much different take on Birkenfeld's case than those who suggest it should scare away potential IRS whistleblowers. Whistleblowers who are willing to tell the truth from the start can easily avoid Birkenfeld's fate, so long as they follow the law and counsel's advice to disclose all. At the same time, we take issue with critics who say Birkenfeld should not even be considered for an IRS Whistleblower reward, since the "rule of law" should determine the answer to that question.

First, Birkenfeld's case should make other potential IRS whistleblowers careful about pursuing IRS whistleblower claims, but not fearful. Most IRS whistleblowers face no realistic chance of prosecution, especially since the government often must depend on whistleblower information to make cases.

Even those relatively few whistleblowers with possible exposure such as Birkenfeld (who admitted to engaging in a tax fraud scheme) can often negotiate protection from prosecution, but only if they tell the whole truth from the start, and follow the rules for obtaining protection. This was a topic in the "IRS Whistleblower Boot Camp" panel discussion that I led this past March, with panelists including IRS Whistleblower Office Director Steve Whitlock--how to protect the whistleblower who has potential exposure.

Why Birkenfeld apparently thought he could get away with withholding information from the government about his own wrongdoing--a foolish move to us--remains a mystery, even after we reviewed his sentencing transcript. That horrendous judgment call distinguishes Birkenfeld's case from all other whistleblower cases we have seen.

At Birkenfeld's sentencing, prosecutor Kevin Downing explained that Birkenfeld's information was extremely valuable to the IRS, and that Birkenfeld probably would not have been prosecuted had he simply been forthcoming by disclosing his own misconduct in assisting tax evasion:

"BUT FOR MR. BIRKENFELD FAILING TO DISCLOSE HIS INVOLVEMENT WITH THE FRAUD AND THE U.S. CLIENTS THAT HE AIDED AND ASSISTED IN TAX EVASION, I BELIEVE WE WELL WOULD HAVE NONPROSECUTED MR. BIRKENFELD. BUT GIVEN THE FACT THAT HE REFUSED TO PROVIDE THAT INFORMATION AND LED US DOWN A COURSE WHERE WE HAD TO START [TO] INVESTIGATE MR. BIRKENFELD AND HIS ACTIVITIES, THAT IS WHY WE ARE HERE TODAY, THAT IS WHY HE WAS INDICTED, AND THAT'S WHY HE PLED."
(Birkenfeld Sentencing Tr. 12-13)(emphasis supplied).

Continue reading "IRS Whistleblower Rewards to Convicted UBS Whistleblower Birkenfeld? The Rule of Law Will Sort It Out." »

IRS "Voluntary Disclosure" Program Inundated by More Than 14,000 Taxpayers

November 17, 2009

We have followed with great interest the IRS Voluntary Disclosure Program, especially after the UBS settlement created fear of discovery in many U.S. taxpayers with offshore accounts.

IRS Commissioner Doug Shulman announced that the IRS Voluntary Disclosure Program was flooded with submissions by more than 14,000 taxpayers, according to the Wall Street Journal.

IRS Whistleblower cases have been impacted--and in some cases probably pre-empted--by the submissions of recalcitrant taxpayers to the IRS Voluntary Disclosure Program. The IRS Criminal Investigative Division in certain areas has been inundated.

It will be fascinating to see the progress of IRS recoveries as a result of these voluntary disclosures by taxpayers.

New SEC Whistleblower Rewards and Whistleblower Protections Approved by House Committee--But Improvements Are Needed

November 9, 2009

Since the Madoff and Stanford schemes proved ruinous to so many investors, many have asked why the SEC has no meaningful "whistleblower" program to expose wrongdoing, a topic we have written about previously.

Perhaps Harry Markopolis' voice is finally being heard, albeit faintly. Last week, the House Financial Services Committee approved legislation that would expand both whistleblower rewards and whistleblower protections, among other things.

Still, past experience with the False Claims Act and the IRS Whistleblower statute shows that the proposed rewards need to be beefed up to be effective.

The “Investor Protection Act of 2009” (excerpted below) also would increase the SEC’s budget and make other changes designed to strengthen enforcement.

The new rewards to whistleblowers would be up to 30% of monetary sanctions of more than $1 million:

"In any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000, the Commission, under regulations prescribed by the Commission and subject to subsection (b), may pay an award or awards not exceeding an amount equal to 30 percent, in total, of the monetary sanctions imposed in the action or related actions to one or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the action."

The proposed new whistleblower rewards are reminiscent of those under the new IRS Whistleblower Program, but need at least two corrections to be effective.

First, the current SEC bill creates no enforceable "right" to a reward--a defect that made the old IRS Whistleblower statute ineffective before it was amended in December 2006.

Second, there should be a minimum percentage of perhaps 15% for the SEC rewards; it should not be left at 0-30%, as the bill now reads. Who would risk a 1% (or even lower) reward? The False Claims Act only became effective after 1986 amendments increased rewards to at least 15% in most cases. The new IRS Whistleblower law is attracting whistleblowers left and right because it provides for a minimum of 15% in most instances.

The proposed SEC law has one advantage over the IRS version: The IRS law unfortunately omits protection of whistleblowers from retaliation, but the proposed SEC whistleblower provisions would provide a remedy similar to that furnished whistleblowers under the False Claims Act. Here is what the proposed bill states (in part):

"An employee, contractor, or agent prevailing in any action brought under subparagraph (B) shall be entitled to all relief necessary to make that employee, contractor, or agent whole, including reinstatement with the same seniority status that the employee, contractor, or agent would have had, but for the discrimination, 2 times the amount of back pay, with interest, and compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorneys' fees."

The bill's proposed SEC whistleblower language is below; the entire bill may be found here:

Continue reading "New SEC Whistleblower Rewards and Whistleblower Protections Approved by House Committee--But Improvements Are Needed" »

Part 2: IRS Whistleblower Program Report by Treasury Inspector General for Tax Administration (TIGTA)

October 8, 2009

We wrote yesterday about the just-released report on the new IRS Whistleblower Program by the Treasury Inspector General for Tax Administration (TIGTA). The "rest of the story" should be told.

Some history is essential to evaluate how far the handling of whistleblower (or "informant") claims has progressed since the newly created IRS Whistleblower Office was formed in early 2007, and what is still needed.

Although information provided by whistleblowers is extremely effective in exposing fraud, before 2006 Congress had not authorized an effective IRS whistleblower rewards program--and some in Congress affirmatively opposed one.

Some of this history is described in a 2006 report by TIGTA, which helped prompt Congress to create the new IRS Whistleblower Rewards Program. That 2006 report described the value of informant claims--and also the absence of any centralized process within the IRS for coordinating those claims. It described what the new IRS Whistleblower Office Director and still-to-be-hired staff would inherit in February 2007.

First, the 2006 IG Report leaves no doubt about how valuable "informant" information has been to the IRS--even when there was no coordination of informant claims:

The Informants’ Rewards Program has significantly contributed to the IRS’ efforts to enforce tax laws, but additional management focus could enhance the effectiveness of the Program as an enforcement tool and make the process more accommodating to informants. Our analysis of IRS data indicated that examinations initiated based on informant information were often more effective and efficient than returns initiated using the IRS’ primary method for selecting returns for examination.

Nonetheless, perhaps based in part on the past hostility toward the IRS's making effective use of whistleblowers before 2006, the old "informant" program was no program at all. This was the "mess" that the new Whistleblower Office Director and tiny staff of four inherited and had to start revamping in 2007, as described by TIGTA's 2006 report:

Continue reading "Part 2: IRS Whistleblower Program Report by Treasury Inspector General for Tax Administration (TIGTA)" »

IRS Whistleblower Program: Inspector General Urges Whistleblower Protection from Retaliation and Administrative Changes

October 7, 2009

Today the Treasury Inspector General for Tax Administration ("TIGTA") released a Report on the IRS Whistleblower Program that urges Congress to protect IRS whistleblowers from retaliation by employers, and recommends various administrative changes to the Program.

The Report's title, "Deficiencies Exist in the Control and Timely Resolution of Whistleblower Claims," is misleading to this writer, who has followed the progress of the new Program since its inception. Before Congress created the new IRS Whistleblower program in December 2006, the Inspector General had observed that the IRS had no centralized approach to dealing with "informant" claims under the "old" program." The new legislation was designed to create a "Whistleblower Office" for the first time ever--with brand new staff hired to "invent" the various procedures and systems needed to fulfill Congress' intent.

To illustrate, when we submitted a substantial IRS whistleblower claim in early January 2007 through the IRS Criminal Investigative Division, the new IRS Whistleblower Office had no Director or staff. Director Steve Whitlock was not appointed until several weeks later, and he promptly set out to hire highly qualified professionals within the IRS to help establish the new Whistleblower Program. The same professionals simultaneously had to keep up with submissions of new claims from all over the country, as well as capture older submissions to the IRS.

Perhaps the IG means that the Whistleblower Office still has not worked out all of the kinks in this new program. Director Whitlock agreed with the recommendations for continuing to improve the claims process.

The most significant part of the Report may be its strong recommendation that Congress authorize protecting IRS whistleblowers from retaliation, as whistleblowers who file qui tam cases under the False Claims Act are protected:

The False Claims Act covers false claims by government contractors but specifically excludes tax fraud. The Whistleblower provisions in the Tax Relief and Health Care Act of 2006 cover actions in the area of tax compliance and provide a structure that is similar in certain respects to the False Claims Act. However, unlike the False Claims Act, Whistleblower law related to tax fraud does not include specific provisions for employee protection against retaliation by an employer. Our discussions with representatives within the operating divisions who work with whistleblowers identified that whistleblowers are concerned regarding possible retaliation from employers and that their confidentiality is their utmost concern.

* * * *
Legislative Recommendation
Legislation is needed to ensure that informants are protected against retaliation by their employers and to provide specific relief to informants who are retaliated against.

One note of caution: the Report refers to $65 billion in "alleged income unreported" in 2008. There is no way to verify this number now, given that informants may be wrong in their estimates.

The full Report is here.

IRS Whistleblower Office Issues Latest Annual Report to Congress

September 28, 2009

The IRS Whistleblower Office has released its Annual Report to Congress, for the fiscal year ended September 30, 2008. Some highlights are below:

First, the IRS Whistleblower Program has experienced explosive growth since Congress authorized these new IRS Whistleblower rewards in December 2006.

According to this Report, "the initial results suggest that whistleblowers with significant knowledge are coming forward as a result of the changes to the award program. We received claims that appear to meet the section 7623(b) criteria on 46 taxpayers in the first three months of FY 2008. By the end of the fiscal year, that number grew to 1,246. Of the 994 claims in which the individual made a specific allegation about the amount of the underpayment, 228 alleged the underpayment of $10 million or more, and 64 alleged the underpayment of $100 million or more. Many of the individuals submitting this information claim to have inside knowledge of the transactions they are reporting, and often provide extensive documentation to support their claims. It is too early to tell how many of the 1,246 cases will result in collected proceeds, and whether the whistleblowers' estimates of the amounts in dispute are accurate."

In our experience from submitting early claims even before the new Whistleblower Office had hired any staff, because the IRS Whistleblower Office's first Director Steve Whitlock immediately assembled a team of extremely able professionals from elsewhere in the IRS, the Whistleblower Office hit the ground running. "During this fiscal year, the Whistleblower Office staff grew from 4 to 14. The current staff includes ten analysts with decades of experience in a broad array of IRS
compliance programs."

As claims poured in, the Director and staff essentially had to "invent" the new Whistleblower Program with all that entails, in addition to keeping up with submissions of more and more claims.

Integrating the Whistleblower Program with the various divisions of the IRS also was a predictable challenge.

"Working with the IRS Operating Divisions, the Criminal Investigation Division, and the Office of Chief Counsel, the Whistleblower Office designed an intake process that includes initial review by Whistleblower Office staff and an evaluation by Operating Division subject matter experts. The Operating Division subject matter experts determine whether the information the whistleblower submitted warrants initiation of an examination of the reported issues. Each IRS Operating Division also has a Division Counsel. Division Counsel attorneys provide advice on technical tax issues as well as any legal issues that could limit the IRS's ability to use some or all of the information the whistleblower provided. For example, information a whistleblower provided may be subject to an evidentiary limitation such as the "attorney-client privilege" or the "federally authorized tax practitioner" privilege under section 7525 of the Code. A Division Counsel attorney assists the subject matter expert in reviewing the information provided to determine if any of the information is subject to an evidentiary limitation and whether an exception to that limitation may apply. In addition, as part of the subject matter expert's analysis, the whistleblower may be asked to meet to discuss the submission, to ensure that the IRS fully understands the issues and that the individual has submitted all relevant information.

From our observations in dealing with the Whistleblower Office, the staff has been very capable and diligent in creating and running the new program, and in coordinating with the other divisions of the IRS. "The IRS established a working group led by the Whistleblower Office, with representatives from the Operating Divisions, Criminal Investigation Division, and the Office of Chief Counsel. The working group addresses the detailed steps needed to
implement the changes in the relevant law, including updates, revisions or replacements for regulations, policies, operating procedures, and forms for whistleblower awards.
This year, the IRS completed a comprehensive review of Internal Revenue Manual
(IRM) provisions of section 7623, and published revisions on December 30,2008. In
addition, the IRS published a Privacy Impact Assessment and a Privacy Act System of Records Notice for the whistleblower program. Publication of both the Privacy Impact
Assessment and the Privacy Act System of Records Notice are essential steps in
establishing program controls as required by the law and regulation.

As to money collected and paid out through the IRS Whistleblower Program, the Report provides information on claims submitted before the law changed in December 2006, and doubled the range of payments authorized to whistleblowers. Given that the claims submitted under the new program are now maturing, we look forward to future reports that show the success of the new IRS Whistleblower Rewards.

From the size of the claims we have seen from our firm's clients, the IRS Whistleblower Program should be a source of significant recoveries that will benefit all honest taxpayers, as well as the IRS Whistleblowers who come forward.

Calls Continue for a "False Claims Act" for Wall Street Whistleblowers

September 20, 2009

Since the Madoff and Stanford scandals, we have written about the calls for the Securities and Exchange Commission (SEC) to establish a meaningful whistleblower rewards program. Currently, no adequate incentives exist for whistleblowers to speak up when they might have a chance to stop large scale fraud and prevent the next Madoff or Stanford debacle. How much better off would so many Americans be if someone had exposed Madoff before he defrauded so many investors?

Forbes has run interesting column by Bill Singer, calling for a statute that apples "False Claims Act" whistleblower remedies to Wall Street. Why not protect investors from the massive losses that so many incurred? The current system obviously failed to do so. Harry Markopolis has described eloquently how the SEC could do so much better, and new SEC whistleblower rewards should make a huge difference.

We are already seeing the successes of another innovative law based on the same idea, the IRS Whistleblower Program. To stop those who would have you and I carry their share of the nation's tax burden, private citizens are stepping forward with better and better information to provide to the IRS about significant tax cheating. The quality of the information that our clients are presenting is compelling, and some of it will help stop major abuses of the tax laws.

Continue reading "Calls Continue for a "False Claims Act" for Wall Street Whistleblowers" »

New IRS Group to Address Offshore Accounts and Other International Tax Abuses by Wealthy Taxpayers

September 4, 2009

Offshore tax abuses and tax evasion have kept the IRS quite busy of late. The fast-approaching September 23 deadline for its "voluntary disclosure program," and its agreement with UBS that will allow it to identify thousands of American taxpayers with offshore accounts, have added momentum to its efforts to combat offshore tax abuses by high net worth taxpayers.

Now, the IRS is creating a new group to "focus on examinations involving webs of entities and arrangements controlled by the high wealth taxpayer segment." It will be part of the IRS Large and Midsize Business Division.

The IRS is also seeking additional resources from Congress to step up its enforcement efforts.

The new group will not deal solely with taxpayers who are UBS clients, but will address a broad variety of international tax issues.

This added expertise should be a positive development for the IRS Whistleblower Program, as it will allow the IRS to take on more and more complex investigations. The public will benefit from the greater results produced in cases of high-dollar tax evasion, as that money owed is finally paid.

Protecting Whistleblowers from Criminal Prosecution: The Mystery of the UBS Whistleblower's Prison Sentence

September 3, 2009

In one of two prominent whistleblower cases in the news this week, whistleblower John Kopchinski will be awarded more than $50 million for his role in exposing improper "off-label marketing" of the drug Bextra by Pfizer. Other whistleblowers also will be rewarded because of this settlement. That settlement of $2.3 billion is the largest in history ($1 billion to settle False Claims Act allegations, and $1.3 billion in criminal fine and forfeiture).

As large as the Pfizer settlement is, the other whistleblower's actions seem likely to lead to recovery of dollars that could dwarf this $2.3 billion settlement. UBS whistleblower Bradley Birkenfeld has lifted the shroud of secrecy from thousands of American taxpayers' offshore accounts at UBS. He has given the IRS a foothold into recovering potentially many billions in unpaid taxes owed.

Yet Birkenfeld was recently sentenced to serve 40 months in federal prison for conspiracy to defraud the United States in a tax fraud scheme while at UBS. His conviction also calls into question his ability to receive a reward under the IRS Whistleblower Program from the billions to be collected by the IRS.

How could this happen?

There are tried and true steps lawyers representing whistleblowers must take to protect their clients from the risk of prosecution. This was one of the topics of the "IRS Whistleblower Boot Camp" panel discussion that I led this past March, with panelists including IRS Whistleblower Office Director Steve Whitlock--how to protect the whistleblower who has potential criminal liability, but who has valuable information.

If adequate protection cannot be obtained, often the whistleblower with real criminal exposure should choose not to go forward. If the information is important enough to the government, however, protection for the whistleblower often can be negotiated, so long as the whistleblower is truthful and forthcoming. As former federal prosecutors who have also defended clients in white collar criminal prosecutions, we have represented many clients in obtaining this type of protection.

Continue reading "Protecting Whistleblowers from Criminal Prosecution: The Mystery of the UBS Whistleblower's Prison Sentence" »

UBS and IRS Voluntary Discloure Program: Interesting Convergence for IRS Whistleblower Program

August 30, 2009

Offshore tax abuses have been an IRS priority for some time, but the impending September 23, 2009 deadline for the IRS "Voluntary Disclosure" program--combined with the recent announcement that UBS has agreed with the IRS to release 4,450 names of U.S. account holders--has created a flurry of activity for the IRS.

Anxious taxpayers with exposure cannot be sure that their names are not on the list being produced. Last week, the IRS added a 52nd "FAQ" about the Voluntary Disclosure Program to explain its application to UBS account holders:

Q52. Are UBS account holders eligible to make a voluntary disclosure under the IRS’s offshore Voluntary Disclosure Practice (VDP) announced on March 23, 2009, and set to expire September 23, 2009?

Yes, provided that the UBS account holder is otherwise eligible under the VDP. However, a UBS account holder becomes ineligible to make a voluntary disclosure under the offshore VDP at the time the IRS receives information from any source, including from the Swiss Federal Tax Administration (“SFTA”), UBS, an informant, or otherwise, relating specifically to the account holder's undisclosed foreign accounts or undisclosed foreign entities.

As part of the agreement with Switzerland and UBS announced by the IRS and the Department of Justice on August 19, 2009, UBS will be sending notices to account holders indicating that their information may be provided to the IRS under the agreement. If a UBS account holder gets this notification from UBS before September 23rd, this notification will not by itself disqualify the account holder from making a voluntary disclosure under the offshore VDP by the September 23rd deadline. Although many of these notices will not be sent by UBS to account holders until after September 23rd, the September 23rd offshore VDP deadline applies to all UBS account holders even if they have not received a notice by that date.(See http://www.irs.gov/newsroom/article/0,,id=210027,00.html).

