A recent study by the Institute on Taxation and Economic Policy details how Fortune 500 Companies are holding a record $2.6 trillion offshore, thereby avoiding $767 billion in U.S. taxes.  While we believe much of this amount is the result of lawful tax planning on the companies’ international operations and the use of tax haven entities, there remains a significant amount of aggressive tax planning here which is ripe for potential IRS whistleblower cases.  For example, a byproduct of holding trillions of dollars offshore is that it is difficult to bring the money back to the U.S. to use it without paying taxes on those deferred profits.  Therefore, many taxpayers have entered into abusive repatriation transactions to bring the cash back.  Or taxpayers have used hyper aggressive tax planning strategies involving financing structures or transfer pricing to get the profits in the tax haven jurisdiction in the first place.  While Congress may eliminate deferral or make other drastic changes to the Internal Revenue Code in the coming year, the fact remains that these tax underpayments already exist and thus are subject to IRS whistleblower claims.  We suspect the transition rules to whatever new international tax regime Congress comes up with will be similarly and abusively gamed by these companies to wring out the last drop of tax savings.

While many of the Fortune 500 companies have set aside reserves for uncertain tax positions that would cover some of this tax avoidance, many other taxpayers have not reserved at all for these positions by convincing their financial auditors that the risk is minimal or by hiding the risk from them altogether. We’ve been carefully tracking these reserves since 2010 and have concluded that the answer is usually a little bit of both.  Either way, whistleblowers with access to tax accrual workpapers would be able to see what those reserved weaknesses are, and whistleblowers who have unique insight to the unreserved positions have valuable information as well about what those skeletons in the closet are.  We’ve had great success reporting both to the IRS under their tax whistleblower program, so if you know of either type of issue you should give us a call to discuss what your opportunities and rights are.

Today the Tax Court released its opinion in Whistleblower 22716-13W v. Commissioner, holding that FBAR civil penalties are not “additional amounts” within the meaning of section 7623(b)(5)(B), and they are not “assessed, collected, … [or] paid in the same manner as taxes”; therefore, FBAR payments must be excluded in determining whether the $2,000,000 “amount in dispute requirement” has been satisfied. 

This case appears to be the continuation of the saga of Whistleblower 22231-12W, whose petition to the Tax Court was dismissed for lack of jurisdiction because the IRS had not yet made a determination regarding his case.  However, on September 6, 2013, the IRS Whistleblower Office issued a final determination letter informing the whistleblower that his claim relating to Taxpayer 1 had been denied.  The letter stated that the claim had been denied because (1) the Government had obtained complete information about Taxpayer 1’s offshore accounts directly from the Swiss bank, without any assistance from petitioner; and (2) petitioner in any event could not qualify for a nondiscretionary award because his claim did not meet the $2,000,000 threshold in section 7623(b)(5)(B).  Petitioner petitioned the Tax Court for review of this determination.   Respondent moved for summary judgment on the basis of petitioner’s alleged failure to satisfy section 7623(b)(5)(B).

Judge Lauber’s opinion in this case gives a history of the Bank Secrecy Act, and FBAR penalties, and how enforcement of the Bank Secrecy Act came to be delegated to the IRS.  From there the case moves on to an analysis of the language of section 7623(b)(5)(B), and specifically the meaning of “additional amounts.”  The opinion traces the meaning of “additional amounts” throughout the Internal Revenue Code and how the Tax Court has interpreted this phrase in the past.  The Court also looked to Williams v. Commissioner, where the Court ruled that FBAR penalties were not additional amounts for purposes of determining Tax Court jurisdiction to hear deficiency and CDP cases.  Judge Lauber concludes that “additional amounts” as used in section 7623(b)(5)(B) means civil penalties set forth in chapter 68, subchapter A, and FBAR penalties are not among the tax penalties enumerated in that portion of the code.

It is interesting that the Court has taken the time to differentiate “additional amounts” in collected proceeds from the “additional amounts” in the monetary threshold.  We look forward to additional opinions weighing in on the definition of collected proceeds.  Even if FBAR penalties are ultimately found to be part of collected proceeds, whistleblowers will need to reach the $2,000,000 threshold of section 7623(b)(5)(B) based on tax, penalties, interest, additions to tax, and additional amounts.  Judge Lauber ended the opinion noting that the petitioner may be correct that section 7623 would offer stronger incentives to whistleblowers if FBAR civil penalties were treated like tax liabilities for purposes of deterring eligibility for nondiscretionary awards under section 7623(b)(5)(B), and might more effectively advance the objectives that Congress envisioned for it.  “But if this is a gap in the statute, it is a gap that only Congress, and not this Court, can fill.”

