Tax Write-Offs of Fraudulently Created Business Losses: A Need for Whistleblowers

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.