The IRS Whistleblower Program adds another element of suspense for non-compliant taxpayers. How many of these taxpayers may learn that the IRS Whistleblower Program has already identified them to the IRS?

And if not yet identified, how many taxpayers who will decline the benefits of voluntary disclosure by September 23 will be revealed to the IRS later through the very effective IRS Whistleblower Program?

Continue reading "UBS and IRS Voluntary Discloure Program: Interesting Convergence for IRS Whistleblower Program" »

Court Agrees with IRS That Hospital CEO Is Personally Liable for Unpaid Payroll Taxes

August 9, 2009

Health care cases that our lawyers see most often involve whistleblowers who know of violations of the False Claims Act. While we also pursue many IRS violations under the IRS Whistleblower Program, the health care industry is not the source of most of those claims.

In perhaps a new trend, last week a federal court in Florida agreed with the IRS that a hospital CEO is personally liable for failing to pay over to the IRS close to $2 million in payroll taxes. (Doulgeris v. United States, M.D.Fla., August 03, 2009).

Earlier this year, the chairman of the board of a tax-exempt hospital was held personally liable for the hospital's failing to collect and pay to the IRS payroll taxes, as the Fifth Circuit Court of Appeals affirmed that decision. (Verret v. United States, 5th Cir., 2009). The board chair, however, had extensive involvement in the operations of the entity.

Payroll tax fraud thus appears to remain an IRS priority. The reasoning of the Florida federal judge explains how the CEO was found personally liable for unpaid payroll taxes;

Continue reading "Court Agrees with IRS That Hospital CEO Is Personally Liable for Unpaid Payroll Taxes" »

Can IRS Whistleblower Program Help Offset Cost of Health Care Overhaul?

July 24, 2009

How to pay for health care in the United States, as costs inexorably grow?

The IRS Whistleblower Program may help by narrowing the "tax gap"--the difference between taxes owed and taxes paid each year. Treasury's latest estimate is that $345 billion owed remains uncollected from those who engage in tax fraud, tax evasion, and other tax noncompliance. ("Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance").

Senate Finance Committee Chair Max Baucus, D-Mont., raised this tax gap with the next IRS Chief Counsel, William J. Wilkins, on July 14: "We're right now trying to figure how to pay for healthcare reform," Baucus told Wilkins. "And it's ironic that coincidentally, the amount we are trying to raise is that amount."

The new IRS Whistleblower Program should dramatically improve the IRS's efforts to close that tax gap. In December 2006, Congress authorized rewards of 15-30% paid to IRS whistleblowers who provide information that assists the IRS in collecting amounts owed to the IRS.

For the first time, IRS whistleblowers have an enforceable "right" to receive a reward. Early indications from the clients who have contacted us are that many substantial claims are being presented, including claims of over $1 billion owed to the IRS. (To see how the IRS Whistleblower Program works, see excerpts of this interview with IRS Whistleblower Office Director Steve Whitlock.)

Even the SEC is examining the success to date of the IRS program, in determining how the SEC might encourage and reward whistleblowers who come forward to reveal the next Madoff or Stanford.

Whistleblowers with solid information will help close the tax gap, and avoid imposing new taxes on the rest of the law-abiding Americans who pay their taxes.

Continue reading "Can IRS Whistleblower Program Help Offset Cost of Health Care Overhaul?" »

Whistleblower Attorneys Discuss False Claims Act Amendments & "The Most Pressing Issues in Representing Whistleblowers"

July 12, 2009

At the 20th Annual Convention of NELA, the National Employment Lawyers Association, I recently had the pleasure of moderating a panel discussion of some of the country's top "whistleblower" lawyers. The topic was "The Most Pressing Issues in Representing Whistleblowers."

Joining me in this panel discussion were Richard Renner and David J. Marshall. Richard is an attorney with Kohn & Colapinto in Washington, DC. and also serves as Legal Director of the National Whistleblowers Center. David is a partner with Katz, Marshall & Banks, LLP in DC.

The discussion included:

(1) the brand new Amendments to the False Claims Act that became law on May 20, 2009;

(2) "winning" cases and clients;

(3) what documents and other evidence may lawfully be gathered;

(4) protecting clients who may have been forced to participate in unlawful acts, and who therefore may face liability or prosecution themselves; and

(5) presenting cases most effectively to capture the government's interest.

In addition, we discussed the new IRS Whistleblower Program, in this second consecutive year that NELA invited me to participate in its national convention's panel discussion of whistleblower issues. Audience members had many excellent questions during and after the discussion.

After our session, my friend Mark Kleiman led a discussion of whistleblower issues entitled "The California False Claims Act & Other Whistleblower Cases." Joining Mark were J. Bernard Alexander III and Wilmer J. Harris.

Much thanks to NELA's fine Board and Executive Director Teri Chaw in arranging this terrific conference in Rancho Mirage, California.

Interview with IRS Whistleblower Office Director Steve Whitlock on "Best Practices in Pursuing IRS Whistleblower Claims" Is Released

May 15, 2009

Last Fall, and again in March 2009, whistleblower lawyer blog co-author Michael A. Sullivan had the pleasure of sitting down with IRS Whistleblower Office Director Steve Whitlock, for an in-depth interview on the "best practices" for lawyers in pursuing IRS Whistleblower claims for their whistleblower clients.

The interview has just been published in the April 2009 False Claims Act & Qui Tam Quarterly Review. It includes some of the important points made by Director Whitlock at the IRS Whistleblower Boot Camp sponsored by Taxpayers Against Fraud in March, 2009, about which we have written previously.

The interview covers the progress of the IRS Whistleblower Office since it was established in early 2007, how the IRS process differs from pursuing qui tam cases under the False Claims Act, and the “best practices” for attorneys who pursue IRS Whistleblower claims.

We appreciate how generous Mr. Whitlock has been with his time in helping educate lawyers who wish to bring IRS Whistleblowers claims, which was the reason for the IRS Whistleblower Boot Camp in March.

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IRS Whistleblower Office Director Steve Whitlock (right) participates in a panel discussion moderated by Whistleblower Lawyer Blog Co-Author Michael A. Sullivan (left) at the IRS Whistleblower Boot Camp.

Some excerpts from the interview are below (more will follow later), and the entire interview should be available through Taxpayers Against Fraud on a subscription basis:

Michael Sullivan: Steve Whitlock, thank you for agreeing to speak with me for the TAF Quarterly to discuss the “Best Practices for Lawyers in Pursuing IRS Whistleblower Claims.”

. . . For lawyers screening cases, are there particular types of cases that the IRS is interested in, or particular industries that are more attractive to the IRS?

Steve Whitlock: The IRS puts out an annual plan and has a strategic plan that reaches out five years, which is posted on www.irs.gov. We describe our enforcement priorities. We try to touch a little bit of everything in different ways because the tax system is that complex. We try to have some presence in every aspect of the tax law.

The largest corporations tend to be under audit nearly continuously. Issues on international tax noncompliance are getting more attention in recent years because of globalization of the economy. There have been some congressional hearings recently about those kinds of questions where large corporations –multinationals–have the ability to take advantage of the tax code and their business structure to reduce their tax liability. Sometimes that is permitted by the tax code, and sometimes it is not. That is an area of focus—to identify those areas where it is not permitted, but somebody is pushing the envelope.

Someone who is not filing and paying—that is always of interest to us. High-income non-filers are especially interesting to us. Define “high income” how you want to, but we generally look at six figures, $200,000, $250,000 in gross income.

We have concerns in the areas of “trust funds,” where a taxpayer is an employer and is withholding from their employees, in order to cover the employees’ personal tax liability. When you have someone who is acting in effect as a trustee for the federal government by withholding tax from employee wages, but then says “You know, I’m having a little trouble with the business. I’m going to pay my bills before I pay the tax bill.” That’s an area that has been an enforcement priority for many years.

We have a whole series of abusive transactions that are identified in our enforcement
priorities. CI, on their part of the website, will identify the “Dirty Dozen.” Some of those are at the retail level, and some of them are not. Some of them involve fairly sophisticated schemes. So, the Service is interested in a lot of different areas.

Fundamentally if there is serious tax noncompliance, if there’s evidence that there is real money involved in it, the Service is going to be interested. If it is below the $2 million threshold in the statute, we still have the backup of the pre-amendment rule, subsection (a) of the statute. We still pay, we still accept, we still process those claims.

Continue reading "Interview with IRS Whistleblower Office Director Steve Whitlock on "Best Practices in Pursuing IRS Whistleblower Claims" Is Released" »

Fraud Against TARP Funds A Real Threat, Warns Special Inspector General for TARP

April 23, 2009

We have written previously how the "bailout" measures such as TARP--the Troubled Assets Relief Program--and other "stimulus" measures must have effective oversight,disclosure, and anti-fraud provisions to protect those funds from those who look to commit fraud. The speed at which the government has acted to address the faltering economy will only increase the opportunities for fraud. Already, TARP whistleblowers have begun to come forward with reports of misuse of billions in TARP funds.

This week, Neal Barofsky, the Special Inspector General for the Troubled Assets Relief Program reiterated those points in his Quarterly Report to Congress. The IG described TARP as "inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering."

Barofsky's unit, known in government lingo as "SIGTARP," has opened twenty investigations that include suspected securities fraud, tax law violations, insider trading and mortgage modification fraud. We expect that his staff is working closely with the Internal Revenue Service Criminal Investigation division (“IRS-CI”), the Securities and Exchange Commission (“SEC”), and other government agencies.

The audits being conducted by Barofsky's unit address, among other things, how TARP funds are being used; compliance with executive compensation provisions; Treasury's decisions about funding the first TARP recipients and its decisions relating to Bank of America’s acquisition of Merrill Lynch; AIG and its bonuses; and the AIG counterparties that received TARP funds. These lists will only grow.

According to Barofsky, "You don't need an entirely corrupt institution to pull one of these schemes off," he said. "You only need a few corrupt managers whose compensation may be tied to the performance of these assets in order to effectively pull off collusion or a kickback scheme."

Just since last Fall, the TARP program has grown in "scope, scale, and complexity" from the original program intended to purchase up to $700 billion in “toxic” assets such as troubled mortgages and mortgage-backed securities (“MBS”). Now, TARP funds are going to twelve separate programs and could reach $3 trillion, according to this week's Report.

As a practical matter, we have found that TARP funds are at greater risk of abuse in the absence of clear restrictions on use of the funds. This glaring oversight in how TARP was originally established must be remedied immediately for anti-fraud measures such as the False Claims Act to be effective in protecting the funds. Clear restrictions and limitations on TARP funds would also allow the IRS Whistleblower Program to be used by whistleblowers who report TARP abuse and fraud.

Here is the link to the Quarterly Report to Congress by the Special Inspector General for the Troubled Assets Relief Program. The Executive Summary is reprinted below:

Continue reading "Fraud Against TARP Funds A Real Threat, Warns Special Inspector General for TARP" »

Tax Evasion Using Offshore Accounts Establishes Fraud, As IRS Prevails Against Statute of Limitations Argument

April 17, 2009

A frequent question in our IRS Whistleblower cases is how IRS Whistleblower claims are affected by the statute of limitations. In long-running violations of the tax laws, that question can determine how much of past tax liability the IRS may be able to recover.

Yesterday, the Tax Court issued a decision that illustrates what happens when the taxpayer has engaged in fraud. (Joseph B. Williams III v. Commissioner, 2009 TNT 72-11). Because the court found that fraud was established by the taxpayer's plea to tax evasion, the court ruled that the IRS could recover for liability dating back to 1993-2000, more than six years before the IRS' notice of deficiency to the taxpayer.

The taxpayer in question, Joseph Bryan Williams, III, was an oil trader for Mobil Oil. In 1993, the taxpayer opened two Swiss bank accounts in the name of a British Virgin Islands corporation. From 1993-2000, the taxpayer had more than $7 million in deposits in these Swiss accounts, which earned more than $800,000 in interest. None of the income was included on the taxpayer's U.S. tax returns over that eight-year period, the last of which was filed in 2001.

After an IRS investigation, the taxpayer was charged criminally, and he ultimately pleaded guilty to (1) one count of conspiracy to defraud the IRS, in violation of 18 U.S.C. section 371 and (2) one count of criminal tax evasion with respect to each of the eight tax years (1993-2000), in violation of section 7201 of the Internal Revenue Code. In October 2007, more than six years after the last return was filed in 2001, the IRS issued a statutory notice of deficiency for all eight years.

The Tax Court rejected any suggestion that the statute of limitations prevented the IRS from recovering for tax years 1993-2000, since "fraud" was established:

Mr. Williams's fraud is the threshold issue in this case, not only because his liability for the fraud penalty depends on it, but also because fraud affects the period of limitations for assessment of his liability for the tax deficiencies. Generally, the IRS must assess a deficiency within 3 years of the date on which the tax return that relates to such deficiency was filed. Sec. 6501(a). For the tax years 1993 through 2000, Mr. Williams's latest-filed return (for 2000) was filed May 15, 2001. However, it was not until more than 6 years later -- on October 29, 2007 -- that the IRS issued to Mr. Williams a notice of deficiency, which is the first step in the process of assessing a deficiency. If the general rule of section 6501(a) applied, then the IRS would have failed to assess the deficiency within the period of limitations and would be barred from assessing and collecting any of the deficiencies or additions to tax for the 8 tax years at issue. However, if the deficiency was determined "[i]n the case of a false or fraudulent return with the intent to evade tax," then the IRS may assess such deficiency "at any time." Sec. 6501(c)(1). Thus, we decide as a threshold matter whether Mr. Williams is liable for fraud under section 6663. (Emphasis supplied).

Because fraud was established, no statute of limitations applied, since "'[i]n the case of a false or fraudulent return with the intent to evade tax,' then the IRS may assess such deficiency 'at any time.'"

In addition, as IRS Whistleblower Office Director Steve Whitlock pointed out in our recent "IRS Whistleblower Boot Camp," it will not be apparent to whistleblowers that, especially in large cases, the taxpayer may have agreed with the IRS to allow the statute of limitations to be extended. There also may be open audit years that allow the IRS to reach back far more than three years.

In short, there are various reasons why the IRS may be able to recover past tax liability well beyond three years.

IRS Announces New List of "Dirty Dozen" Tax Scams

April 13, 2009

In our March 7, 2009 "IRS Whistleblower Boot Camp," IRS Whistleblower Office Director Steve Whitlock mentioned that the IRS's priorities include the "Dirty Dozen"--a list of tax scams that is updated yearly.

The IRS has just issued its 2009 "Dirty Dozen" list, which should be of interest to potential IRS whistleblowers. It is reprinted below:

Beware of IRS’ 2009 “Dirty Dozen” Tax Scams

WASHINGTON — The Internal Revenue Service today issued its 2009 “dirty dozen” list of tax scams, including schemes involving phishing, hiding income offshore and false claims for refunds.

“Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman said. “There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.”

Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.

The IRS urges taxpayers to avoid these common schemes:

Phishing

Phishing is a tactic used by Internet-based scam artists to trick unsuspecting victims into revealing personal or financial information. The criminals use the information to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.

Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to phishing@irs.gov. Further instructions are available at IRS.gov. To date, taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRS phishing sites. If you believe you have been the target of an identity thief, information is available at IRS.gov.

Hiding Income Offshore

The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.

Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.

Continue reading "IRS Announces New List of "Dirty Dozen" Tax Scams" »

Appreciating Harry Markopolis, the Madoff "Whistleblower" to the SEC

March 16, 2009

I had the pleasure of seeing again and speaking last week with Harry Markopolis, the "whistleblower" now renowned for his excellent work in recognizing and reporting to the SEC that Bernie Madoff was running a huge Ponzi scheme. Harry was in Washington attending the "IRS Whistleblower Boot Camp" sponsored by Taxpayers Against Fraud.

Harry Markopolis exemplifies the whistleblower who works diligently to "do the right thing." His appearance on 60 Minutes gave us a taste of his frustration over the years in attempting to cause the SEC to take action about Madoff.

We commend Harry for wearing the "white hat" so well--and we take our hats off to him. Let's hope the SEC creates a meaningful whistleblower program and listens to Harry about how it should operate.

IRS Whistleblower Attorneys Join IRS Whistleblower Office Director and Other IRS Officials for "IRS Whistleblower Boot Camp"

March 9, 2009

I spent a very productive day today with IRS Whistleblower Office Director Steve Whitlock, former IRS Commissioner Margaret Richardson, IRS Special Counsel Tom Kane, and other senior IRS officials working with the IRS Whistleblower Office, in helping stage the most comprehensive legal education program yet about the new IRS Whistleblower Program--the "IRS Whistleblower Boot Camp." The day-long event was sponsored by Taxpayers Against Fraud.

After sessions on various aspects of how the tax whistleblower program operates, I was honored to lead the panel discussion with Director Whitlock and others on some difficult and complex issues in representing whistleblowers. We discussed in depth claims by whistleblowers such as CPAs, lawyers, and fiduciaries who have had confidential relationships with the taxpayers in question; and claims by whistleblowers who were involved in misconduct. Joining our panel discussion were Special Counsel Tom Kane of the Office of Chief Counsel, and my friend and fellow whistleblower attorney Paul D. Scott of San Francisco.

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Whistleblower Lawyer Blog Co-Author Michael A. Sullivan (left) moderates the panel discussion with IRS Whistleblower Office Director Steve Whitlock (right).

Director Whitlock explained how the claims submitted to the two year-old IRS Whistleblower Office have grown from approximately 80 in the first year, to approximately 2000 at present.

The IRS officials reviewed offshore tax schemes, tax fraud and tax evasion, and many other types of tax noncompliance as potential bases of IRS Whistleblower claims.

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The IRS Whistleblower Boot Camp began with "IRS Whistleblower Office 101," a panel discussion introducing the applicable regulations, providing an overview of the IRS Whistleblower Office, and providing an update on the progress of the program. It was moderated by TAF Member Margaret Finerty, and included as panelists Director Steve Whitlock, and IRS Whistleblower Office Analysts Robert Gardner, Dawn Applebaum, and Al Gibson. (Dawn Applebam had joined me last week in Atlanta to make an excellent presentation on the IRS Whistleblower Program at the annual "Whistleblower Law Symposium" that our firm sponsors.)

The main domestic and international tax fraud schemes, and the types of cases the IRS Whistleblower Office would like to receive, were the subject of a discussion by former IRS Commissioner Margaret Richardson. The panelists were IRS "Subject Matter Experts" Larry Brongel (Large and Mid-sized Business Division (LMSB), Retailers, Food, Pharmaceuticals and Healthcare Industry); Sheila Olander (Sr. Analyst Special Agent with the IRS Criminal Investigative Division, Office of Financial Crimes); Elizabeth Elfrey (Director, Fraud/Bank Secrecy Act in the IRS Small Business/Self Employed (SBSE)); and Al Gibson (Whistleblower Office Analyst).

TAF member Frederick Morgan, and attorney and CPA Ralph Minto, then discussed expanding a False Claims Act practice to include IRS Whistleblower cases.

TAF President Neil Getnick led a panel discussion on issue-spotting and practice pointers when bringing IRS Whistleblower cases. The panelists were Director Steve Whitlock, Special Counsel Tom Kane, and TAF Member and fellow whistleblower attorney Brian Kenney.

