Tax shelters are an on-going battle for the IRS and the Department of Justice with large amounts of money at stake for the government, the taxpayer, and possibly for a knowledgeable whistleblower. Tax shelter cases involve schemes that attempt to manipulate internal revenue laws in order to reduce participants tax liability and are typically marketed to a large number of taxpayers. Tax shelters tend to involve unnecessarily complicated transactions so that the transaction appears to fit the technical requirements of a beneficial rule, but clearly lack the economic substance. In these cases, a knowledgeable whistleblower could provide the IRS with information about the scheme allowing the IRS to engage in a promoter audit that would allow the IRS to audit and assess tax, interest, and penalties against the taxpayers that used the tax shelter and the promoter that sold or promoted the tax shelter. The assistance of a whistleblower in a tax shelter transaction could reduce the time that it takes the IRS to discover and ultimately assess tax on the improperly sheltered income.
For example, Paul M. Daugerdas, a former partner at Jenkens & Gilcrest, was convicted for his role in a tax shelter scheme in which he and his co-conspirators designed, marketed, and implemented fraudulent tax shelters used by wealthy individuals to avoid paying taxes to the IRS from 1994 to 2004. Over the course of a decade, the scheme generated over $7 billion of fraudulent tax losses and netted Daugerdas approximately $95 million in fees.
Internal Revenue Service, Criminal Investigation Chief Richard Weber described the conviction saying: “Mr. Daugerdas’s use of convoluted mechanisms to conceal income from the IRS is criminal activity. He designed and marketed tax shelters making him $95 million in illegal profits from the ten-year scheme. Taxpayers deserve our vigilance in making sure everyone pays their fair share of tax.” However, the jury acquitted Denis Field, the former CEO of BDO Seidman, on seven counts against him including conspiracy and tax evasion.
According to the Department of Justice, Daugerdas participated in a scheme to defraud the IRS by designing, marketing, implementing, and defending fraudulent tax shelters between 1994 and 2004. As part of this scheme, Daugerdas and others undertook to prevent the IRS from: (i) detecting their clients’ use of these shelters; (ii) understanding how the transactions operated to produce the tax results reported by the clients; (iii) learning that the shelters were marketed as cookie-cutter products designed to eliminate or reduce large tax liabilities; (iv) learning that the clients were not seeking profit-making investment opportunities, but were instead seeking huge tax benefits; and (v) learning that, from the outset, all the clients intended to complete a pre-planned series of steps that had been designed to lead to the specific tax benefits sought by the clients. Daugerdas and others created, and assisted in creating, transactional documents and other materials that falsely and fraudulently described their clients’ motivations for entering into the tax shelters and for taking various steps in order to yield the tax benefits. As a result of the scheme, the defendant and his co-conspirators made millions of dollars in fees and bonuses. Specifically, Daugerdas made $95 million in profits but used tax shelters to reduce the taxes he paid to less than $8,000; without the shelters, he would have owed over $32 million in taxes.
In addition to Daugerdas and Field, five others were indicted for their roles in this scheme, including David Parse and Donna Guerin. David Parse, a former broker at Deutsche Bank was convicted of various tax fraud charges in May, 2011 after an 11-week jury trial, and was sentenced in March, 2013 to 46 months in prison. Donna Guerin, a former lawyer at J&G’s Chicago tax practice pled guilty for her role in the scheme to various tax fraud charges in September, 2012. She was sentenced in March, 2013 to eight years in prison and ordered to pay $190 million in restitution.