Whistleblower Lawyer Blog

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" »

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.

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 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" »

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.

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.

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.

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"" »

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

--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"" »

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" »

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?" »

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" »

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.”

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.

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 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" »

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

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.

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.

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" »

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?" »

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" »

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" »

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" »

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").

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 " »

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.

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" »

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.

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.

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.

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!

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.

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" »

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).

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.

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 " »

(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 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.

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.

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).

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 " »

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)" »

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.

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.

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" »

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.

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!

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" »

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" »

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.

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?

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.

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.

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.

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).

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.

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.

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 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.