Continue reading "IRS Whistleblower Attorneys Join IRS Whistleblower Office Director and Other IRS Officials for "IRS Whistleblower Boot Camp"" »

Whistleblower Attorneys to Discuss Qui Tam Cases Under False Claims Act, IRS Whistleblower Program, and Sarbanes-Oxley Whistleblower Cases at Annual "Whistleblower Law Symposium"

March 1, 2009

I am very excited about co-chairing the Annual "Whistleblower Law Symposium" once again this week.

From Atlanta, Boston, Chicago, New Orleans, San Antonio, and Washington, D.C., many of the country's leading attorneys in whistleblower cases under the "qui tam" statute, the False Claims Act, the Sarbanes-Oxley statute, and the IRS Whistleblower Program will gather in Atlanta on March 4 to discuss some of the more challenging aspects of representing whistleblowers (or defending against whistleblower claims) under these laws.

We are honored to have one of the officials of the IRS Whistleblower Office, Dawn Applebaum, join us in person to discuss the progress of the new IRS Whistleblower Rewards Program. The IRS Whistleblower Office has just celebrated its second anniversary.

We are also privileged to have the top state enforcement officials in health care fraud cases from Texas, Florida, and Georgia, to explain how they coordinate state and federal health care fraud whistleblower cases under the federal and state False Claims Acts.

Also joining us is Rep. Edward Lindsey, the Legislative Sponsor both of the Georgia State False Medicaid Claims Act, and recent legislation to solidify Georgia’s Office of State Inspector General.

Because of the wave of new whistleblower statutes that have been inspired by the successes of the False Claims Act, our firm instituted the Whistleblower Law Symposium. Once again, top-notch speakers will address a broad variety of issues that arise under these whistleblower laws, including:

--Whistleblowers in Health Care: Recent Cases and Strategies for Healthcare Providers and Counsel When a Whistleblower Calls

--Recent Developments in Qui Tam Cases Under the False Claims Act—The Relator’s Perspective

--Current Issues in Defending Qui Tam Claims

--Coordinating State and Federal Whistleblower Cases Under the State and Federal False Claims Acts—Current Priorities and Recent Results

--Federal Priorities and Procedures in Qui Tam Cases

--Plaintiffs’ & Defendants’ Approaches to Sarbanes-Oxley Claims

--Update on the IRS Whistleblower Program

We are fortunate to have such excellent faculty members from around the country join us. Our faculty members and their topics are listed below.

Continue reading "Whistleblower Attorneys to Discuss Qui Tam Cases Under False Claims Act, IRS Whistleblower Program, and Sarbanes-Oxley Whistleblower Cases at Annual "Whistleblower Law Symposium"" »

UBS Agrees to Pay $780 Million & Identify Customers in IRS Tax Fraud Case

February 18, 2009

Off-shore tax evasion and international tax avoidance schemes are priorities of the IRS and the IRS Whistleblower program, which rewards tax whistleblowers. Our whistleblower lawyer blog has followed the ongoing investigation of UBS for its activities, which took a major turn today.

Today, the government announced that UBS AG, Switzerland’s largest bank, has admitted to helping U.S. taxpayers hide accounts from the IRS. UBS has agreed to identify its customers and to pay $780 million, as part of a "deferred prosecution agreement" on charges of conspiring to defraud the United States by impeding the IRS.

Based on an order by the Swiss Financial Markets Supervisory Authority (FINMA), UBS agreed "to immediately provide the United States government with the identities of, and account information for, certain United States customers of UBS’s cross-border business." UBS also agreed to stop providing banking services to U.S. clients with undeclared accounts.

In 2000, after UBS purchased the brokerage firm Paine Webber, UBS entered into an agreement with the IRS to report income and other identifying information for its U.S. clients who held United States securities in a UBS account, according to the government. The government alleged that UBS was required to withhold income taxes from U.S. clients.

To evade those new reporting requirements, the government alleged that employees and managers within the cross-border business, with the knowledge of certain UBS executives, helped U.S. taxpayers open new UBS accounts in the names of nominees and/or sham entities. Assets of the individual’s accounts were then moved to the new accounts, and the U.S. taxpayer would not be identified as a beneficiary, according to the government.

UBS managers and employees also reportedly used encrypted laptops and other counter-surveillance techniques to help prevent the detection of their marketing efforts and the identities and offshore assets of their U.S. clients. Clients of the cross-border business allegedly filed false tax returns omitting the income earned on their Swiss bank accounts, and failed to disclose the existence of those accounts to the IRS.

Continue reading "UBS Agrees to Pay $780 Million & Identify Customers in IRS Tax Fraud Case" »

Hedge Funds Face Regulation & Oversight by SEC--Will There Be Another Compliance Tool in Addition to IRS Whistleblower Program?

February 1, 2009

When improprieties occur with hedge funds, the hedge funds' lack of transparency and dearth of disclosure obligations make violations of the law difficult to uncover. Sometimes, persons in the hedge fund industry report those abuses through the IRS Whistleblower Program, as some of our IRS Whistleblower clients have done.

Nonetheless, the hedge fund industry remains cloaked in secrecy, frustrating experts who now seek to gauge the impact of hedge funds on the current financial crisis.

A new bill just introduced in the Senate, the "Hedge Fund Transparency Act," would lift that cloak and create disclosure requirements for hedge funds and oversight of hedge funds by the SEC. This bipartisan bill sponsored by Senators Chuck Grassley and Carl Levin modifies a prior approach to hedge fund scrutiny pressed by Sen. Grassley, after a whistleblower complained that SEC supervisors were impeding an investigation into a major hedge fund.

According to Sen. Grassley, "The bill contains four basic requirements to make hedge funds subject to SEC regulation and oversight. It requires them to register with the SEC, to file an annual disclosure form with basic information that will be made publicly available, to maintain books and records required by the SEC, and to cooperate with any SEC information request or examination."

Until the Bear Stearns debacle, there seemed little political will for any serious oversight of hedge funds. The SEC in 2004 had issued a rule requiring hedge funds to register under the Investment Advisers Act, to comply with related regulations, and to provide basic information through a public disclosure form. In June 2006, however, the U.S. Court of Appeals for the District of Columbia Circuit declared the rule invalid as incompatible with the Investment Advisers Act.

In hindsight, that absence of scrutiny may be seen as a grave error, one which may have helped create the current financial meltdown.

Since 1998, when the Federal Reserve acted to rescue Long-Term Capital Management (LTCM), a hedge fund with more than $125 billion in assets under management and a total market position of approximately $1.3 trillion, investments in hedge funds have grown dramatically.

Continue reading "Hedge Funds Face Regulation & Oversight by SEC--Will There Be Another Compliance Tool in Addition to IRS Whistleblower Program?" »

Whistleblower Protections Added to Economic Stimulus Bill Passed by House

January 28, 2009

When the Wall Street "bailout" grew with Congress' creation of the Troubled Asset Relief Program (TARP), Sen. Chuck Grassley emphasized the importance of "whistleblowers" and the False Claims Act to protecting these taxpayer funds from fraud and abuse.

Tonight, the House added to the bailout by passing the economic stimulus package, HR 1, and approved an amendment adding whistleblower protection for federal employees.

The stimulus bill reportedly provides for $523 billion in spending, and $275 billion in tax cuts. It originally lacked protection for federal employees who are whistleblowers. An amendment by Reps. Todd Platts, R-Pa., and Chris Van Hollen, D-Md. added those protections from last year's thwarted Whistleblower Protection Enhancement Act, which cleared the House but not the Senate.

The history of government spending programs proves beyond doubt that the vast majority of fraud and abuse can only be revealed by whistleblowers. Protecting taxpayer dollars means protecting and rewarding whistleblowers. As Sen. Grassley observed in a November 17, 2008 letter about TARP:

As a longtime supporter of whistleblowers, I can attest to the fact that whistleblowers are often the key to uncovering schemes to defraud the government. With their inside knowledge of how businesses, corporations, or government agencies operate they are often privy to information that is often the necessary component to piece together how a fraud is perpetrated.

Both the False Claims Act and the IRS Whistleblower Program will be important in stopping fraud and misuse of taxpayer funds. When there is fraud, there is often an IRS violation as well.

Continue reading "Whistleblower Protections Added to Economic Stimulus Bill Passed by House" »

With TARP and Wall Street Bailout, Securities Fraud and Accounting Fraud Are Targeted by New Supplemental Anti-Fraud Enforcement (“SAFE”) Markets Act

January 27, 2009

Financial fraud is a frequent topic of whistleblower cases and of this whistleblower lawyer blog, especially with TARP and the Wall Street "bailout" dominating headlines.

Senators Chuck Shumer and Richard Shelby have proposed a bipartisan bill to bolster federal resources to combat securities fraud and accounting fraud, the Supplemental Anti-Fraud Enforcement (“SAFE”) Markets Act.

Here are excerpts from the Senators' announcement:

“Our white collar crime divisions are under-staffed, under-funded, and overwhelmed,” Schumer said. “When a wave of violent crime sweeps through a city, the immediate response is to beef up the police forces, putting more cops on the beat, extending overtime, and making sure the city returns to safety. Our reaction to the financial crisis and the massive and complex financial fraud investigations that loom should be no different.”

* * * *

In recent months, amid the financial crisis that has roiled the U.S. economy, a rising number of securities and accounting fraud cases have surfaced, accounting for billions of dollars in losses for investors. But the agencies on the front lines of policing the Wall Street’s top financial institutions and investment managers have been hamstrung by a lack of resources. Since September 11, 2001, when the nation’s law enforcement priorities understandably shifted to counterterrorism efforts, the ranks of personnel at white-collar crime units have declined sharply. By some published estimates, the Bush administration failed to replace at least 2,400 FBI agents who were transferred to counterterrorism squads. As a result, the FBI’s white collar units are currently down at least 625 agents from pre-9/11 levels, a reduction of 36 percent.
Many United States Attorneys’ offices throughout the country have been subjected to hiring and budget freezes. The number of new Assistant United States Attorneys has grown by around .5% each year during recent years. But new hires have been allocated to prosecuting internet crime, immigration offenses, and gangs – important areas, to be sure, but none more emergent than financial fraud during our current crisis. As a result, from 2000-2007, the number of prosecutions of frauds against financial institutions plummeted by 48 percent.

After the savings and loan debacle of 20 years ago, Congress authorized $75 million to hire more FBI agents and prosecutors. The law enforcement effort resulted in more than 600 convictions and $130 million in ordered restitution. Schumer and Shelby’s bill similarly seeks to provide extra resources to meet the added strain put on these law enforcement agencies.

The $110 million authorized by the senators’ proposal would allow for new hires at each of three different law enforcement offices, as listed below:

-- 500 new FBI agents ($80 million)
-- 50 new Assistant United States Attorneys ($10 million)
-- 100 new SEC enforcement division employees ($20 million)

The senators said Thursday that the investment in enforcement is a small price to pay to protect U.S. markets, and it could pay for itself. An increase in fines levied by the SEC and collection of orders of restitution in criminal cases could be far greater than the $110 million cost of increasing enforcement personnel.

Will Wall Street Bailout Help Firms That Are "Tax Dodgers" and Hide Income in Offshore Tax "Havens"? And Will the IRS Whistleblower Program Provide a Remedy?

January 18, 2009

As our government hemorrhages its taxpayers' funds to "bail out" firms that made poor decisions--such as American International Group (AIG), Bank of America, Citigroup, Goldman Sachs, and American Express--a just-issued report from the Government Accountability Office (GAO) raises a disturbing question: have many of the same firms already been avoiding paying their "fair share" of U.S. taxes by using offshore tax "havens"?

If so, whistleblowers will be performing a civic duty by reporting any tax evasion and noncompliance through the IRS Whistleblower Program.

"This report shows that some of our country's largest companies and federal contractors, many of which are household names, continue to use offshore tax havens to avoid paying their fair share of taxes to the U.S. And some of those companies have even received emergency economic funds from the government," said Sen. Byron Dorgan. "I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that."

GAO's findings included that:

Eighty-three of the 100 largest publicly traded U.S. corporations in terms of 2007 revenue reported having subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions and 74 of the 83 had federal contracts in fiscal year 2007. For the 74 corporations, the amount of the federal contract obligations ranged from $12,000 to over $23 billion.

Several insurance companies, including American International Group Inc., Hartford Financial Services Group, Travelers Cos. Inc., Allstate Corp. and Berkshire Hathaway Inc. reportedly have subsidiaries in tax havens or financial privacy jurisdictions such as Bermuda and Switzerland.

With a "tax gap" of more than $350 billion each year--the amount owed but not paid in federal taxes--it is galling to most taxpayers to see any company that avoids paying its fair share now receive billions more in a "bailout" through the TARP program.

The GAO report did not state that any of the listed firms utilizing tax "havens" were necessarily violating current law. Sen. Dorgan did say that he planned to introduce legislation to "shut down these tax dodgers."

Continue reading "Will Wall Street Bailout Help Firms That Are "Tax Dodgers" and Hide Income in Offshore Tax "Havens"? And Will the IRS Whistleblower Program Provide a Remedy?" »

Offshore Tax Evasion Case: Former UBS AG's Raoul Weil Declared a Fugitive

January 16, 2009

Offshore tax evasion and international tax avoidance schemes have been priorities of the IRS and its IRS Whistleblower Program, as our whistleblower lawyer blog has followed repeatedly.

This week, the U.S. prosecution of the former head of UBS AG's wealth management business, Raoul Weil, took a strange turn as he failed to surrender himself and was declared a fugitive. Weil allegedly conspired to help 17,000 American taxpayers conceal approximately $20 billion of assets in Swiss accounts, to avoid payment of U.S. taxes.

Weil is not the only person to try to conceal himself from the many ongoing DOJ and IRS investigations into tax fraud, tax evasion, and other tax cheating and fraud. In June, former hedge fund manager Samuel Israel III reportedly tried to fake his own death, rather than face a 20-year prison sentence for defrauding investors out of $400 million. (He later turned himself in to authorities.)

Of course, these disappearances raise questions about Bernard Madoff's actions while not incarcerated as he faces the music for what is apparently perhaps the largest known fraud scheme in history.

Continue reading "Offshore Tax Evasion Case: Former UBS AG's Raoul Weil Declared a Fugitive" »

More IRS Whistleblower Procedures Announced by IRS Large and Midsize Business Division (LMSB)

January 13, 2009

The IRS Large and Midsize Business Division (LMSB) has published a new memorandum on how it will handle IRS Whistleblower claims, the process for citizens to report tax fraud, tax evasion, and other tax noncompliance--and share in the government's recovery of money. (http://www.irs.gov/pub/foia/ig/lmsb/lmsb-4-1108-052.pdf).

The LMSB Division has responsibility over corporations, subchapter S corporations, and partnerships with assets greater than $10 million. This IRS Division is divided by industry groups, including (1) Communications, Technology, and Media; (2) Financial Services; (3) Heavy Manufacturing and Transportation; (4) Natural Resources and Construction; and (5) Retailers, Food, Pharmaceuticals and Healthcare. (The IRS Financial Services group, as well as the IRS overall, will be especially busy as the troubled economy and the TARP "bailout" motivate more citizens to report tax cheating through IRS Whistleblower claims.)

Among the procedures discussed are measures to protect the confidentiality of the whistleblower and the whistleblower's information:

Protection of Whistleblower’s Information

The identity of persons who furnish information regarding possible tax violations must be protected. All employees must handle such information in strict confidence. Such information must be given special handling to avoid disclosure to anyone other than those employees who have an absolute “need to know”. All memoranda of oral interviews with whistleblowers, or any other communications which might, in any way identify whistleblowers, including information provided by the whistleblower, must be sealed and handled in the strictest confidence.

In order to ensure the confidentiality of the whistleblower, it is important that no mention is made of the whistleblower to the taxpayer, in the Revenue Agent Report or in the workpapers. All information related to the whistleblower should be maintained in a whistleblower award claim file which is kept separate from the tax file and other audit workpapers.

It is a longstanding practice of the Service that the identity of a confidential source of information, including a whistleblower, will not be disclosed, except to those officials with a "need to know" in the performance of their official duties. This practice applies whether the request is made under the Freedom of Information Act or in the context of an administrative or judicial proceeding. If anyone outside the Service asks if a whistleblower has provided information impacting the examination, examiners should neither confirm nor deny that a whistleblower is involved in any matter. This response must be provided in all cases because the knowledge that a whistleblower provided information may, in fact, identify the whistleblower.

The IRS Whistleblower Program is an excellent initiative that states should emulate to recover scarce taxpayer dollars from those who cheat the law-abiding public, by not paying their fair share of the tax burden.

TARP Fund Restrictions Are Proposed in New Legislation

January 10, 2009

Much criticism has flowed from how the first $350 billion in TARP "bailout" funds are being used. Thus far, the need for additional restrictions to prevent and penalize fraud and abuse of TARP money remains unmet.

In response, yesterday House Financial Services Committee Chairman Barney Frank proposed legislation establishing greater limits on use of TARP funds, among other things.

The "TARP Reform and Accountability Act of 2009" (HR 384) would require quarterly reports from recipients on their use of TARP funds, restrict the use of TARP funds for acquisitions, and impose further limits on executive compensation. Among its other terms are that it would increase the authority of the Financial Stability Oversight Board.

A potentially very significant point is that the Act empowers Treasury to apply the new limits on bonuses and other executive compensation to past recipients of TARP funds.

The new restrictions should further Sen. Grassley's call for use of the False Claims Act, the very successful qui tam whistleblower statute, to protect TARP funds.

The entire TARP Reform and Accountability Act of 2009 may be found at http://www.rules.house.gov/111/LegText/111_HR384txt.pdf.


IRS on Tax Preparer Fraud: Report Illegal Tax Schemes to IRS Whistleblower Office

January 7, 2009

With tax season approaching, the IRS has alerted the public to "tax preparer fraud" by issuing issued a "fact sheet" (at http://www.irs.gov/newsroom/article/0,,id=202123,00.html). The IRS also has attached information about reporting abusive tax schemes through the IRS Whistleblower Program, which provides rewards to whistleblowers.

Interestingly, the IRS has included descriptions of some of the tax fraud and tax evasion schemes that have caused courts to issue "more than 290 permanent injunctions against abusive tax scheme promoters and abusive return preparers since 2001."

The summary by the IRS is reprinted below:

Continue reading "IRS on Tax Preparer Fraud: Report Illegal Tax Schemes to IRS Whistleblower Office" »

With Treasury Reporting TARP Funds to More Than 200 Financial Institutions, Who--Besides Whistleblowers--Can Guard Against Fraud and Abuse?

January 6, 2009

The Treasury Department last week issued its December 2008 report to Congress on what it has done with the "bailout" funds through the Troubled Asset Relief Program (TARP) and Capital Purchase Program (CPP). With more than 200 institutions receiving taxpayer money, an overriding question is how to prevent and redress the inevitable fraud and abuse of TARP and other taxpayer funds, through whistleblowers and other means.

Treasury reported that, as of December 31, 2008, it had invested $177.5 billion in more than 200 U.S. financial institutions. As discussed previously on the whistleblower lawyer blog, Treasury recounted its announced assistance to General Motors and GMAC, as part of the Automotive Industry Financing Program (AIFP).

Treasury also described its New Year's Eve investment in Citigroup of $20 billion in preferred stock and warrants, as part of a new Targeted Investment Program (TIP). It also discussed reporting to Congress on the "Asset Guarantee Program," an insurance program.

Treasury's list of institutions receiving funds is reprinted below.