Kathryn Keneally, Assistant Attorney General, Tax Division of the Department of Justice, acknowledged that the Department of Justice had used information provided by whistleblowers in tracking down unreported offshore bank accounts held by United States citizens while speaking to the Civil and Criminal Penalties Committee of Tax Section of the American Bar Association at its May Meeting on Saturday, May 10, 2014.  Ms. Keneally included whistleblower information along with several other sources of information, including bank disclosures, while discussing the Department of Justice’s Offshore Compliance Initiative.  Ms. Keneally emphasized her quote from a May 9, 2014 Press Release:

As today’s announcement shows, we receive information about U.S. taxpayers with undisclosed accounts from many sources, some of which are not public.  For many accountholders, the time to come forward voluntarily to avoid criminal prosecution has run out.  

Although contributions by whistleblowers frequently go unacknowledged, Ms. Keneally’s statement shows that the information provided by whistleblowers is vital to the continued success of the Department of Justice’s enforcement efforts.  This begs the question of how these whistleblowers will ultimately be rewarded for the information they provide.

Bloomberg reporters Alex Barinka and Jesse Drucker just wrote an interesting article about how one large multinational is using its tax haven structures, which are typically put in place to supercharge foreign earnings by moving them to low tax jurisdictions through aggressive transfer pricing, to boost earnings when sales slowdown.  Based on an analysis of IBM’s financials, last year IBM drove its effective tax rate down to the lowest levels in 20 years, a mere 15.6% instead of the normal corporate income tax rate of 35%.

IBM is becoming more aggressive in its tax planning tactics.  IBM fell two places on the Ferraro 500 despite the fact that its reserves increased from $5.58 billion in 2011 to $5.67 billion in 2012.  It will be interesting to see IBM’s tax reserves for 2013 once it files its 10-K.  Since we started tracking tax reserves for the Fortune 500 in 2010, using reserves from 2009, IBM has increased its tax reserves by nearly a billion dollars.  It should be noted that the tax reserves that are reported are for those position that the company does not feel will be sustained on audit.  This type of large-scale aggressive corporate tax planning is ripe for a whistleblower to come forward with information identifying the flaws in these tax schemes.

Last week the Canada Revenue Agency (“CRA”) formally announced a whistleblower program for reporting Canadian tax fraud. Our contacts in Canada have told us that this measure has been in the works for a long time.  For now the details remain a little thin, but it appears like the program -called the Offshore Tax Informant Program (“OTIP”) – is modeled after the old IRS whistleblower program, whereby whistleblowers have to get a contract with the CRA in advance of submitting any information in order to get an award.  Those awards are between 5 and 15% of the amount collected by the CRA, although their definition of collected proceeds does not appear to be as expansive as the US definition.  Furthermore the scope of tax issues which are subject to OTIP are limited, so you should consult counsel to determine if any information you have may make you eligible for an award.

Thumbnail image for MartySullivan1-800x531.jpgKudos to Martin Sullivan, Chief Economist and Contributing Editor at Tax Analysts who had a nice piece in the Washington Post published about him over the weekend.  I’ve always admired Marty’s ability to cut through the political BS and revenue scoring to see the true cost and impact of our tax laws and proposed tax legislation.  In this article Marty tells it like it is and where the real money is in large corporate tax avoidance.

USA Today last week also published the results of their recent review of the Annual Statements of the Standard & Poor’s 500, and found that 57 companies had a effective tax rate of zero.  Nada.  0%  That’s zero point zero. (Some were even negative, but that often occurs temporarily with losses or significant NOL carryforwards.)  


They said that “The effective tax rate is a popular measure used by investors to compare how much companies pay in tax relative to profit” and it’s no surprise to us that there are so many companies paying no taxes.  We see companies paying no Federal Income taxes every year when we compile the Ferraro 500 list of companies based on the size of their uncertain tax position reserves.  

And finally, on a related note, just this morning Jesse Drucker at Bloomberg profiled an advisor in Ireland who is instrumental in helping multinationals with Irish tax avoidance strategies.  Jesse wrote: “In 2010, U.S. companies attributed $95 billion in profits to Irish subsidiaries, up more than sevenfold from $13 billion in 2000… Many of the Irish subsidiaries have no offices or employees and pay no income taxes. They are merely ways to move profits out of countries where sales take place to mailbox subsidiaries in zero-tax island havens.”  


I saw an interesting article today by the President and Publisher of Tax Analysts in which he drew attention to the role of tax professionals in the growing crisis over reduced corporate tax receipts in a time of record corporate profits. He focused his audience’s attention on a recently released study by The Organisation for Economic Co-operation and Development (“OECD”) which described the need for the international tax community to solve the problem of base erosion and profit shifting (“BEPS”). Sure, that’s a lot acronyms to the uninitiated, but at its heart this is a giant shell game of “where’s the income?”, and unfortunately for those of us living in civilized society, the offshore tax haven shell is where it’s at. Large multinationals frequently use abusive strategies, some of highly questionable legality, to minimize their worldwide tax bill. Many politicians have made hay over US based multinationals reporting billions of dollars of income in e.g. the British Virgin Islands, and hardly any here where their employees and a large portion of their sales actually are.


