IRS Seeks Documents from Citigroup and Lehman Brothers Holdings on Derivatives

Now that Congress has created a meaningful IRS Whistleblower Rewards Program, tax whistleblower attorneys took note of yesterday’s report that the IRS is looking into whether derivatives trades for hedge funds and other investors are being used to avoid tax withholding obligations, according to the Wall Street Journal yesterday. The IRS reportedly has issued “Information Document Requests” to Citigroup and Lehman Brothers Holdings to find out.

As Reuters reports, the derivatives trades in
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Most Defendants in KPMG Case Escape Prosecution–At Least For Now

As we have written about previously, abusive and fraudulent tax shelters promoted by accounting firms are high on the list of conduct that the IRS (and IRS tax whistleblowers) seek to stop. Today, the government’s prosecution of 13 former KPMG partners and other executives was derailed–at least for now–when the trial judge dismissed charges against them, while allowing the charges to remain against other defendants.

Judge Lewis Kaplan had already ruled that these defendants’
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IRS Tax Whistleblowers with Knowledge of Stock Option Backdating Should Take Note

Now that the IRS has an effective IRS Whistleblower Rewards Program for whistleblowers who report tax fraud, tax evasion, or other violations of the Internal Revenue laws, the IRS’ recent announcement of focusing on back-dating of stock options should be interesting. In continuing our past discussions of claims under the IRS Whistleblower Rewards Program, we point out the tax fraud that the IRS has decided to target involving back-dated stock options.

The IRS recently announced that backdating of stock options is a “Tier I Compliance Issue and therefore is a mandatory examination item for taxpayers with backdated stock option grant and/or exercise prices.”

This unlawful practice can produce adverse tax consequences for the corporation issuing the option. As the IRS announcement explains, corporations are subject to a $1 million annual limit on the deduction for compensation to the CEO and four other highest compensated officers in a publicly traded corporation.

Under Treasury Regulations section 1.162-27(e)(2)(vi), there is a “qualified performance based compensation” exception to the $1 million deduction limit for compensation attributable to option exercises if the option exercise price equals or exceeds the per share value on the grant date and certain other requirements are met. A failure to satisfy this requirement may cause compensation attributable to the option exercise to be subject to the $1 million deduction limit.
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IRS whistleblowers and whistleblower attorneys take note: accounting firms participating in selling tax shelters were jolted by today’s announcement of the indictment of four Ernst & Young partners for tax fraud conspiracy and other federal criminal charges relating to tax shelters.

The four accountants were alleged to have marketed tax shelter transactions based on fraudulent factual scenarios, through which wealthy taxpayers could eliminate or reduce the taxes paid to the IRS, according to the government’s announcement. All four persons charged had worked in E&Y’s group
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I posted earlier today on this whistle blower lawyer blog about the comments of the Director of the new IRS Whistleblower Office, Stephen Whitlock, on how the IRS Whistleblower program is off to a good start, with credible claims and supporting evidence having been submitted by whistleblowers and their attorneys.

Since then, my partner commented that he believes one of our larger cases was referred to in the IRS Director’s comments about “knowledgeable insiders.” We also neglected to mention our IRS Whistleblower
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The head of the new IRS Whistleblower Office, Stephen Whitlock, reports that the new IRS Whistleblower Rewards Program is off to a strong start.

Today’s Wall Street Journal quotes Mr. Whitlock as saying that the claims submitted to the IRS Whistleblower Office to date appear to have credibility and have evidence to support them.

Since the new IRS Whistleblower program was authorized by Congress in December, our firm has been working with the IRS in pursuing whistleblower claims in the Midwest,
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We have had many calls this week from potential clients in our IRS Whistleblower practice, probably because msn.com featured an article about the IRS Whistleblower program on Monday that linked to our whistleblower lawyer blog.

As I have explained to many whistleblower clients, the new regulations for the IRS Whistleblower Rewards Program are in the works, but have not been issued. We have been pursuing IRS Whistleblower claims under the new program and have found the IRS agents to be excited about it.

Adding to the mix for those seeking a whistleblower attorney is that Congress is considering amendments to the law that established the new IRS Whistleblower Program in December 2006. Among the possible changes/additions are a provision opening up the Whistleblower Program to more claims by setting a different threshold for the amount of money in question, which could allow more whistleblowers to qualify for a reward.

Another provision would appropriate funds for the IRS Whistleblower Office, some of which might help defray expenses incurred by the whistleblower’s legal representative. Yet another provision addresses the confidentialty of whistleblowers in Tax Court proceedings.

These proposed changes are part of HB 2, the “minimum wage” bill, which passed the Senate in February.

We will continue to keep up with any developments affecting the IRS Whistleblower Program, which we believe promises to be a great success. If you have any questions about the IRS Whistleblower program, feel free to email me here.

The current section of the proposed HB 2 that applies to the IRS Whistleblower Program is below:
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The new IRS Whistleblower Rewards Program that we have been discussing is featured in the March 13 issue of Smart Money Magazine–and Smart Money cites our Whistleblower blog and quotes one of our authors.

The Smart Money reporter, Lisa Scherzer, contacted our firm, Finch McCranie, LLP, to discuss the IRS Whistleblower Rewards program and our experiences in representing clients in the IRS Whistleblower program. We commented that most potential whistleblowers who have contacted us are ethical, conscientious persons who are troubled
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