With abuses already being reported by TARP whistleblowers, we urge the government to act decisively to plan for and redress the inevitable abuses that will occur. Sen. Grassley has emphasized that the qui tam whistleblower provisions of the False Claims Act be used to deal with TARP bailout fraud and abuse, as we have discussed previously. The IRS Whistleblower Rewards Program should also serve an essential role in protecting taxpayer funds, as well as rewarding whistleblowers.

Continue reading "With Treasury Reporting TARP Funds to More Than 200 Financial Institutions, Who--Besides Whistleblowers--Can Guard Against Fraud and Abuse?" »

Treasury Department Announces TARP Investment in GMAC

December 29, 2008

The TARP bailout funding continues, as the Treasury Department announced today that it will buy $5 billion in senior preferred equity with an 8% dividend from GMAC LLC.

Senator Charles Grassley has emphasized that TARP and other "bailout" funds must be protected through whistleblower protections and whistleblower laws such as the False Claims Act. The GMAC announcement today will present ample opportunities to test those premises on which Congress approved the bailout funding.

The Treasury announcement is reprinted below:

Continue reading "Treasury Department Announces TARP Investment in GMAC" »

KPMG Tax Shelter Fraud Trial Ends With Three Tax Evasion Convictions for Accountants and Lawyer

December 18, 2008

Fraudulent tax shelters continue to be a target not only of IRS Whistleblower claims, but also of enforcement actions.

We have followed closely the KPMG tax shelter fraud case in this whistleblower lawyer blog. The trial of four defendants ended this week, with two former KPMG partners and one attorney convicted of multiple counts of tax evasion for their roles in the bogus tax shelters. Another lawyer defendant was acquitted.

Prosecutors alleged that KPMG officials offered wealthy clients illegal offshore tax shelters, and paid outside attorneys to give the bogus shelters the appearance of legitimacy. According to the government, the investments had no real risk, and generated "paper losses that allowed the accounting firm's clients to offset income.

Through tax shelters with names such as BLIPS, FLIP and OPUS, the clients were able to claim falsely that they had taken sizeable loans to buy stock, according to the government. Clients allegedly paid fees equal to 7 percent of the amount of losses sought.

After a two month trial, former KPMG tax partner Robert Pfaff, former KPMG senior tax manager John Larson, and attorney Raymond J. Ruble were found guilty on multiple counts of tax evasion. Another former KPMG tax partner was acquitted on the five counts of tax evasion.

The accounting firm agreed two years ago to pay $456 million to resolve the allegations against the firm itself. Guilty pleas previously were entered by the government’s chief witness, David Amir Makov, former KPMG partner David Rivkin, and former HVB Group accountant Domenick DeGiorgio.

Continue reading "KPMG Tax Shelter Fraud Trial Ends With Three Tax Evasion Convictions for Accountants and Lawyer" »

Whistleblowers, TARP, and Other Wall Street "Bailout" Measures--Why the False Claims Act and IRS Whistleblower Program Are More Essential Than Ever

December 8, 2008

On the same grey November day when President Bush visited Wall Street's Federal Hall to address the ever-morphing "bailout," I was in lower Manhattan meeting with IRS officials about an IRS Whistleblower matter. The tax evasion scheme we discussed was yet another that has cost taxpayers dearly.

As NYPD officers scurried about to help protect the President that day, I wondered who and what would protect our taxpayer funds--the hundreds of billions the government was now about to dole out--from fraud and abuse.

Fraud is rampant, as proven by the evidence brought to light by so many of our whistleblower clients under the qui tam statute, the False Claims Act, and now under the new IRS Whistleblower Program.

A few days later, Sen. Chuck Grassley hammered the same point in a November 17, 2008 letter to Treasury Secretary Paulson and Attorney General Mukasey. Grassley has insisted on effective oversight of the Troubled Asset Recovery Program (TARP) and the Capital Purchase Program (CPP), as well as on encouraging "whistleblowers" to come forward:

In the meantime, taxpayer dollars are at risk and I believe it is important to discuss alternative procedures and measures that can be taken to ensure taxpayers aren’t taken to the cleaners by unscrupulous individuals. One proven and effective method of overseeing taxpayer funds has been to support courageous whistleblowers who risk their jobs and livelihoods to bring forth allegations of fraud, waste, and abuse of taxpayer monies. As a longtime supporter of whistleblowers, I can attest to the fact that whistleblowers are often the key to uncovering schemes to defraud the government. With their inside knowledge of how businesses, corporations, or government agencies operate they are often privy to information that is often the necessary component to piece together how a fraud is perpetrated. As such, I believe you should both work to ensure that all entities participating in the TARP and CPP are made aware that any allegations of fraud, waste, or abuse will be treated seriously and properly referred to the Treasury Inspector General or the Attorney General for review until a Special Inspector General for the TARP is appointed.

Grassley also emphasized the importance of the False Claims Act, the nation's primary civil weapon for combating fraud against taxpayer funds, in preventing and penalizing fraud in the bailout:

[E]ntities who receive federal funds under the TARP and CPP are subject to the provisions of the FCA should they use false or fraudulent submissions in order to obtain federal funds. For instance, any entity that submits false or fraudulent information in an application to Treasury in order to obtain federal funds available through the CPP would be liable to the Government under the FCA. Further, while it has been reported that the Treasury does not currently plan to utilize authority under the Act to use the TARP to purchase distressed assets either directly or indirectly, should Treasury exercise its authority to do so, any fraudulent statements or submissions made to induce the Government to purchase those assets would also subject the fraudfeasors to liability. As a result, these individuals and corporations could be subject to civil penalties and treble damages for committing fraud against the Government.

Continue reading "Whistleblowers, TARP, and Other Wall Street "Bailout" Measures--Why the False Claims Act and IRS Whistleblower Program Are More Essential Than Ever" »

Offshore Tax Evasion Investigations by IRS and Justice Department Expand, As IRS Whistleblowers Continue to Come Forward

December 3, 2008

The Justice Department has announced that its investigation of offshore tax evasion will expand to include Europe's largest bank, HSBC in London, and Credit Suisse in Zurich. The increasing scrutiny of illegal offshore tax schemes comes as the Wall Street bailout and turmoil in the banking and financial services industries generate more interest in IRS Whistleblower Program claims.

DOJ and IRS continue to investigate UBS, Switzerland's largest bank. Last month saw the unsealing of the an indictment of Raoul Weil, a UBS senior executive, who faces charges of conspiring to defraud the United States by concealing American clients' taxable assets.

Scrutiny of Credit Suisse and HSBC reportedly includes whether the two banks may have helped U.S. clients hide up to $30 billion from U.S. tax authorities.

The IRS and DOJ investigations highlight differences in U.S. and Swiss law. Switzerland does not criminalize routine tax evasion, and bank secrecy rules in Switzerland prohibit disclosure of account holder information in these cases.

U.S. officials have already obtained previously "secret" UBS bank information reportedly revealing that some 20,000 U.S. citizens have maintained offshore accounts with UBS, and that approximately 17,000 of those accounts were never disclosed to the IRS. Estimates of willful tax evasion of $300 million per year have been reported previously.

These investigations also underscore problems in compliance with the IRS qualified intermediary program. Foreign financial institutions and foreign branches of U.S. financial institutions can agree with the IRS to be qualified intermediaries, and thus be subject to simplified withholding and reporting rules. The program seeks to make sure that the IRS is informed of foreign accounts with taxable assets, but many of these assets continue to be concealed from the IRS.

As U.S. taxpayers face an ever-increasing cost to "rescue" or bail out financial institutions, tax evasion and tax fraud schemes revealed by whistleblowers through the IRS Whistleblower Program will attract greater and greater scrutiny. Perhaps some of these whistleblowers can help offset the bailout's ultimate costs by reducing the several hundreds of billions in unpaid tax liability each year (the "tax gap").

Tax Court Prepares for IRS Whistleblower Cases by Adopting New Proposed Amendments to Rules of Practice and Procedure

October 24, 2008

One of the hallmarks of the new IRS Whistleblower Rewards Program is that whistleblowers have an enforceable right to rewards, and can appeal the IRS Whistleblower Office's rewards decisions to the U.S. Tax Court.

The Tax Court has taken a step forward in issuing new proposed amendments to its Rules of Practice and Procedure to prepare for IRS whistleblower cases. The amendments are reprinted below.

A critical improvement is that the Tax Court has listened to concerns expressed by whistleblower attorneys about the need to allow whistleblowers to proceed "anonymously" and not reveal their identity publicly. The explanation of New Rule 340 would allow anonymous filings to endeavor to preserve confidentiality:

"Pursuant to section 7461(b)(1), the Court may issue protective orders, upon motion by a party or any other person and for good cause shown, to prevent or restrict the disclosure of trade secrets and other information. See Tax Court Rule 103(a). As result of this authority, in appropriate cases, the Court may permit a petitioner to proceed anonymously and seal the record in that case. See, e.g., Anonymous v. Commissioner, 127 T.C. 89 (2006). The Court contemplates that these generally applicable statutory provisions, Rule 103, and related case law, while they do not require the Court's records in all whistleblower actions to be sealed or require the Court to permit all petitioners in those cases to proceed anonymously, do provide authority for the Court to allow a petitioner to proceed anonymously and to seal the record when appropriate in whistleblower actions."

The full text is as follows:

Continue reading "Tax Court Prepares for IRS Whistleblower Cases by Adopting New Proposed Amendments to Rules of Practice and Procedure " »

With Wall Street Bailout, Whistleblowers to Reveal Fraud and Abuses Through IRS Whistleblower Claims and Qui Tam False Claims Act Cases?

October 10, 2008

Will the IRS Whistleblower Program and the False Claims Act be powerful weapons in redressing the fraud and abuse that led to the current financial crisis--and to the future fraud and abuse that is certain to target the "bailout" billions of taxpayer funds?

Fraud and abuse have never been in short supply. The ongoing financial crisis points to staggering amounts of past financial abuses that now threaten to wipe out Americans' savings, if not undermine the world economy.

Now, the federal government's stated plans to spend hundreds of billions of taxpayer funds for the "bailout"--largely because of the lack of past oversight--will create countless opportunities for more fraud against the taxpayers.

In the Savings and Loan debacle, a judge asked, "Where were the lawyers?" Where were those who could have spoken out and stopped those abuses before they caused ruinous harm?

Today, the toxic loans, collateralized debt obligations, and credit default swaps that infect our financial system raise a broader question: how many persons failed to speak out to try to stop their corrupting misuse?

Scoundrels depend on silence from others while they loot the public fisc. To stop the looting, Americans (and others) must stand up, and speak up.

Whistleblowers will be essential to minimizing the theft of the bailout billions, through the IRS Whistleblower Program and the qui tam provisions of the False Claims Act, on which we have written extensively. Each allows private citizen whistleblowers to help the government recover taxpayer funds, and rewards the whistleblowers with what is typically 15-30% of the funds recovered.

It will be justice to see those whistleblowers courageous enough to speak up share in the government's recovery of the billions already lost, and the billions more of taxpayer funds that are about to be spent.

1st Annual Report on New IRS Whistleblower Program Issued by Secretary of the Treasury

September 30, 2008

When Congress authorized the new IRS Whistleblower Program in December 2006, it required annual reporting to Congress about how the new whistleblower provisions have been used, what results were obtained, and what recommendations to improve the program should be considered.

The Secretary of the Treasury has recently issued the first such Report, which summarizes the first 12 months of the new IRS Whistleblower Office.

For those who follow the IRS Whistleblower Program, the Report provides a look into the substantial progress made in a short time by this very small group within the IRS. These developments have been followed on this whistleblower lawyer blog since the infancy of the IRS Whistleblower Office.

Much-anticipated data about recoveries and rewards paid under the IRS Whistleblower Program is included in the Report. In FY 2007, the IRS paid $13 million in rewards to "informants" (whistleblowers), but those rewards were based on the lower percentages that applied before the IRS Whistleblower statute was amended effective December 20, 2006, to double the size of rewards available to 15-30% of the government's recovery. Rewards for IRS Whistleblower claims submitted after December 20, 2006 should be much greater, especially since the new Program has generated a wave of submissions.

The IRS's priorities for the Whistleblower Program in FY 2008 include revising old policies and procedures concerning whistleblower rewards, developing the criteria to be used in making reward decisions, soliciting feedback to help guide the new Program, and testing and then deploying a new case management system. (Some of the same information will be discussed in an upcoming article on "best practices" in pursuing IRS Whistleblower claims that I was requested to write for the TAF Quarterly Review, based on my interview of IRS Whistleblower Office Director Stephen Whitlock in early September.)

We congratulate the very capable staff of the IRS Whistleblower Office for all of their progress to date. For those interested in reading the full Report, the body of the Report is reprinted below:

Continue reading "1st Annual Report on New IRS Whistleblower Program Issued by Secretary of the Treasury" »

IRS Whistleblower Office Director and Tax Court Judge Gather with Whistleblower Attorneys

September 11, 2008

For the second time since the new IRS Whistleblower office was created in early 2007, IRS Whistleblower Office Director Stephen A. Whitlock addressed questions from whistleblower attorneys at the Taxpayers Against Fraud annual conference yesterday in Washington. Joining him as panelists were U.S. Tax Court Special Trial Judge Lewis R. Carluzzo; Professor Dennis J. Ventry, Jr. of American University's Washington College of Law; Erika Kelton of Phillips & Cohen LLP; and as moderator Paul D. Scott of the Law Offices of Paul D. Scott.

Afterward, I had the pleasure of meeting one-to-one and interviewing IRS Whistleblower Office Director Whitlock for an article on "best practices" for lawyers who pursue IRS Whistleblower claims, which will appear in Taxpayers Against Fraud's publication, the TAF Quarterly Review.

As this whistleblower lawyer blog has followed closely, much progress with the new IRS Whistleblower Program has occurred since Director Whitlock first appeared at the TAF Annual Conference a year ago to explain the new program.

In December 2007, the IRS issued its long-anticipated interim "guidance" for pursuing IRS Whistleblower claims.

An explosion of new claims followed that announcement, as the total claims quickly grew tenfold from 80 to 800 (not counting claims screened out by the Whistleblower Office). The leanly-staffed Whistleblower Office has grown to only fifteen, many of whom were in attendance yesterday.

Meanwhile, in June 2008 the United States Tax Court--which will hear any appeals of whistleblower rewards--has proposed amendments to its Rules of Practice and Procedure regarding whistleblower award actions, which can be found at http://www.ustaxcourt.gov/press/060208.pdf. Thus, it was very productive to bring together Tax Court Judge Carluzzo, whistleblower attorneys, and Director Whitlock to discuss their own perspectives on issues arising in the pursuit of IRS Whistleblower claims.

We congratulate the Whistleblower Office staff members for the progress of the program, and applaud their professionalism in working with the hundreds of claims that are being submitted.

We also thank TAF Executive Director Jeb White for staging a first-class conference for the country's qui tam and IRS Whistleblower attorneys.

Dismissal of Fraudulent Tax Shelter Charges Against Former KPMG Partners Is Upheld by Appellate Court

August 28, 2008

As this whistleblower lawyer blog has discussed before, accounting firms that promote fraudulent tax shelters are prime targets of IRS enforcement efforts (often assisted by IRS tax whistleblowers).

In a decision last week, the prosecution of 13 former KPMG partners and other executives for their alleged involvement in fraudulent tax shelters was thwarted--again. A panel of judges from the Second Circuit Court of Appeals affirmed the trial judge's dismissal of the charges against these KPMG defendants.

The court did not find the tax shelters to be lawful, however. Instead, it agreed with the trial court that "the government deprived [the defendants] of their right to counsel under the Sixth Amendment by causing KPMG to place conditions on the advancement of legal fees to [the defendants], and to cap the fees and ultimately end them. Because the government failed to cure the Sixth Amendment violation, and because no other remedy will return [the defendants] to the status quo ante, we affirm the dismissal of the indictment."

We await the government's announcement whether it will ask the entire court to reconsider its ruling; seek review by the Supreme Court; or seek to bring other charges.

As we have written, tax fraud, tax evasion, and other violations of IRS laws, rules and regulations can be addressed--in criminal and civil cases, often with the help of whistleblowers--without violating the Constitution. Those enforcement efforts must continue, so that honest citizens do not get stuck paying more than their fair share of the tax burden.

Attorney Assisting Offshore Tax Evasion Is Rewarded With Prison Sentence and Judgment to Pay of $2.7 Million

August 24, 2008

As this whistleblower lawyer blog has written about often, abuses of offshore transactions have increasingly become a target of IRS enforcement efforts. A Utah attorney learned this lesson last week when he was sentenced to ten years in prison, and was ordered to pay $2.7 million, for his role in an offshore tax evasion scheme that deprived the government of more than $20 million in taxes.

Attorney Dennis B. Evanson of Sandy, Utah, was convicted of conspiracy to commit mail and wire fraud, tax evasion and assisting in the filing of false tax returns charges. This lawyer used false documentation for fictitious currency transaction losses, false insurance expense deductions and bogus capital losses, all for the purpose of fraudulently offsetting taxable income for clients.

According to the government, the scheme relied in part on offshore companies, offshore bank accounts in the Cayman Islands and Nevis, services of offshore nominees, and opinion letters that purportedly authorized the fraudulent transactions.

Evanson and a co-conspirator received a fee that was typically equal to 30 percent of the tax evaded by his clients.

The conviction followed guilty pleas by another attorney, an accountant, and two certified public accountants, all of whom await sentencing.

"Promoters of elaborate offshore criminal financial schemes for the purpose of committing tax evasion isn't tax planning; it's criminal activity," stated Eileen Mayer, Chief of IRS Criminal Investigations. "Taxpayers should be wary of anyone claiming to be an expert on how to hide income from the IRS."

We commend the IRS and Justice Department for their success in pursuing offshore tax evasion.

IRS Announces Process for Review of Whistleblower Claims by IRS Large and Midsize Business Division (LMSB)

August 1, 2008

As another step toward the further development of the new IRS Whistleblower Program, our friends at the IRS Large and Midsize Business Division (LMSB) in Lower Manhattan have announced a three-step process for IRS Whistleblower claims that are eligible for the new "rewards" authorized by Congress in December 2006.

IRS Commisioner Frank Ng describes it as a "process for analyzing informant information and disseminating it to the field" for claims with at least $2 million in question, which is the threshold amount for whistleblowers to be eligible to receive the new IRS whistleblower rewards of 15-30% of the government's recovery.

The first step is the "initial receipt of information and the initial review of the claim from the informant [whistleblower]," primarily by the IRS Whistleblower Office.

Second, the Whistleblower Office will "send the informant information to a Subject Matter Expert (SME) in each Business Operating Division," who will "evaluate the information provided by informants to determine its merit and what action should be taken."

As our whistleblower lawyer blog has written about previously, the IRS has taken steps to ensure that privileged or unlawfully obtained information is not presented. The 'Subject Matter Expert" will "insulate the audit team from direct contact with the whistleblower and must ensure the audit team does not receive 'tainted' information. Tainted information may include documents that are subject to privilege or were illegally obtained by the informant."

In the third step, "Counsel and the SME will make a recommendation to the Industry Director on the legal issues and risks associated with the informant information." The Industry Director then "will decide whether and how to proceed with the case."

The complete Memorandum from Commissioner Ng can be found at http://www.irs.gov/businesses/article/0,,id=185244,00.html.

We congratulate the IRS on the continued development of this valuable program!

