Articles Posted in Recent Developments

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.
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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.

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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.

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:
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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:
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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.”

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.

On July 31, Congress enacted a new Whistleblower Law designed to promote consumer product safety. The new federal legislation specifically was enacted to protect public and private sector employees who disclose to their employers, a regulatory agency or a state Attorney General any perceived violation of the Consumer Product Safety Commission. The law also provides protection for employees who refuse to participate in violations of the Consumer Product Safety Commission Act. Obviously, the purpose of this legislation was to protect employees who, in good faith, report potential safety problems connected with consumer products and to prevent retaliation against such an employee either in the private or public sector. Any employee who, in good faith, reports or discloses potential violations of the Consumer Product Safety Commission Act, is protected from retaliation by this legislature.

Under the new whistleblower legislation, an employee who believes that they have been unlawfully retaliated against for disclosing a violation of the Consumer Product Safety Commission Act must file with the Occupational Health and Safety Administration (OHSA) a complaint of retaliation within 180 days of becoming aware of the retaliatory action. Afterwards, on an administrative basis, OHSA will conduct an investigation. Either the employee or the employer can request a hearing before an Administrative Law Judge (ALJ) and can appeal an adverse decision to the Department of Labor’s Administrative Review Board. If the Department of Labor has not issued a final decision within 210 days after the filing of the complaint, an employee may remove the complaint to Federal Court and ask for a jury trial.

Under the new Act’s provisions, in order to deter employers from retaliating against employees who, in good faith, report violations or potential violations of the Consumer Product Safety Commission Act, a prevailing employee who has been unlawfully retaliated against will be entitled, among other things, to reinstatement, back pay, compensatory damages and litigation costs including reasonable attorney’s fees.

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.

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.”