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

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.

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