Offshore Tax Evasion and Cayman Islands Hearing Prompts Grassley's Call to Follow IRS Whistleblower Program with Additional IRS Tools

July 29, 2008

At the Senate Finance Committee's hearing on the Cayman Islands and offshore tax evasion last week, Senator Charles Grassley reiterated the importance of the new IRS Whistleblower program to combat tax evasion, but also stressed the need for Congress to provide the IRS greater tools to address offshore tax evasion.

The July 24 hearing focused on GAO's investigation into the Ugland House, a law firm's office building in the Cayman Islands that is the registered address of thousands of corporations. The hearing also examined "U.S. income tax evasion by taxpayers who hide their assets and income in foreign bank accounts and foreign entities."

Sen. Grassley discussed the importance of the IRS Whistleblower program, as he observed that he had "pushed to get legislation passed that would increase rewards for individuals who blew the whistle on tax cheats and created an office at the IRS to coordinate whistleblower claims. These improvements were based on my experience with the False Claims Act that rewards whistleblowers who help the government find fraud in government contracting. This allows the IRS to take better advantage of whistleblower information that is often detailed, inside information. This is information that the IRS may not have otherwise received."

Recognizing some of the results of that effort, Grassley stated that he is "pleased that many at the IRS and Treasury now recognize the benefits of rewarding tax whistleblowers. It is vital that the IRS take full advantage of those who are willing to blow the whistle on tax fraud."

Grassley concluded by stating that he will announce new proposals to fight offshore tax evasion.

In our own discussions with IRS officials about our whistleblower clients, we have already seen (and written here about) the IRS's great enthusiasm for pursuing offshore tax abuses, involving hedge funds and otherwise. Private citizen whistleblowers are perhaps the best source of information about concealed abuses of the tax laws, which make us all pay more than our fair share of taxes.

We applaud Senator Grassley and the IRS for their resolve on these types of abuses.

IRS Predicts Whistleblowers Will Be Important to Efforts to Combat Offshore Tax Evasion After UBS

July 28, 2008

This past week the IRS Commissioner of the Large and Midsized Business Division summarized the IRS's efforts to combat offshore tax evasion. He predicted that whistleblowers will become increasingly important to the IRS' efforts, given the existence of the new IRS Whistleblower rewards.

IRS Commissioner Frank Ng described to Congress the "critical importance to tax administration in this country -- the practice of sheltering U.S. earned income in foreign jurisdictions as a means of avoiding U.S. taxation."

He identified as "Tier I" issues the following transactions::

Transfer of intangibles/cost sharing
Abusive foreign tax credit transactions
Abusive hybrid instrument transactions
Transfer pricing
Foreign earnings repatriation

The IRS Commissioner described some of what has been revealed through ongoing investigations:

Ongoing IRS Investigations

In the area of ongoing investigations, let me start by laying out some of the facts about one case that I am able to discuss, because the case that I am about to describe is a matter of public record. It involves a major Swiss bank.

Continue reading "IRS Predicts Whistleblowers Will Be Important to Efforts to Combat Offshore Tax Evasion After UBS" »

Whistleblower Attorneys at NELA Conference Address "Strategic Thinking in Whistleblower Cases"

July 1, 2008

This past week, more than 450 of the country's best employment lawyers who represent individuals gathered in Atlanta for the National Employment Lawyers Association's Annual Conference.

I had the pleasure of appearing with a group of excellent attorneys on a panel of that discussed "Strategic Thinking in Whistleblower Cases," moderated by Robin Potter of Chicago (who won a major victory last week).

20080626_13-53-11strategicThinkingForWhistleblower.JPG
Speakers at the 2008 NELA Conference panel on "Strategic Thinking in Whistleblower Cases" were (front row) David Marshall and Bryan J. Schwartz, and (back row) Michael A. Sullivan and Mark Kleiman.

David Marshall
of D.C.'s Katz, Marshall & Banks, LLP began by discussing how nesessary whistleblowers are, as well as important considerations in pursuing Sarbanes-Oxley whistleblower cases.

Bryan J. Schwartz of Nichols Kaster & Anderson’s office in San Francisco then spoke on strategies in representing federal employees as whistleblowers.

Next, Michael A. Sullivan (this whistleblower lawyer blog author) of Finch McCranie, LLP discussed briefly the trend of new State False Claims Acts, and then explained in greater detail the new IRS Whistleblower Rewards Program.

Mark A. Kleiman of Santa Monica closed by regaling the audience with lessons he has learned from False Claims Act litigation, in particular from the recent case against Merck that resulted in a huge settlement.

I enjoyed this terrific opportunity to work with and hear from these accomplished lawyers, and thank NELA (especially Terri Chaw and the NELA staff) and my friends at NELA-Georgia for organizing this outstanding conference. I applaud the work not only of my co-panelists at the NELA Conference, but also of the many NELA members who strive tirelessly to obtain justice for their clients.

New IRS Whistleblower Rules Are Issued by U.S. Tax Court

June 5, 2008

One of the most meaningful improvements of the new IRS Whistleblower Program authorized by Congress in December 2006 is that IRS Whistleblowers have an enforceable right to a reward when they report significant tax violations. To enforce that right, tax whistleblowers can seek review by the U.S. Tax Court of award decisions.

This week, the United States Tax Court has proposed amendments to its Rules of Practice and Procedure regarding whistleblower award actions, which can be found at http://www.ustaxcourt.gov/press/060208.pdf. The IRS Whistleblower Office is expected to review the proposed Rules now and provide feedback to the Court.

The Tax Court also has invited public comments on the proposed amendments, to be received by July 31, 2008.

Excerpts of the Tax Court's announcement of the new proposed Rules for IRS Whistleblower claims are below:

Continue reading "New IRS Whistleblower Rules Are Issued by U.S. Tax Court " »

IRS Whistleblower Program: Updated Summary for Lawyers with Potential Tax Whistleblower Claims

April 29, 2008

(Updated) For a national conference of employment lawyers, I was asked to participate in a panel discussion of "Strategic Thinking in Whistleblower Cases" and to explain the new IRS Whistleblower Program.

Because our whistleblower lawyer blog (http://www.whistleblowerlawyerblog.com/irs_rewards_program_tax/) has followed closely the development of the new IRS Whistleblower Program since Congress authorized it in December 2006, I will summarize here some of the key points about the IRS Whistleblower Program, which is still taking shape. By experimenting and using this "blog" as an old-fashioned seminar paper--with the interactive features of the web--the National Employment Lawyers Association lawyers (and others) may be able to "link to" other pertinent topics on the web, such as the various IRS materials discussed here.

Overview

Until December 2006, the Internal Revenue Service had no effective program to encourage whistleblowers to report tax fraud and tax violations. Rewards to "IRS Whistleblowers" were rare, slow, discretionary, and small--and typically could not exceed 15 percent of the amount recovered by the IRS. As a result, the "old" program was ineffective--even though the IRS historically has made good use of information from informants.

The new IRS Whistleblower Program provides the first meaningful rewards to whistleblowers who report substantial tax violations when at least $2 million is owed to the IRS. The amended IRS Whistleblower statute, 26 U.S.C. § 7623, doubles the rewards available to 15-30% of the government's recovery, and for the first time creates an enforceable right for the whistleblower to receive a reward. Not only taxes, but also interest and penalties, count in calculating the whistleblower’s reward.

Many challenges nonetheless remain in representing IRS Whistleblowers. Perhaps the greatest is convincing an overburdened IRS that your client's case is worth the investment of its limited resources. The IRS already has many other cases awaiting investigation, and would-be whistleblowers continually add to that "pile" by submitting hundreds of other potential cases.

Background--Why Now?

The new IRS Whistleblower rewards were inspired by another whistleblower statute, the federal False Claims Act. The successes of the False Claims Act over the past two decades convinced Senator Chuck Grassley (R-Iowa) and others in Congress that meaningful whistleblower rewards are an effective tool for the government to recover public dollars obtained by fraud. Since the False Claims Act was amended in 1986 to increase the size of rewards and otherwise encourage "qui tam" lawsuits that expose fraud against the government, the federal government's fraud recoveries have grown dramatically--from less than $100 million in 1987, to more than $3 billion in 2006.

Tax violations, however, fall outside the False Claims Act, which expressly “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.” 31 U.S.C. § 3729(e). As a result, there was no meaningful incentive for tax whistleblowers to come forward to the IRS before December 2006.

With a "tax gap" of more than $200 billion in estimated unpaid taxes each year, the old IRS program brought in less than $100 million annually--even though information from "insiders" historically has been quite productive for the IRS. In fact, the June 2006 Report of the Treasury Inspector General for Tax Administration (TIGTA) noted that, based on past experience,"examinations initiated based on informant information were often more efficient and effective." (See June 2006 Report of Treasury Inspector General for Tax Administration--which predated Congress' creation of the new IRS Whistleblower Rewards Program, entitled "The Informants Rewards Program Needs More Centralized Management Oversight," No. 2006-30-092. (
http://www.treas.gov/tigta/auditreports/2006reports/200630092fr.pdf).


Continue reading "IRS Whistleblower Program: Updated Summary for Lawyers with Potential Tax Whistleblower Claims" »

Bogus Tax Shelters, Tax Fraud, and Tax Evasion Are Targeted by IRS and Justice Department

April 8, 2008

Bogus tax shelters and other tax fraud and evasion are among the common reports by tax whistleblowers to whistleblower attorneys. Today, the government launched a new, coordinated federal effort by the IRS, the Justice Department's Tax Division, and U.S. Attorneys to stop fraudulent tax claims, frivolous tax returns, and bogus tax schemes.

Quoting former Supreme Court Justice Oliver Wendell Holmes’ famous observation that “[t]axes are what we pay for a civilized society,” Nathan J. Hochman, the Tax Division’s Assistant Attorney General, announced the "National Tax Defier Initiative," or "TAXDEF." Its purpose is to "investigate, pursue and, where appropriate, prosecute those who take concrete action to defy and deny the fundamental validity of the tax laws."

According to the Tax Division, this TAXDEF initiative will:

--"Strengthen and expand coordination" among the Tax Division, the IRS, and U.S. Attorneys’ offices "to ensure that both criminal and civil enforcement tools are fully considered and utilized."

--"Leverage expertise and resources" so that agents and attorneys across the country may "efficiently detect, investigate and where appropriate, prosecute tax defiers," from a national perspective.

--Expand the government's use of injunctions to stop "tax defier activity. Since 2001 the Tax Division has obtained over 300 civil injunctions against tax promoters and preparers, over a third of which directly involved tax defier activity." The government views injunctions as a "powerful method of stopping the promotion of tax defier activity at the earliest possible moment," and estimates its collections at more than $600 million from these efforts.

--Maximize the government's use of technology to "detect, develop and prosecute cases." According to the Tax Division, the Internet in the last decade has "greatly facilitated tax defier activity and turned what was once a paper–based local or regional enterprise into a click and download national operation."

--"Alert and educate the public to the falsity of tax defier claims and publicize the consequences of tax defier conduct." The government says it wants "to pull back the curtain and show the public that the promoters of these schemes are not wizards imparting the secrets of a 'tax-free universe' but are nothing more than garden variety hucksters and modern day snake oil salesmen peddling tax evasion schemes."

Our whistleblower lawyer blog agrees with the government's theme today that tax cheats place a greater burden on the vast majority of honest Americans who pay their taxes. For this reason, those who expose tax cheating should be thanked for their efforts.

The government's announcement is at http://www.usdoj.gov/opa/pr/2008/April/08_tax_275.html.

IRS Tax Whistleblower Program Update: IRS Authorizes Contingent Fee Arrangements for Retaining Lawyers in Tax Whistleblower Cases

March 28, 2008

The new IRS Whistleblower Program authorized by Congress in December 2006 continued its progress this week, with the IRS's announcement yesterday approving the use of contingent fee arrangements in retaining tax whistleblower attorneys.

Our whistleblower lawyer blog has followed the development of the new IRS Whistleblower Program since its infancy. The new tax whistleblower provisions are extremely important in the fight to protect taxpayer funds from fraud and other violations of the law.

In this March 27, 2008 announcement, Notice 2008-43, the IRS announced interim rules that would apply until it amends section 10.27(b) of Circular 230.

Citing the revised IRS Whistleblower statute, the interim rules state that "[a] practitioner may charge a contingent fee for services rendered in
connection with a claim under section 7623 of the Internal Revenue Code."

This is the second IRS announcement just this week about the new IRS Whistleblower Program. On March 25, 2008, the IRS announced temporary regulations concerning disclosing information to whistleblowers under contracts among the IRS, whistleblowers, and their attorneys.

We congratulate the IRS on moving forward with the new Whistleblower Program's development.

IRS Whistleblower Program for Tax Whistleblowers: IRS Announces Sharing of Information with Whistleblowers and Their Attorneys Under Written Contracts

March 27, 2008

The IRS this week announced another interesting development in its new IRS Whistleblower Program, which this whistleblower lawyer blog has followed closely. This announcement addressed new regulations permitting the IRS to share tax return information with whistleblowers and their lawyers under written contracts with the IRS, and also to advise those whistleblowers and their attorneys about the status of their whistleblower claims.

On March 25, 2008, the IRS announced new, temporary regulations permitting "disclosure of [tax] return information . . . to a whistleblower and, if applicable, the legal representative of the whistleblower, to the extent necessary in connection with a written contract among the IRS, the whistleblower and, if applicable, the legal representative of the whistleblower, for services relating to the detection of violations of the internal revenue laws or related statutes."

If return information is disclosed to the whistleblower and the whistleblower's attorney under such an agreement, the information must be kept confidential. It "may not be disclosed or otherwise used by the whistleblower or a legal representative of a whistleblower, except as expressly authorized by the IRS."

How much the IRS may communicate with whistleblowers, and still fulfill legal requirements about privacy of taxpayers' returns, has been an interesting topic of discussion since the new IRS Whistleblower Program was created in December 2006. We look forward to discussing the new provisions with the very capable IRS officials who administer the new Whistleblower Program.

The new temporary regulations may be found at 26 C.F.R. § 301.6103(n)-2T(b)(1).

IRS Tax Whistleblower Progress Continues with IRS Chief Counsel's Advice on Informant Contacts

March 10, 2008

The new IRS Whistleblower Rewards Program continues to take shape, as the IRS's Chief Counsel has advised IRS employees on the contacts they may have with certain whistleblowers or "informants."

The new IRS Whistleblower Program for tax whistleblowers is an exciting development. It has brought together a team of extremely qualified professionals at the IRS, and has provided them the legal means to create an effective whistleblower program.

This Notice (CC-2008-011) addresses what contacts IRS employees may have with (1) informants with information about their current employer; and (2) informants who act as a taxpayer's representative in an IRS examination or other IRS matter.

The IRS's dealings with whistleblower or informants can present sensitive issues of privilege and confidentiality of information, as our whistleblower lawyer blog has discussed previously (and as I have discussed in a panel discussion last Fall with IRS Whistleblower Office Director Stephen Whitlock.)

This Notice from the IRS Chief Counsel's Office recognizes the need to protect "privilege issues that may be present when an informant is a current employee and/or the taxpayer's representative. It should be assumed that a current employee or a taxpayer's representative has access to information that may be privileged and there has been no affirmative waiver by the taxpayer of applicable privileges. The use of potentially privileged information by the Service can also have the same effect of tainting an issue or an entire case."

The IRS Notice reiterates the "one-bite" rule that permits the government to use information from a private party, "even if the private party obtained the information in an illicit or illegal manner as long as the government is a passive recipient of the information and did not encourage or acquiesce in the private party's conduct." This "one-bite" rule is derived from a 1921 Supreme Court decision, Burdeau v. McDowell, 256 U.S. 465 (1921).

Continue reading "IRS Tax Whistleblower Progress Continues with IRS Chief Counsel's Advice on Informant Contacts " »

Tax Fraud Prosecution Over Abuse of Offshore Transactions Leads to Convictions of CPAs and Attorney by IRS and Justice Department (from Whistleblower Lawyer Blog)

January 29, 2008

Our whistleblower lawyer blog has followed closely investigations of hedge funds and other offshore investors for tax fraud and other IRS violations. After investigating a tax fraud conspiracy involving offshore companies and offshore bank accounts, the Justice Department and the IRS have announced that an attorney and two certified public accountants have pleaded guilty to tax fraud and aiding the preparation of a false tax return.

Attorney Graham R. Taylor of Tiburon, Calif., pleaded guilty last week, shortly before a trial scheduled in Salt Lake City before U.S. District Court Judge Tena Campbell. Certified Public Accountants Stephen F. Petersen of Coalville, Utah, and Reed H. Barker of Littleton, Colo., pleaded guilty to the tax fraud a week earlier, and Petersen also entered a guilty plea to aiding in the preparation of a client's false tax return.

The alleged $20 million fraud scheme included using phony documentation for fictitious currency transaction losses, false insurance expense deductions, and "bogus" capital losses for the purpose of fraudulently offsetting taxable income for clients, according to the government. The defendants used offshore companies, offshore bank accounts, the services of offshore nominees, and opinion letters that allegedly gave legal authority for the fraudulent transactions.

CPA Petersen of Coalville also admitted that he and an attorney who still faces charges would typically receive a fee of up to 30 percent of the tax evaded by the clients.

Attorney Taylor admitted that he devised, marketed and implemented a tax shelter known as "The Hybrid" to assist others in evading income taxes. Taylor also admitted that he prepared tax opinion letters with fraudulent misrepresentations; that he used persons in the Cayman Islands as nominees for his clients; and that he falsely disguised client funds through fraudulent transfers.

The three defendants who pleaded guilty, together with alleged co-conspirators attorney Dennis B. Evanson of Sandy, Utah, accountant Brent H. Metcalf of Cottonwood, Utah, and investment broker Wayne F. DeMeester of Sammamish, Wash., had been indicted in late 2005 for conspiracy to defraud the United States, conspiracy to commit mail fraud, and wire fraud. Five of these defendants also were charged with tax evasion and assisting in the filing of false tax returns.

The case was investigated by the IRS Criminal Investigation division. It is being prosecuted by the Department of Justice's Tax Division and the U.S. Attorney's Office for the District of Utah. Jury selection for the remaining defendants began yesterday.

Continue reading "Tax Fraud Prosecution Over Abuse of Offshore Transactions Leads to Convictions of CPAs and Attorney by IRS and Justice Department (from Whistleblower Lawyer Blog)" »

Hedge Fund Tax Probes Expand to Congress Following IRS Hedge Fund Inquiries

January 18, 2008

Both the IRS Financial Services group (part of its LMSB Division) and the IRS Whistleblower Office have emphasized to me--as recently as yesterday--their strong interest in hedge fund abuses that violate the tax laws.

The tax whistleblower section of our whistleblower lawyer blog has followed the expanding probes and increased scrutiny of hedge funds, including our segments on "IRS to Scrutinize Derivatives--Do They Allow Offshore Investors to Avoid Withholding Taxes on U.S. Stock Dividends?" in July 2007, and on "IRS Whistleblower Program: Hedge Funds and Private Equity Firms Under Increasing IRS Scrutiny for Tax Abuses" in November 2007.

Subpoenas from the U.S. Senate Permanent Subcommittee on Investigations reportedly have been issued to Citigroup Inc., Lehman Brothers Holdings Inc., Morgan Stanley, and Swiss bank UBS AG, according to this week's Wall Street Journal reports, relating to use of derivatives by hedge funds and other offshore investors. (January 15, 2008 WSJ).

Clients in the hedge fund industry who have contacted our firm often occupy sensitive positions that require them to exercise great care in not subjecting themselves to legal sanctions, as they witness apparent improprieties that trouble them.

