Articles Posted in IRS Whistleblower Program (for Tax Whistleblowers)

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When the Tax Relief and Healthcare Act of 2006 was signed into law on December 20, 2006, Congress hoped to encourage businessmen and women to come forward with information concerning tax cheats. The new IRS Whistleblower Program (found at 26 U.S.C. § 7623) purposely focuses on large claims. To qualify for whistleblower rewards, a minimum of $2 million in taxes, penalties and interest must be involved. Given this amount of money, the primary targets of the new legislation are businesses whose employees and/or former employees are willing to report them for tax violations.

Under the old IRS Whistleblower Program, the typical whistleblower tipster was an ex-boyfriend, girlfriend, and/or ex-spouse. In spite of information from these sources, over the years the IRS was unable to collect very much by way of back taxes. Indeed, between the fiscal years 2001 and 2005, nationwide the IRS collected a grand total of $27.3 million based on such tips. With the new law now in place, the profile of the tipster has changed. Those coming forward now typically are former Controllers, Chief Financial Officers, and other high ranking executives.

Here at our firm, our experience has been exactly that which Congress attempted to encourage. We have received calls from former CFOs and controllers of companies, accountants and other high ranking executives who are turning in their present or former employers for alleged tax violations. Thus, the kinds of cases that we see now reflect a new profile of the average whistleblower. Unlike the old days where the typical tipster was the ex-boyfriend, girlfriend or spouse, the new whistleblower informant is typically a businessman or woman with significant and verifiable insider information concerning the under reporting of significant amounts of income. This is exactly what Congress intended when it enacted into law the new Tax Whistleblower provisions.

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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 question are when securities firms buy stocks from offshore hedge-fund clients; the banks then pay their clients any principal return and dividends that these stocks generate. Because the fund technically does not hold the stock, the funds escape paying up to 30 percent in taxes on the dividend, according to sources discussed by Reuters.

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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’ constitutional rights had been violated when the government pressured KPMG not to advance the legal fees and expenses of the 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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Even though the Internal Revenue Service has had a Rewards Program for many years, until recently, there was very little encouragement for tax whistleblowers or informants to come forward concerning their knowledge of the under-reporting of taxes. While it is well known that income tax evasion costs taxpayers approximately $300 billion a year, the Internal Revenue Service in the past has failed to aggressively address this problem. While enforcement actions against criminals are designed to help deter tax fraud, the $300 billion annual figure is proof, in and of itself, that such deterrence has not been effective in collecting back taxes. Moreover, the old “Form 211” IRS Rewards Program was singularly unsuccessful.

According to government statistics, between the fiscal years 2001 and 2005, only $27.3 million was paid by the Internal Revenue Service to informants as rewards for tips and information. The average individual reward under the old IRS Rewards Program was a mere $24,000.00. This is in stark contrast to results achieved under the Federal False Claims Act where awards for whistleblowers can and typically are in excess of 6 or 7 figures. The new IRS Whistleblower Rewards Program provides enhanced inducement for whistleblowers to come forward when they have knowledge of under-reported income. The new program is greatly improved because it provides that the whistleblower will receive anywhere between fifteen to thirty percent (15 – 30%) of any collected back taxes, plus interest and penalties on the back taxes owed. Moreover, to encourage the whistleblower to have confidence in the system, the whistleblower even has the right to appeal to a U.S. Tax Court any decision by the IRS that their rewards should be reduced below 30%, if the Internal Revenue Service is successful in collecting back taxes based on information provided by the whistleblower.

Our firm has already seen very encouraging signs that the new program is working as intended. We have received numerous inquiries from informants, on a nationwide basis, coming forward with significant information about the evasion of back taxes owed. We have also been encouraged by the response of the Internal Revenue Service to these claims when we have presented them. Thus, it appears that the new IRS Rewards Program is actually encouraging whistleblowers and informants to come forward and provide the Internal Revenue Service with information concerning their knowledge of income tax evasion. While the program is less than seven months old and is just getting started with very little back taxes actually collected, the most encouraging news is that the IRS has opened numerous files and is now embarked on numerous investigations which otherwise would not be taking place at all had the whistleblowers not come forward under the new program. This is certainly a change in the right direction.

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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 that developed tax shelters, initially named VIPER (“Value Ideas Produce Extraordinary Results”), and later SISG (“Strategic Income Solutions Group”), according to the government.

The indictment announced by the U.S. Attorney for the Southern District of New York named present or former E&Y tax partners in Texas, New York, and Louisiana. Three of the four reportedly were also lawyers. The indictments allege a scheme to defraud the IRS through fraudulent tax shelters from 1998 through 2004.

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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 claims for our clients in New York and the Northeast.

So much for blogging on days when I am out with a bug. The new IRS Whistleblower Rewards Program goes on!

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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, West, Southwest, and Southeast, and is evaluating IRS claims in other parts of the country. We have written about it extensively on this whistle blower lawyer blog, including a discussion of proposed legislation that would modify the program.

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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 by improper practices at their firms. They usually have tried unsuccessfully to correct the improprieties internally, and have found that the wrongdoers are unwilling to listen.

In fact, many whistleblower clients have begun to experience repercussions for trying to do the right thing, before they ever contact a whistleblower lawyer.

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