We appreciate the predicaments that persons in high positions of responsibility can face. As former federal prosecutors who have litigated (and defended) criminal tax cases, we know that they need counseling first on avoiding exposing themselves to criminal or civil liability, as they weigh whether to report these improprieties through the IRS Whistleblower Program.

Since most people who contact us are honest persons who are troubled by abuses of the tax laws, we applaud their integrity--and congratulate those who are reporting these improprieties that defraud other taxpayers.

IRS Whistleblower Progress: Kudos to These Tax Whistleblower Attorneys

January 17, 2008

The progress of the new IRS Whistleblower Program has been a subject of great interest of this whistleblower lawyer blog. I would like to congratulate two fellow tax whistleblower attorneys, Erika Kelton of Phillips & Cohen, LLP, and Paul D. Scott of the Law Offices of Paul D. Scott, for their contributions to its progress.

Last September, I had the pleasure of appearing with them, IRS Whistleblower Office Director Stephen Whitlock, and Professor Dennis Ventry in a panel discussion in Washington to explain the new IRS Whistleblower Program at the Taxpayers Against Fraud annual conference. Since then, Erika and Paul have continued to work hard on the IRS Whistleblower Committee of TAF, and have contributed greatly to the development of the new IRS Whistleblower "guidance."

Their contributions to making the new program a success should be recognized! Thank you, Erika and Paul.

IRS Tax Whistleblower Procedures Continue to Take Shape

January 11, 2008

The new IRS Whistleblower Office's Rewards Program that we have followed closely on this whistleblower lawyer blog made further progress this week. The IRS gave notice on January 9 that it intends to create a proposed new system of records--"Whistleblower Office Records."

The purpose is to allow the new IRS Whistleblower Office to administer the IRS Whistleblower program more effectively, in contrast to the "old," decentralized procedures that the IRS used before Congress authorized the new IRS Whistleblower Rewards in December 2006.

The new Whistleblower Office Records will contain records pertaining to whistleblower award applications that were filed before or after the new Whistleblower Office was created in early 2007. Based on my earliest discussions with IRS Whistleblower Office Director Stephen Whitlock, it is an essential step to bring all whistleblower submissions to the same place so that the Whistleblower Office can administer the program effectively.

We congratulate Mr. Whitlock and the Whistleblower Office on their continued efforts and progress to make the Whistleblower Program as effective as it can be.

The Notice is "Whistleblower Office Records -- Treasury/IRS 42.005," 73 F.R. 1667-1669. It is reprinted below:


Continue reading "IRS Tax Whistleblower Procedures Continue to Take Shape" »

IRS Tax Whistleblowers & False Claims Act Qui Tam Cases--2007 Year in Review by Whistleblower Lawyer Blog

December 31, 2007

2007 has been a most significant year for whistleblowers. The whistleblower lawyer blog attorneys look back on some of the milestones:

1. As soon as Congress authorized the first meaningful IRS Whistleblower Rewards Program to pay tax whistleblowers 15-30% of IRS recoveries from those who violate the tax laws by statue effective on December 20, 2006, beginning in January our whistleblower lawyers submitted some of the first IRS Whistleblower claims in the nation under the new law. Our IRS Whistleblower cases have continued to grow throughout the year.

2. Our IRS whistleblower submissions have led to criminal and civil investigations over tax cheating, and our whistleblower clients are in a position to receive 15-30% of the amount of collected proceeds (including penalties, interest, additions to tax, and additional amounts) recovered by the IRS.

3. This Spring, legislative officials requested that one of our whistleblower lawyer blog co-authors help draft a state False Claims Act for Georgia, and then invited him as the only private attorney to testify at the legislative hearings to explain the federal False Claims Act, and how the new state False Claims Act will operate. The new Georgia State False Medicaid Claims Act was signed into law on May 24, 2007, and early results show that it already has been effective in uncovering and stopping Medicaid fraud.
Best%20IMG_1885CropSmallerEmailREDO.jpg

Participating in the signing ceremony with Governor Sonny Perdue were (shown above from left to right) Carrie Downing, Director of Legislative and External Affairs of the Georgia Department of Community Health; Dr. Rhonda Medows, Commissioner of the Georgia Department of Community Health; Inspector General Doug Colburn; Governor Perdue; Rep. Edward Lindsey, sponsor of the State False Medicaid Claims Act; whistleblower lawyer blog author Michael A. Sullivan of Finch McCranie, LLP; and Philip Consuegra, Legislative Assistant to Rep. Lindsey.

4. As the new IRS Whistleblower Program took shape during 2007, our whistleblower lawyer blog followed each development to educate the public and other attorneys about the new IRS Whistleblower Rewards.

5. At a national conference sponsored by Taxpayers Against Fraud in September, whistleblower lawyer blog author Michael A. Sullivan joined IRS Whistleblower Office Director Stephen Whitlock, Professor Dennis Ventry, and fellow IRS whistleblower attorneys Paul Scott and Erika Kelton for a panel discussion to explain how the new IRS Whistleblower Program will operate.

6. To educate other professionals about developments with the False Claims Act and the wave of new state False Claims Acts, whistleblower lawyer blog attorneys published articles in journals that included Compliance Today, a publication of the Health Care Compliance Association. Our whistleblower lawyer blog attorneys also chaired the Whistleblower Law Symposium, and were invited to lead panel discussions and give presentations at the Southeastern Health Care Fraud Conference and various other conferences.

7. Of course, like other whistleblower law attorneys, our firm has continued to represent whistleblowers to recover damages for fraud in health care programs inclluding Medicare and Medicaid, Hurricane Katrina federal disaster relief, government procurement, and other matters affecting federal and state tax dollars.

We are continually inspired by our clients for their commitment to honesty and integrity in the use of government funds. We look forward to another successful year keeping you informed with this whistleblower lawyer blog!

IRS Whistleblower Instructions for Filing Tax Whistleblower Claims Issued by IRS--and Are Reprinted Here on Whistleblower Lawyer Blog

December 20, 2007

The IRS a few hours ago issued the long-discussed "interim" guidance on pursuing Tax Whistleblower claims under the new IRS Whistleblower Program. This IRS Notice 2008-4 on filing claims under the IRS Whistleblower Program is effective January 14, 2008, and appears at http://www.irs.gov/pub/irs-drop/n-08-04.pdf.

Our whistleblower attorneys who work with the IRS in representing Tax Whistleblower clients will be continue their discussions of how the new IRS Whistleblower program is operating. The IRS Notice is reprinted below for convenience of whistleblower lawyer blog readers:

Continue reading "IRS Whistleblower Instructions for Filing Tax Whistleblower Claims Issued by IRS--and Are Reprinted Here on Whistleblower Lawyer Blog" »

Tax Whistleblowers: IRS Whistleblower Office Issues Long-Awaited Guidance for Tax Whistleblower Claims

December 19, 2007

Our whistleblower lawyer blog has followed closely the evolution of the new IRS Whistleblower Program, which celebrates its one-year anniversary on December 20, 2007. Late today, on the eve of that anniversary, the new IRS Whistleblower Office issued long-awaited interim "guidance" for filing Tax Whistleblower claims--which should help tax whistleblowers and their attorneys.

Until now, whistleblower lawyers and their clients had to learn the procedures from reports of various public statements and discussions with IRS officials. I had the pleasure of getting to know how the IRS Whistleblower Office's Director Stephen Whitlock intends to approach these claims, through appearing on a panel discussion with him in September in Washington to explain how the new IRS Whistleblower Program operates.

This interim guidance appears in IRS Notice 2008-4, which will be reprinted on this whistleblower lawyer blog in the next post. The IRS is soliciting comments, and much discussion undoubtedly will follow, both on our whistleblower lawyer blog and elsewhere.

It is an exciting day to see the new Guidance from the IRS on this important new IRS Whistleblower Program! We look forward to discussing it in detail on this blog, but simply wanted to get the word out tonight about this IRS announcement received from the IRS shortly before 6:00 p.m. tonight.

Continue reading "Tax Whistleblowers: IRS Whistleblower Office Issues Long-Awaited Guidance for Tax Whistleblower Claims" »

Tax Fraud & Tax Evasion Among Medicaid Providers: New IRS Whistleblower Program Fills Gap in False Claims Act for Whistleblowers and Their Attorneys

December 3, 2007

Two important topics of this whistleblower lawyer blog are addressed in a recent Government Accounting Office (GAO) Report on tax cheating by Medicaid providers. The Report shows the wisdom of the new IRS Whistleblower Program, which fills a "gap" in the coverage of the major whistleblower statute, the False Claims Act.

GAO reports that thousands of Medicaid providers collect large amounts of federal dollars each year, while cheating the government by failing to pay taxes owed--usually payroll taxes and personal income taxes. In testimony before the Permanent Subcommittee on Investigations, Senate Committee on Homeland Security and Governmental Affairs, GAO's Gregory D. Kutz, described these abuses.

These tax abuses reportedly included:

• The owner of a chain of nursing homes, who owed more than $14 million in taxes, while having a $2 million home with crystal chandeliers, porcelain china, and Oriental rugs.

• The owners of a hospital, who owed $5 million in payroll taxes, but who bought a vacation home worth $1 million.

• A medical-clinic owner, who owed more than $1 million to the IRS, had a $4 million house, luxury vehicles, and a pleasure boat.

According to the Report, "[r]ather than fulfill their role as 'trustees' of federal payroll tax funds and forward them to IRS, these providers diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Individuals associated with some of these providers diverted the payroll tax money for their own benefit or to help fund their businesses. Many of these individuals accumulated substantial assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes. In addition, some case studies involved businesses that were sanctioned for substandard care of their patients. Despite their abusive and related criminal activity, these 25 providers received Medicaid payments ranging from about $100,000 to about $39 million in fiscal year 2006." (http://www.gao.gov/new.items/d08239t.pdf, at 2).

The new IRS Whistleblower Program may provide a means to stop this abuse. Authorized by Congress in December 2006 (with the new regulations due to be issued by December 20, 2007), the new IRS Whistleblower Program established an enforceable right for "whistleblowers" or informants to receive 15-30% of money recovered by the IRS, including interest and penalties.

The federal False Claims Act, which was invigorated in 1986 with provisions that have made it the government's "primary" weapon against fraud, allows rewards for whistleblowers who report Medicare fraud, Medicaid fraud, and most other types of fraud and false claims against the federal government. The False Claims Act expressly does not apply to IRS obligations, however. Thus, the new IRS Whistleblower Program allows whistleblowers to help stop tax fraud and evasion by Medicaid providers, and to receive a share of the recovery.

Our whistleblower attorneys will continue to work both with the IRS and with the Department of Justice in representing whistleblowers who bring such fraud to light.

IRS Whistleblower Regulations & "Guidance" for Whistleblower Attorneys from the IRS

November 12, 2007

Anticipating the new IRS Whistleblower Program regulations that are due by the December 20, 2007 first anniversary of the new IRS Whistleblower Program, the IRS Office of Chief Counsel has just issued a Notice on "Coordination of Section 7623 Whistleblower Claims in the Tax Court."

As discussed extensively on this whistleblower lawyer blog, one of the major features of the new IRS Whistleblower Program is that whistleblowers who meet the program's criteria now have an enforceable right to share in money recovered by the government based on the whistleblower's information submitted. The Tax Court now has jurisdiction to consider appeals of whistleblower rewards.

The Notice on November 1, 2007 from the IRS Office of Chief Counsel, CC-2008-001, provides guidance relating to this new cause of action in the Tax Court, the review of award determinations made by the IRS Whistleblower Office. (See http://www.irs.gov/pub/irs-ccdm/cc-2008-001.pdf.)

This Notice recites that, pending additional procedures being established in the CCDM regarding pleadings, motions and decision documents, if a petitioner raises a section 7623 ("whistleblower reward") issue in a Tax Court case, certain notifications should be given to the Office of Associate Chief Counsel (Procedure & Administration), Branch 7, and the Office of Associate Chief Counsel (General Legal Services), Public Contracts and Technology Law Branch, to discuss how the issue should be "handled and coordinated."

For information provided to the IRS before the effective date of the new Whistleblower Program, December 20, 2006, the IRS has stated that the "old" law applies.

I know from speaking with IRS Whistleblower Office Director Stephen Whitlock this Fall, before and after our presentation together in Washington on the new IRS Whistleblower Program, that the IRS is busy working to complete the new regulations that will govern this first meaningful IRS Whistleblower Program. We look forward to reporting on these developments, and to continuing to work with the IRS in representing whistleblowers with information about significant tax noncompliance and tax fraud.

After all, why should honest citizens continue to pay more, becuse of tax cheating by those who refuse to bear their share of the load?

IRS Whistleblower Program: Hedge Funds and Private Equity Firms Under Increasing IRS Scrutiny for Tax Abuses

November 5, 2007

Continuing this whistleblower lawyer blog's discussions of the IRS's strong interest in hedge funds and private equity firms, there have been several recent public statements and reports about IRS efforts to identify and stop tax fraud and tax noncompliance in these segments of the financial services industry.

Today, suspected tax abuses by hedge funds and private equity managers were the subject of a Tax Notes report, which cites a November 1, 2007 statement by the IRS. That same day, Bloomberg reported that IRS officials have identified seven areas of "interest" to examine for tax violations and abuses:

(1) failing to file or improper filing of tax returns and information returns;

(2) circumventing withholding requirements on cross-border loans;

(3) managers' failing to pay tax on all income they receive;

(4) improperly classifying ordinary income as capital gains;

(5) circumventing tax laws by funds flowing between onshore and offshore entities;

(6) the timing and allocation of incentive payments and other income; and

(7) using improper accounting methods to minimize income.

On the same day, the House Ways and Means Committee voted to approve legislation to treat (and tax) payments to private equity firm partners who perform investment services as ordinary income, rather than as capital gains; and also to tax nonqualified deferred compensation paid by offshore hedge funds to investment managers. The debate continues in Congress about these issues.

With those many honest persons at hedge fund and private equity firms apparently being asked to "look the other way" in the face of such abuses--and perhaps risk exposing themselves to criminal or civil liability by appearing to "go along" with the wrongful acts--the number of "whistleblowers" who take advantage of the confidential procedures of the new IRS Whistleblower Program is increasing.

The new IRS Whistleblower Program will help identify and discourage these abuses, as hedge funds and private equity firms remain a great priority for the IRS. As IRS official Stuart Mann of the IRS Financial Services group emphasized to me when I saw him recently, "Bring your hedge fund whistleblower clients directly to me." These whistleblowers perform an essential public service.

IRS Tax Evasion & Stock Options Fraud Lead to Prison Sentence for Options Administrator

October 24, 2007

On this whistleblower lawyer blog, we have written previously about abuse of stock options--and how the IRS has declared that tax fraud and evasion from back-dating of stock options is a "Tier I" priority. Now, stock option fraud and income tax evasion will send a former stock options administrator to prison for almost four years.

The Securities and Exchange Commission has announced that Vencent Donlan was sentenced in a California federal court to 46 months in prison after pleading guilty to wire fraud and tax evasion charges. He was alleged to have fraudulently obtained stock and stock options from Wireless Facilities Inc.

Between November 2002 and November 2003, Donlan allegedly received more than $7 million by abusing his position as WFI's stock option grant administrator. The SEC alleged that Donlan issued and transferred more than 700,000 shares of the company's stock and stock options to a brokerage account that Donlan held with his wife. Donlan was alleged to have made false entries in WFI's stock options software to hide unauthorized stock option grants he made to his wife, as well as to have provided false information to the company's brokerage firm and transfer agent.

The tax law violations included that Donlan had evaded paying more than $2.2 million in federal income taxes on the income from his sales of this stock in 2002-2003. Donlan had already been ordered to disgorge all of his ill-gotten gains and pay interest and penalties.

We are encouraged by the successes of these government representatives who are working to stop fraud that causes losses to other persons or our public bodies.

Revenue Recognition Fraud Charges Lead Nortel Networks Agrees to Pay $35 Million

October 23, 2007

Accounting fraud can create liability for violating the securities laws and IRS tax rules and regulations. This whistleblower lawyer blog regularly comments on cases of interest, as whistleblowers often play an important role in bringing the violations to light.

The U.S. Securities and Exchange Commission has announced civil fraud charges against Nortel Networks Corp. and Nortel Networks Ltd., alleging improper revenue recognition by Nortel between 2000 and 2003, designed to make the company look appear more profitable. Nortel agreed to pay $35 million to resolve these accounting fraud allegations.

Previously, the SEC reportedly announced civil fraud charges against Nortel's former CEO Frank Dunn, former CFO Douglas Beatty, former Controller Michael Gollogly, and former Assistant Controller Mary Anne Pahapill for their roles in the alleged accounting fraud. The SEC also later alleged involvement in the fraudulent scheme by four former vice presidents of finance of Nortel's business units.

We applaud the good work of the SEC in combatting these fraudulent practices.

Illegal Tax Shelter Case Trial Postponed As Judge Disqualifies Counsel in KPMG Case

October 23, 2007

Our whistleblower lawyer blog attorneys have written about how abusive and fraudulent tax shelters promoted by accounting firms are priorities on the list of conduct that the IRS (and IRS tax whistleblowers) seek to stop. We have followed the KPMG tax shelter prosecution, which was set for opening statements to begin on October 23.

Just before the trial, Judge Lewis A. Kaplan responded to a late motion by the government pointing out potential conflicts of interest by counsel for former KPMG partner John Larson, by disqualifying his attorney. A new trial date will be set in November, once new counsel is obtained.

The 2005 KPMG indictment concerning alleged abusive and illegal tax shelters has been clear evidence that the government is prepared to hold accountable the accountants, financial advisers, lawyers and bankers who participate in illegal tax schemes.

The case is pending in the United States District Court for the Southern District of New York, UNITED STATES v. JEFFREY STEIN, et al., S1 05 Crim. 0888 (LAK).

Tax Write-Offs of Fraudulently Created Business Losses: A Need for Whistleblowers

October 19, 2007

Individuals who have knowledge of the fraudulent write-off of bogus business losses are in a position to reap the rewards from such illegal conduct should they report it under the IRS Whistleblower Program. If a business writes off bogus business losses from a transaction and claims a tax refund, for example, such a transaction could constitute fraud and thereby expose the company to a whistleblower action by an insider with knowledge of such fraud. An apparent example of this was reported this week in an article in Information Week describing a federal investigation into the computer services firm, Oracle. According to the article, federal investigators are looking into whether Oracle improperly wrote off a quarter of a billion dollars in losses in the calendar year 2003 for the express purpose of obtaining a massive tax refund. Allegedly, Oracle claimed that it lost $223 million on stock transactions in the calendar year 2003 and applied for a $78 million tax refund. The government’s contention seems to be that the tax write-offs were completely fraudulent because no business losses actually incurred. Allegedly, the stock losses were fraudulently manufactured to support the refund application. If the IRS is correct, Oracle might have to repay to the government $78 million plus penalties and interest on the money.

What the article did not say is whether the source of the information about Oracle came from a whistleblower. The stock transactions at issue allegedly occurred in 2003. There does not appear to be a statute of limitations issue. If a whistleblower is the source of the information that started the government’s investigation, under the New IRS Whistleblower Program, the informant could receive up to 30% of the $78 million tax refund plus the same percentage of collected penalties and interest. In short, if the government was unaware of the scheme and learned of the scheme through an informant/whistleblower, then, in that event, if the IRS is successful in its efforts to get the refund back, the whistleblower would then be entitled to a reward because otherwise the government could not have recovered money.

While, of course, we do not know whether the allegations against Oracle are true and correct, what is noteworthy is that the Internal Revenue Service is clearly interested in investigating cases where businesses have written off large business losses which may be inappropriate. In this case, the appearance is that the write-off was inappropriate because the stock transactions at issue appear to have been manufactured to create a tax loss. Again, whether the allegations are true or not with respect to Oracle, the fact remains that the Internal Revenue Service will investigate such cases and obviously would appreciate assistance from insiders and whistleblowers who are willing to come forward to report possible violations of the tax code.

As we have written previously, the new IRS Whistleblower Program provides significant incentives for whistleblowers to come forward in cases of this nature. (The reward in this case could be in excess of $25 million!) If an insider is aware that his or her employer is falsely deducting from its tax returns manufactured, inflated or otherwise improper business losses, and the tax implications exceed $2 million, such an insider could be eligible to recover 30% of the back taxes, penalties and interest if they come forward under the new IRS Whistleblower Program.

The clients who have been represented by our firm thus far under this new IRS program have impressed us with their integrity and concerns about tax fraud in general. Indeed, as citizens we should all be concerned about tax fraud because it affects each and every one of us. To the extent that an employee is aware of employer misconduct involving tax fraud, we hope that such individuals will not hesitate to expose their employers to the government. Tax cheats deserve to be exposed.

IRS Whistleblower Program Featured, With Interview of "Whistle-Blower Lawyer" Blog, in Financial Week Magazine

October 16, 2007

The new IRS Whistleblower Rewards Program--and observations by one of the whistleblower lawyer blog attorneys--were featured in an October 15, 2007 article by Nicholas Rummell in Financial Week. Financial Week is a publication geared toward the CFO and other professionals in finance and accounting, with coverage of economics and business markets, regulatory and legislative actions, financing, banking, insurance, real estate, cash management, investment management, benefits and retirement finance, investor relations, accounting and technology.

This article discusses the fast start of the new IRS Whistleblower Program authorized by Congress in December 2007, which our whistleblower attorneys have written about extensively. I had the pleasure of speaking at length with writer Nicolas Rummell about the new IRS program, which is most promising. (The Financial Week article is at http://www.financialweek.com/apps/pbcs.dll/article?AID=/20071015/REG/71012026.)

Of particular interest was how those in the financial services industry, including hedge funds, have utilized the new IRS Whistleblower Program.

I want to clarify some of the comments attributed to this whistleblower lawyer blog author. In particular, based on comments by those in the Whistleblower Program, the statute of limitations is three years for tax noncompliance or tax violations that do not necessarily amount to tax fraud or tax evasion. It increases to six years if there is an open audit or investigation by the IRS. But for tax fraud or tax evasion, there is no statute of limitations as a matter of law. (We have written about the statute of limitations previously.)

Based on our dealings with the IRS, the new Whistleblower Office is operating with extremely professional and capable officials, who are looking to reward individuals who come forward with useful information about tax noncompliance and violations of the tax laws. We are excited to represent clients in the financial services industry and other industries in the new IRS Whistleblower Program. The new IRS regulations to be released by December 2007, should answer many questions that currently exist about the new IRS program.

IRS Whistleblowers and 75 Billion Dollars?

October 5, 2007

It is estimated that the annual tax gap between those who owe money to the government as taxes and those who actually pay them (i.e. the annual underpayment of taxes) is $345 billion. Under the new IRS Whistleblower provisions, an insider with information about tax fraud can claim a minimum of 15% up to a maximum of 30% of back taxes collected by the government based on information received from the whistleblower. What this means is that each year if, in fact, the annual tax gap is accurately reported at $345 billion, whistleblowers nationwide could potentially receive 15 to 30 percent of this amount plus interest and penalties should they report tax cheats to the government.

The typical case we see here in our practice is where an insider at a business becomes concerned about blatant tax fraud. Examples include executives using corporate funds for their personal use, fraudulent business expenses, diversion of income to off-shore accounts, etc. The forms of fraud in the tax context are myriad and sometimes complex but the whistleblowers that have contacted our firm all are genuinely interested in making sure that tax cheats have to pay their tax bills. Indeed, what is unfair about this?

Given the huge amount of the annual tax gap, Congress hoped to increase whistleblower activity by enacting the new IRS Whistleblower provisions which provide increased incentives for insiders to come forward. Not only is the insider now entitled to a minimum of 15% of all back taxes collected, they also are eligible for up to 30% of such back taxes collected including 30% of interest and penalties collected on the taxes owed. Moreover, as we have previously blogged about, where overt fraud and income tax evasion is involved, there is no civil statute of limitations which prohibits such claims.

As former federal prosecutors who used to prosecute cases involving income tax evasion and false tax returns, we are pleased to represent those men and women who come forward with “insider” knowledge of tax fraud. All citizens should be opposed to tax fraud as we each, in our voluntary tax system, annually pay our fair share of taxes as required by the law. Those that try to evade their responsibilities in some cases should probably be criminally prosecuted but in all cases should be forced to pay what they owe. Finch McCranie is pleased to represent whistleblowers who through their efforts are making sure that tax cheats pay what they owe plus interest and penalties.

IRS Whistleblower Officials Explain Details of New IRS Whistleblower Rewards Program

September 21, 2007

IRS officials explained long-awaited details of how the new IRS Whistleblower Rewards Program will work to whistleblower attorneys gathered last week at the annual Taxpayers Against Fraud Conference in Washington.

This whistleblower lawyer blog author had the pleasure of appearing with the Director of the new IRS Whistleblower Office, Stephen Whitlock, in a panel discussion on the new IRS Whistleblower Program. I enjoyed spending time with Director Whitlock and with the other participants, Professor Dennis Ventry of American University's Washington College of Law, and attorneys Erika Kelton and Paul Scott. (Paul Scott, our moderator, deserves special thanks put putting together an extremely useful and informative program).

Later, before a second IRS Whistleblower presentation, I enjoyed having lunch and a long discussion of the particulars of the new IRS Whistleblower Program with two other IRS officials: Stuart Mann, one of the lead IRS officials with responsibility over the Financial Services industry, Large and Mid-Size Business Division (LMSB), which includes corporations, subchapter S corporations, and partnerships with assets greater than $10 million; and Nicole Cammarota, who is also with the IRS LMSB Division and who I understand is working on the new IRS Whistleblower regulations.

The Large and Mid-Sized Business Division of the IRS is dealing with IRS Whistleblower claims concerning these larger entities, which can involve very substantial tax liability. The IRS has divided its LMSB Division into five industry subgroups: (1) Communications, Technology, and Media; (2) Financial Services; (3) Heavy Manufacturing and Transportation; (4) Natural Resources and Construction; and (5) Retailers, Food, Pharmaceuticals and Healthcare.

The Financial Services group at the IRS is based at the Manhattan IRS Office at 290 Broadway (near City Hall). Its responsibilities include tax issues relating to commercial banking, savings and loans, life insurance, property & casualty insurance, securities and private pools of capital, including hedge funds and private equity.

After our lunch, Mr. Mann and Ms. Cammarota discussed with the larger group their observations about the new IRS Whistleblower Program, in a panel discussion with Marcella Auerbach and Brian Kenney, led by David Stone. The Director of the IRS Whistleblower Office, Stephen Whitlock, also attended and chimed in about his own areas of responsibility, apparently to make sure the IRS is giving consistent direction about the new Whistleblower Program overall.

Whistleblower Law Attorneys to Gather for Symposium on False Claims Act, State False Medicaid Claims Act, and New IRS Whistleblower Rewards Program

September 18, 2007

Some of the country's leading attorneys in qui tam whistleblower cases and IRS Whistleblower cases will gather for the "First Annual Whistleblower Law Symposium," which will take place at the Georgia State Bar Headquarters on Thursday, September 20, beginning at 9:00 a.m. (See Agenda below). This Whistleblower Law Symposium is organized and co-chaired by the authors of this whistleblower lawyer blog, Michael A. Sullivan and Richard W. Hendrix.

The presenters will include the very successful Pat O’Connell of the Texas Attorney General’s Office, whose group has recovered more than $216 million in health care fraud cases since 1999; and Jim Breen, who has represented relator Ven-A-Care of the Florida Keys Inc. in many very substantial qui tam cases, including the action that led to last week’s announcement by DOJ of a settlement with Aventis Pharmaceuticals Inc.

In addition, Steve Cowen of King & Spalding, LLP will chair a discussion of issues in defending False Claims Act cases; Marlan Wilbanks and other relators’ counsel will speak as well; and Charlie Richards of the Georgia Attorney General's Office and Georgia’s Inspector General Doug Colburn will discuss the new Georgia State False Medicaid Claims Act.

We will also discuss the bill introduced last week by Senators Grassley, Durbin, Specter, and Leahy to make substantial modifications to the federal False Claims Act, the “False Claims Act Correction Act of 2007.” (See http://grassley.senate.gov/public/index.cfm?FuseAction=PressReleases.Detail&PressRelease_id=fac0a482-1321-0e36-ba6f-0150b8a2b182&Month=9&Year=2007).

Further, my partner Richard Hendrix and I will explain and discuss the new IRS Whistleblower Program created by Congress in December 2006. I spent several hours this past week in Washington with the Director of the new IRS Whistleblower Office, Stephen Whitlock, to prepare for and appear in a panel discussion to explain the new IRS Whistleblower Program. I also enjoyed lunch with the lead IRS official responsible for IRS Whistleblower claims in the financial services industry, Stuart Mann, and with Nicole Cammarota, an IRS official who is working on the new regulations. There is a great deal of excitement about this new IRS Whistleblower program, which rewards citizens who report large tax fraud, tax evasion, and other tax law violations to the IRS. (Our firm is pursuing a variety of IRS Whistleblower cases across the country.)

For anyone who believes that taxpayers pay too much to allow fraud against the federal and state governments, these exciting new developments in the law are important.

We are excited to be hosting this Whistleblower Law Symposium, and to discuss recent developments in the False Claims Act, the new state False Claims Acts, and the new IRS Whistleblower Program. The Agenda for the Symposium is below.

Continue reading "Whistleblower Law Attorneys to Gather for Symposium on False Claims Act, State False Medicaid Claims Act, and New IRS Whistleblower Rewards Program" »

New IRS Whistleblower Rewards Program Explained at National Conference with Its Director, Stephen Whitlock

September 8, 2007

Tomorrow in Washington, this whistleblowerlawyerblog author is looking forward to participating in a panel discussion with the Director of the new IRS Whistleblower Office, Stephen Whitlock, to explain how the new IRS Whistleblower Rewards Program works.

We will speak at the Taxpayers Against Fraud Annual Conference in Washington at 6 p.m. on September 9. Leading the panel discussion will be Paul Scott. I am also looking forward to the presentations by Erika Kelton and Professor Dennis Ventry of American University's Washington College of Law.

I have enjoyed speaking with Director Stephen Whitlock before about the progress of this exciting new program that rewards whistleblowers for bringing forth information about tax fraud, tax evasion, and underpayments of taxes. Our firm has been continually impressed by the professionalism of the IRS agents we have worked with in representing clients who have presented whistleblower claims to the IRS.

Confidentiality of IRS Tax Whistleblowers or Informants--Federal Regulation on Keeping Whistleblowers Confidential

August 22, 2007

Our potential tax whistleblower clients--who call our attorneys about participating in the new IRS Whistleblower Rewards Program--regularly ask before they proceed if the IRS will keep their identities confidential.

Across the country, the IRS Special Agents we have been dealing with in representing our tax whistleblower clients (for example, in New York, Las Vegas, Dallas, and Atlanta, to name a few) have consistently answered the question the same way. Confidentiality is addressed by Treasury Regulations applicable to the IRS, which provide in part as follows: "No unauthorized person will be advised of the identity of an informant." 26 C.F.R. § 301.7623-1(e).

We have found the IRS Agents we deal with to be quite professional. They appreciate whistleblowers coming forward. They recognize that, when the IRS receives information from persons in this position, their investigative work is far more focused--and effective.

In fact, the June 2006 Report of the Treasury Inspector General for Tax Administration noted that, based on past experience,"examinations initiated based on informant information were often more efficient and effective." (See June 2006 Report of Treasury Inspector General for Tax Administration--which predated Congress' creation of the new IRS Whistleblower Rewards Program, entitled The Informants Rewards Program Needs More Centralized Management Oversight, No. 2006-30-092. See also www.tigta.gov.)

In our experience, the IRS professionals are very excited to have the new Program under the IRS Whistleblower Statute. They recognize the great service that whistleblowers provide. We look forward to further progress as the new regulations are announced this Fall.

Should a Tax Whistleblower in the New IRS Whistleblower Program Use an IRS Form 3949?

July 28, 2007

Question about the new IRS Whistleblower Rewards Program: if you go to the Internal Revenue Service’s website, the IRS notifies persons that, if they have evidence of suspected tax violations, they should use a Form 3949 and send it to an Internal Revenue Service Office in Fresno, California. While this blog is not legal advice, we have not seen a basis for individuals seeking a reward under the new IRS Whistleblower Program for blowing the whistle to utilize this form. The reason is because this form is not necessarily connected to the new IRS Whistleblower Program which came into being in December of 2006.

The Information Referral Form 3949A utilized by the IRS is a form that generically describes suspected tax fraud, but does not include within its provisions an application for a reward under the new IRS Whistleblower Program. The same is true for the old Form 211. While the IRS Form 211 arguably still applies to claims less that $2 million, because the new program pertains specifically to those seeking rewards concerning information for the payment of back taxes in excess of $2 million, we have not seen requirements that individuals applying for rewards use the Form 3949-A or send it blindly to the IRS in Fresno. While the information contained within the Form 3949A can be included in an application for a reward under the new Whistleblower program, simply sending in the Form 3949A may not be the equivalent of applying for the reward under the new Whistleblower Program as described in 26 U.S.C. § 7623.

Regulations on the new Whistleblower Program this fall may shed light on these questions. And again, since the facts vary from case to case and a blog cannot provide legal advice, please contact an attorney with experience with the IRS Whistleblower Program for guidance--either our firm or someone else with this experience.

The Profile of the New Tax Whistleblower

July 25, 2007

When the Tax Relief and Healthcare Act of 2006 was signed into law on December 20, 2006, Congress hoped to encourage businessmen and women to come forward with information concerning tax cheats. The new IRS Whistleblower Program (found at 26 U.S.C. § 7623) purposely focuses on large claims. To qualify for whistleblower rewards, a minimum of $2 million in taxes, penalties and interest must be involved. Given this amount of money, the primary targets of the new legislation are businesses whose employees and/or former employees are willing to report them for tax violations.

Under the old IRS Whistleblower Program, the typical whistleblower tipster was an ex-boyfriend, girlfriend, and/or ex-spouse. In spite of information from these sources, over the years the IRS was unable to collect very much by way of back taxes. Indeed, between the fiscal years 2001 and 2005, nationwide the IRS collected a grand total of $27.3 million based on such tips. With the new law now in place, the profile of the tipster has changed. Those coming forward now typically are former Controllers, Chief Financial Officers, and other high ranking executives.

Here at our firm, our experience has been exactly that which Congress attempted to encourage. We have received calls from former CFOs and controllers of companies, accountants and other high ranking executives who are turning in their present or former employers for alleged tax violations. Thus, the kinds of cases that we see now reflect a new profile of the average whistleblower. Unlike the old days where the typical tipster was the ex-boyfriend, girlfriend or spouse, the new whistleblower informant is typically a businessman or woman with significant and verifiable insider information concerning the under reporting of significant amounts of income. This is exactly what Congress intended when it enacted into law the new Tax Whistleblower provisions.

Under the old “Form 211" Program run by the IRS, the rewards to a whistleblower were small. Under the new program, the rewards are high. The informant is now entitled to as much as 30% of the recovery of back taxes, penalty and interest. Because the minimum amount of money involved in these cases must exceed $2 million, simple math indicates that very large rewards are forthcoming for those individuals who are willing to step forward and report income tax evasion. Moreover, if a reward from the IRS fails to recognize the whistleblower’s contribution to the collection of such back taxes, under the new law, the whistleblower/informant may even appeal the reward amount to the U.S. Tax Court.

In virtually every case that we have filed thus far with the Internal Revenue Service under the new program, we have dealt with executives as clients. We are no longer receiving calls from ex-spouses or girlfriends but rather from high ranking company executives. While the forms of fraud are always different depending on the case, the objective of the schemes reported to us are always the same: to cheat the United States out of lawfully owed tax dollars. As former federal prosecutors, we are proud to represent those willing to come forward to expose those who would attempt to evade their lawful tax obligations. We pay our fair share of taxes just as our whistleblower/clients do, others should do the same - and, if they don’t, they should be penalized. This is exactly what Congress envisioned when the new law was passed.

IRS to Scrutinize Derivatives--Do They Allow Offshore Investors to Avoid Withholding Taxes on U.S. Stock Dividends?

July 20, 2007

IRS Seeks Documents from Citigroup and Lehman Brothers Holdings on Derivatives

Now that Congress has created a meaningful IRS Whistleblower Rewards Program, tax whistleblower attorneys took note of yesterday's report that the IRS is looking into whether derivatives trades for hedge funds and other investors are being used to avoid tax withholding obligations, according to the Wall Street Journal yesterday. The IRS reportedly has issued "Information Document Requests" to Citigroup and Lehman Brothers Holdings to find out.

As Reuters reports, the derivatives trades in question are when securities firms buy stocks from offshore hedge-fund clients; the banks then pay their clients any principal return and dividends that these stocks generate. Because the fund technically does not hold the stock, the funds escape paying up to 30 percent in taxes on the dividend, according to sources discussed by Reuters.

Schemes to avoid paying taxes place greater burdens on the millions of honest Americans who satisfy their own tax obligations. We applaud the IRS's efforts to stop unlawful schemes.

The new IRS Whistleblower Rewards Program should make the IRS's efforts all the more effective. The enthusiasm of the three IRS agents we met with this week remind us how important the new IRS Whistleblower program should be!

In Case Alleging Fraud Against IRS in Misuse of Tax Shelters by Former KPMG Partners, Judge Dismisses Charges Against 13 Defendants

July 16, 2007

Most Defendants in KPMG Case Escape Prosecution--At Least For Now

As we have written about previously, abusive and fraudulent tax shelters promoted by accounting firms are high on the list of conduct that the IRS (and IRS tax whistleblowers) seek to stop. Today, the government's prosecution of 13 former KPMG partners and other executives was derailed--at least for now--when the trial judge dismissed charges against them, while allowing the charges to remain against other defendants.

Judge Lewis Kaplan had already ruled that these defendants' constitutional rights had been violated when the government pressured KPMG not to advance the legal fees and expenses of the defendants.

With that prior ruling, the government agreed that the Court should dismiss the charges against these 13 defendants. The government now may attempt to upset the judge's ruling on appeal, or perhaps try to bring other charges against these defendants.

As former prosecutors, we have followed the separate indictment of four Ernst & Young partners for tax fraud conspiracy and other federal criminal charges relating to tax shelters.

We believe that tax fraud, tax evasion, and other violations of IRS laws, rules and regulations can be battled effectively--in criminal cases or civil ones, whether or not whistleblowers are involved-- within our Constitution's protections. It will be interesting to see if the ruling in the case of the former KPMG executives, is appealed and stands.

The case is pending in the United States District Court for the Southern District of New York, UNITED STATES v. JEFFREY STEIN, et al., S1 05 Crim. 0888 (LAK)..


IRS Declares That Tax Fraud and Evasion from Back-Dating of Stock Options Is a Top Priority

July 15, 2007

IRS Tax Whistleblowers with Knowledge of Stock Option Backdating Should Take Note

Now that the IRS has an effective IRS Whistleblower Rewards Program for whistleblowers who report tax fraud, tax evasion, or other violations of the Internal Revenue laws, the IRS' recent announcement of focusing on back-dating of stock options should be interesting. In continuing our past discussions of claims under the IRS Whistleblower Rewards Program, we point out the tax fraud that the IRS has decided to target involving back-dated stock options.

The IRS recently announced that backdating of stock options is a "Tier I Compliance Issue and therefore is a mandatory examination item for taxpayers with backdated stock option grant and/or exercise prices."

This unlawful practice can produce adverse tax consequences for the corporation issuing the option. As the IRS announcement explains, corporations are subject to a $1 million annual limit on the deduction for compensation to the CEO and four other highest compensated officers in a publicly traded corporation.

Under Treasury Regulations section 1.162-27(e)(2)(vi), there is a “qualified performance based compensation” exception to the $1 million deduction limit for compensation attributable to option exercises if the option exercise price equals or exceeds the per share value on the grant date and certain other requirements are met. A failure to satisfy this requirement may cause compensation attributable to the option exercise to be subject to the $1 million deduction limit.

Continue reading "IRS Declares That Tax Fraud and Evasion from Back-Dating of Stock Options Is a Top Priority" »

Tax Whistleblowers Encouraged to Come Forward

June 6, 2007

Even though the Internal Revenue Service has had a Rewards Program for many years, until recently, there was very little encouragement for tax whistleblowers or informants to come forward concerning their knowledge of the under-reporting of taxes. While it is well known that income tax evasion costs taxpayers approximately $300 billion a year, the Internal Revenue Service in the past has failed to aggressively address this problem. While enforcement actions against criminals are designed to help deter tax fraud, the $300 billion annual figure is proof, in and of itself, that such deterrence has not been effective in collecting back taxes. Moreover, the old “Form 211" IRS Rewards Program was singularly unsuccessful.

According to government statistics, between the fiscal years 2001 and 2005, only $27.3 million was paid by the Internal Revenue Service to informants as rewards for tips and information. The average individual reward under the old IRS Rewards Program was a mere $24,000.00. This is in stark contrast to results achieved under the Federal False Claims Act where awards for whistleblowers can and typically are in excess of 6 or 7 figures. The new IRS Whistleblower Rewards Program provides enhanced inducement for whistleblowers to come forward when they have knowledge of under-reported income. The new program is greatly improved because it provides that the whistleblower will receive anywhere between fifteen to thirty percent (15 - 30%) of any collected back taxes, plus interest and penalties on the back taxes owed. Moreover, to encourage the whistleblower to have confidence in the system, the whistleblower even has the right to appeal to a U.S. Tax Court any decision by the IRS that their rewards should be reduced below 30%, if the Internal Revenue Service is successful in collecting back taxes based on information provided by the whistleblower.

Our firm has already seen very encouraging signs that the new program is working as intended. We have received numerous inquiries from informants, on a nationwide basis, coming forward with significant information about the evasion of back taxes owed. We have also been encouraged by the response of the Internal Revenue Service to these claims when we have presented them. Thus, it appears that the new IRS Rewards Program is actually encouraging whistleblowers and informants to come forward and provide the Internal Revenue Service with information concerning their knowledge of income tax evasion. While the program is less than seven months old and is just getting started with very little back taxes actually collected, the most encouraging news is that the IRS has opened numerous files and is now embarked on numerous investigations which otherwise would not be taking place at all had the whistleblowers not come forward under the new program. This is certainly a change in the right direction.

Accounting Firm Partners Indicted in Tax Fraud Case Over Tax Shelters Promoted by Ernst & Young

May 30, 2007

IRS whistleblowers and whistleblower attorneys take note: accounting firms participating in selling tax shelters were jolted by today's announcement of the indictment of four Ernst & Young partners for tax fraud conspiracy and other federal criminal charges relating to tax shelters.

The four accountants were alleged to have marketed tax shelter transactions based on fraudulent factual scenarios, through which wealthy taxpayers could eliminate or reduce the taxes paid to the IRS, according to the government's announcement. All four persons charged had worked in E&Y's group that developed tax shelters, initially named VIPER ("Value Ideas Produce Extraordinary Results"), and later SISG ("Strategic Income Solutions Group"), according to the government.

The indictment announced by the U.S. Attorney for the Southern District of New York named present or former E&Y tax partners in Texas, New York, and Louisiana. Three of the four reportedly were also lawyers. The indictments allege a scheme to defraud the IRS through fraudulent tax shelters from 1998 through 2004.

One defendant--a lawyer--was alleged to have instructed the accounting firm's employees to destroy documents when he knew of a pending IRS audit of the transaction, according to the announcement by the government. The government also alleged that eleven of the firm's used the tax shelter scheme to eliminate $3.7 million of their own tax liability.

"Where were the lawyers" was the refrain of a judge after the S&L collapse. Although defendants are presumed innocent until proven guilty, it appears the same question may be asked here.

We applaud the IRS Criminal Investigation Division for pursuing those who do not pay their fair share of taxes, leaving you and me to pay more.

Addendum: IRS Whistleblower Office Is Off to a Strong Start . . .

May 16, 2007

I posted earlier today on this whistle blower lawyer blog about the comments of the Director of the new IRS Whistleblower Office, Stephen Whitlock, on how the IRS Whistleblower program is off to a good start, with credible claims and supporting evidence having been submitted by whistleblowers and their attorneys.

Since then, my partner commented that he believes one of our larger cases was referred to in the IRS Director's comments about "knowledgeable insiders." We also neglected to mention our IRS Whistleblower claims for our clients in New York and the Northeast.

So much for blogging on days when I am out with a bug. The new IRS Whistleblower Rewards Program goes on!

New IRS Whistleblower Director Says IRS Rewards Program Is Off to a Strong Start

May 16, 2007

The head of the new IRS Whistleblower Office, Stephen Whitlock, reports that the new IRS Whistleblower Rewards Program is off to a strong start.

Today's Wall Street Journal quotes Mr. Whitlock as saying that the claims submitted to the IRS Whistleblower Office to date appear to have credibility and have evidence to support them.

Since the new IRS Whistleblower program was authorized by Congress in December, our firm has been working with the IRS in pursuing whistleblower claims in the Midwest, West, Southwest, and Southeast, and is evaluating IRS claims in other parts of the country. We have written about it extensively on this whistle blower lawyer blog, including a discussion of proposed legislation that would modify the program.

Senator Charles Grassley of Iowa, who pushed for such an IRS Whistleblower program for years, also complimented the progress of the IRS Whistleblower Office's efforts.

Our congratulations go to Mr. Whitlock and the IRS for protecting taxpayer funds by making tax cheats pay--like honest taxpayers do!

Amendments to New IRS Whistleblower Law Considered

April 5, 2007

We have had many calls this week from potential clients in our IRS Whistleblower practice, probably because msn.com featured an article about the IRS Whistleblower program on Monday that linked to our whistleblower lawyer blog.

As I have explained to many whistleblower clients, the new regulations for the IRS Whistleblower Rewards Program are in the works, but have not been issued. We have been pursuing IRS Whistleblower claims under the new program and have found the IRS agents to be excited about it.

Adding to the mix for those seeking a whistleblower attorney is that Congress is considering amendments to the law that established the new IRS Whistleblower Program in December 2006. Among the possible changes/additions are a provision opening up the Whistleblower Program to more claims by setting a different threshold for the amount of money in question, which could allow more whistleblowers to qualify for a reward.

Another provision would appropriate funds for the IRS Whistleblower Office, some of which might help defray expenses incurred by the whistleblower's legal representative. Yet another provision addresses the confidentialty of whistleblowers in Tax Court proceedings.

These proposed changes are part of HB 2, the "minimum wage" bill, which passed the Senate in February.

We will continue to keep up with any developments affecting the IRS Whistleblower Program, which we believe promises to be a great success. If you have any questions about the IRS Whistleblower program, feel free to email me here.

The current section of the proposed HB 2 that applies to the IRS Whistleblower Program is below:

Continue reading "Amendments to New IRS Whistleblower Law Considered" »

IRS Whistleblower Rewards Featured in Smart Money Magazine

March 15, 2007

The new IRS Whistleblower Rewards Program that we have been discussing is featured in the March 13 issue of Smart Money Magazine--and Smart Money cites our Whistleblower blog and quotes one of our authors.

The Smart Money reporter, Lisa Scherzer, contacted our firm, Finch McCranie, LLP, to discuss the IRS Whistleblower Rewards program and our experiences in representing clients in the IRS Whistleblower program. We commented that most potential whistleblowers who have contacted us are ethical, conscientious persons who are troubled by improper practices at their firms. They usually have tried unsuccessfully to correct the improprieties internally, and have found that the wrongdoers are unwilling to listen.

In fact, many whistleblower clients have begun to experience repercussions for trying to do the right thing, before they ever contact a whistleblower lawyer.

Fortunately, Smart Money got it right in describing why whistleblowers typically come forward!

IRS Names New Head of IRS Criminal Investigative Division

February 27, 2007

The IRS agents we have been meeting with since January to pursue whistleblower claims under the new IRS Whistleblower Rewards Program have a new boss, the IRS announced today.

The Criminal Investigative Division of the IRS will be led by Eileen Mayer, who was most recently head of the IRS's Office of Fraud/Bank Secrecy Act.

We are encouraged by IRS Commissioner Mark W. Everson's comments that "she will play a key role in IRS efforts to halt tax fraud." Agents of the Criminal Investigative Division work tax fraud cases, some of which are now originating under the new IRS Whistleblower Rewards program.

As a result of the IRS's efforts, the Department of Justice has brought many successful prosecutions.
The IRS's press release is reprinted below:

Continue reading "IRS Names New Head of IRS Criminal Investigative Division" »

Comments--Whistleblower Lawyers, Other Attorneys, and Clients on the Whistleblower Lawyer Blog

February 22, 2007

Since we began the Whistleblower Lawyer Blog to discuss topics of interest to attorneys, potential whistleblowers and others about developments in the new IRS Whistleblower Rewards Program, in qui tam litigation under the False Claims Act, and other whistleblower developments that might be of interest to other lawyers or whistleblowers, we have received some very positive feedback.

We have discussed not only how the IRS Whistleblower Program and the False Claims Act work, but we have also tried to highlight specific areas we have been working in, such as Hurricane Katrina fraud, Iraq fraud, Medicare and Medicaid fraud, and the new IRS Whistleblower Rewards Program, to name a few. We are always looking to improve the Whistleblower Lawyer Blog and solicit your input on any other issues who would like to see addressed.

Please reply directly to me with comments at msullivan@finchmccranie.com. Thanks for your input!

Watching the New IRS Whistleblower Procedures Take Shape

February 19, 2007

We are excited to see the new IRS Whistleblower Office's procedures being developed. We obtained a copy of a recent letter from IRS Commissioner Mark W. Everson, describing how the new Whistleblower procedures are taking shape, to Senator Charles Grassley.

Senator Grassley has been instrumental in pushing for effective whistleblower laws, both in qui tam litigation under the False Claims Act, and now in the new IRS Whistleblower Program. Here is an excerpt of Commisioner Everson's January 29, 2007 letter describing the implementation of the new IRS Whistleblower Program:

"The IRS has already taken steps to establish the new Whistleblower Office, which will report directly to the Deputy Commissioner for Services and Enforcement. This places the new office on par with other Operating divisions at the IRS. It will be headed by an IRS executive who has experience with IRS operations as well as with whistleblower operations in other government agencies. This executive should be assigned to the new position by February 4, 2007 [and our Whistleblower Lawyer Blog readers can learn about the new Director here] and will be available to attend your bipartisan roundtable discussion to obtain first-hand input from key stakeholders.

"The IRS Chief counsel and Assistant Secretary for Tax Policy are responsible for issuing the guidance required by the Tax Relief Act of 2006. Both offices are currently studying the legislation to identify areas and issues to be addressed in the guidance. They will obtain input from all interested parties, including the new executive in charge of the Whistleblower Office, to determine issues needing guidance. We are hopeful that the roundtable discussion will provide an opportunity to receive additional input. Chief Counsel and Tax Policy plan to issue this guidance within the one year timeframe required in the legislation."

Continue reading "Watching the New IRS Whistleblower Procedures Take Shape" »

Potential Whistleblowers: IRS Offers Program for Employers "Back-Dating" Stock Options

February 14, 2007

We are encouraged that the IRS is taking action in response to the fraudulent practice of "back-dating" of stock options. Potential whistleblowers may wish to see the IRS' description of its program to deal with an aspect of this problem.

Here is an excerpt from the IRS' announcement of how it is permitting employers to "step forward" and pay a penalty, and a related IRS Release can be read here:

(From IRS Release:)

IRS Offers Opportunity for Employers to Satisfy Tax Obligations of Rank-and-File Employees with ‘Backdated’ Stock Options

IR-2007-30, Feb. 8, 2006

WASHINGTON — Internal Revenue Service officials today announced an initiative aimed at providing relief for rank-and-file employees affected by their companies’ issuance of backdated and other mispriced stock options. While the program will be available to help these employees who may be unaware that they held backdated options, the opportunity will not be available for backdated options exercised by most corporate executives or other insiders.

If an employee exercised a ‘backdated’ stock option in 2006, the employee may owe an additional 20-percent tax, plus an interest tax, under the Federal tax laws governing deferred compensation. If the option had been properly priced, the employee normally would only have owed income tax on the difference between the value at the date of grant and exercise.



Continue reading "Potential Whistleblowers: IRS Offers Program for Employers "Back-Dating" Stock Options " »

New IRS Whistleblower Office Has First Director

February 2, 2007

We saw more good news when the IRS announced the first director of the new IRS Whistleblower Office--Stephen A. Whitlock. Mr. Whitlock was formerly in charge of the Office of Professional Responsibility. He also had led anti-fraud and abuse programs at the Defense Department.

The IRS's press release is reprinted here:

IRS Begins Work on Whistleblower Office; Whitlock Named First Director

IR-2007-25, Feb. 2, 2007

WASHINGTON — The Internal Revenue Service today named Stephen A. Whitlock as director of its new Whistleblower Office, where he will be responsible for administering the program designed to receive information that helps uncover tax cheating and to provide appropriate rewards to whistleblowers.

“This is an important new office at the IRS, and Steve brings a strong background in ethics and tax issues to help get this program off to a good start,” said IRS Commissioner Mark W. Everson. “Under Steve’s leadership, we will meet expectations from Sen. Grassley and other supporters to run a robust program.”

Continue reading "New IRS Whistleblower Office Has First Director" »

Progress with the New IRS Rewards Program for Tax Whistleblower Cases

January 31, 2007

We have been working with the IRS to bring information about large tax cheating to the IRS's attention, so that clients can participate in the new IRS Whistleblower rewards. The IRS officials sound excited to have this new tool at their disposal, and we are happy to help our whistleblower clients obtain the new rewards. Our latest one deals with fraud in the Hurricane Katrina relief effort, where the public and government have been cheated out of what appears to be many millions of dollars.

We find it especially exciting when a qui tam whistleblower client also has information that qualifies the client to participate in the new IRS whistleblower rewards. This new IRS law enacted in late December 2006 provides for rewards to the whistleblower of 15 to 30% of the government's recovery of taxes, interest, and penalties when income has been under-reported or underpaid.

You might be interested to know that the new IRS whistleblower program is different than the qui tam provisions of the False Claims Act, the main tool the government has had to date for combating fraud. The IRS whistleblower program permits payments of up to 10% of the government's recovery, even when the whistleblower is not an "original source" of the information.

We are excited to offer this service to our whistleblower clients and potential clients. We already feel like we have a "leg up" in helping clients because, as former federal prosecutors, we use that experience to advise our whistleblower clients on criminal law issues. After all, many times our clients have been uncomfortably close to the fraud they are reporting. Now, we can offer this third area of experience-the IRS whistleblower rewards program.

We think the increase in rewards to IRS whistleblowers is an excellent change in the law, which we will use to benefit our clients.

New IRS Whistleblower Rewards Statute

January 26, 2007

We hear from many lawyers and clients that they are not aware of the new IRS Whistleblower Rewards Program. The new provisions took effect on December 20, 2006, and yet so far they are locate on the web.

We hope it is helpful to you to find the new IRS Whistleblower Rewards amendments here, in the amended version of the statute:

26 U.S.C. § 7623.

(a) In general.--The Secretary, under regulations prescribed by the Secretary, is authorized to pay such sums as he deems necessary for--

(1) detecting underpayments of tax, or

(2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same,

in cases where such expenses are not otherwise provided for by law. Any amount payable under the preceding sentence shall be paid from the proceeds of amounts collected by reason of the information provided, and any amount so collected shall be available for such payments.

Continue reading "New IRS Whistleblower Rewards Statute" »

Tax Whistleblower Rewards Increase

January 22, 2007

We are excited that, in December 2006, Congress dramatically increased the "rewards" to whistleblowers under the IRS Whistleblower rewards program. Whistleblowers now can receive up to 30% of the taxes, interest, and penalties that the IRS recovers based on information furnished by a whistleblower in large tax cases.

For years, the Internal Revenue Service has been authorized to pay informants reporting tax fraud a percentage of any back due taxes collected. Usually the maximum percentage was approximately fifteen (15%) percent of the back tax recovered.

The new whistleblower reform provisions passed by Congress have changed this maximum, and now allow the Internal Revenue Service to consider not only the back tax amount, but also interest and penalties. Given the amounts of money involved, and depending on the passage of time, the fines, penalties and interest in addition to the tax could be significant.

Moreover, the law changes the amount that goes to the informant from a fifteen (15%) percent cap to a thirty (30%) percent cap of all collected proceeds which again includes penalties, interest and the back tax. The new provisions also allow an above-the-line deduction for attorney’s fees and cost paid by and on behalf of the individual in connection with any award for providing information regarding violations of the tax laws. The Internal Revenue Service must now create a Whistleblower Office within the IRS to administer the mandatory reward program.

Congress will require a yearly report to the Secretary of Treasury regarding the effectiveness of any reward program implemented by the IRS. Congress estimates that these new provisions will raise $33 million over the next five years which is but a small fraction of the under reported income in the United States each year. Nonetheless, it is an improvement over existing procedures.

Continue reading "Tax Whistleblower Rewards Increase" »

Will Whistleblower Tax Reforms Produce Results?

January 22, 2007

The Federal False Claims Act has been recognized as the government’s most effective tool for combating fraud and waste in government programs. According to the Justice Department, false claims act recoveries for the fiscal year 2006 exceeded 3 billion dollars. Unfortunately, the whistleblower reward program utilized by the Internal Revenue Service can hardly be characterized as being so successful. Since new IRS reward reform measures were enacted by Congress, we have been giving thought to the crucial question of whether the IRS will be successful in implementing its new informant reward program. Statistics available from the IRS are hardly encouraging. Between fiscal year 2001 and 2005, a paltry $27.3 million was paid by the Internal Revenue Service to informants as rewards. The average individual reward was around $24,000.00. When we compare this to the results achieved under the Federal False Claims Act, obviously, the disparity in results is staggering which is probably why it is that Congress recently acted to encourage the Internal Revenue Service to reform its whistleblower program. The real question is whether the Internal Revenue Service is up to the job and whether it will learn lessons from the success of its other federal agencies in combating taxpayer fraud and abuse.

Continue reading "Will Whistleblower Tax Reforms Produce Results?" »