We agree that for the most part companies abide by, and optimize their behavior for, the rules that are set for them. However, the grey line is often crossed. In our Ferraro 500 last year we noticed that reserves for uncertain tax positions exceeded total US corporate tax collections*, and that’s just for the Fortune 500 companies. While moving the line to collect more revenue (while maintaining international competitiveness) and to make it more of a black line than a grey line should be the goal of legislators, governments need to get better at enforcing the existing rules. Utilizing valuable information obtained from knowledgeable whistleblowers should be a critical component of that enforcement. Without enforcement, a change in the rules is meaningless.


*Fiscal 2011 Fortune 500: Profits $824 billion & Reserves $187 billion; Total IRS Corporate Tax Collections $181 billion. Whereas in Fiscal 2010, Fortune 500: Profits $708 billion & Reserves $197 billion; Total IRS Corporate Tax Collections $191 billion.

Tax practitioners and government officials recently came together at the American Bar Association International Tax Enforcement Conference in New York to discuss international tax enforcement rules and procedures.  Among the topics of discussion was the federal government’s increased arsenal of tools available in combating offshore tax evasion, making its efforts stealthier and less predictable to practitioners and taxpayers, according to a panel of tax controversy practitioners.  These new tools include data mined from voluntary disclosures; cooperation by taxpayers and bankers; and notably, information obtained from whistleblowers.  

Thomas E. Bishop, Assistant Special Agent In Charge, IRS Criminal Investigation division in New York, referred to the 2006 IRS whistleblower law as a “game changer” for the IRS’s efforts to combat offshore evasion.  Bishop stated that the Criminal Investigation division is investigating individuals based on information provided by whistleblowers.  The use of whistleblower information was also discussed by Sandra Brown, Assistant U.S. Attorney/Tax Division Chief (Central District of California), who said that the Justice Department has ongoing investigations because of information provided by whistleblowers.  Brown continued by saying that people tend to picture the jilted ex-spouse as the whistleblower who provides information on individual taxpayers, but that view is antiquated.  Business partners and associates are providing information as well, she said, adding, “Those who lie with dogs know where the fleas are.”

Not only has whistleblower information brought specific information forward, whistleblower information, along with other tools used by the government, has created a situation where practitioners can no longer predict the next wave of enforcement, said Charles P. Rettig of Hochman, Salkin, Rettig, Toscher & Perez PC.  Practitioners used to be able to mine their own data to predict those enforcement efforts, but that’s changed, he said.  Scott D. Michel of Caplin & Drysdale agreed, citing subpoenas recently issued by the U.S. attorney’s office for the Southern District of New York to account holders of Bank Frey & Co., a Swiss bank.  Those subpoenas essentially “came out of the blue,” with no inkling by practitioners that the bank was even on the government’s radar, he said.

We note that this is anecdotal until the IRS publishes statistics on the mater, but it is encouraging to hear from Criminal Investigation and the United States Attorney’s office that they think the whistleblower program is providing them with good cases.  But this is not all together surprising as we have referred a number of cases to the IRS Criminal Investigation Division with good results.  A well-informed whistleblower can be a key asset in any tax case, not just in offshore evasion.  I will be speaking with Stephen Whitlock, Director of the IRS Whistleblower Office, at the ABA Tax Section meeting in January.  One of the talking points of our panel will be the IRS’s great successes in utilizing informant information and its impact on all levels of enforcement both civil and criminal. 

As the calendar year winds to a close we wish you and your loved ones a Merry Christmas and Happy New Year.  We look forward to another year’s hyper-aggressive tax transactions being locked in place waiting for a fresh crop of IRS Whistleblowers to bring the transgressions to justice.

Congratulations to Brad Birkenfeld for receiving a $104 million award from the IRS for turning in UBS for their offshore banking practices. Kudos to Steve Kohn and Dean Zerbe, his counsel since 2009 on this matter. It appears that Birkenfeld’s award determination was based on the $400 million of “collected proceeds” (tax penalties and interest) that were proscribed to be paid to the IRS pursuant to UBS’s Deferred Prosecution Agreement, dated February 18, 2009, (see paragraph 3).

The IRS’s award determination shows that tax whistleblowers can and do make significant contributions to the enforcement of the internal revenue laws, and will be rewarded for their help. The process works. While the road may be long and sometimes winding, tax whistleblowers can have an impact on tax cheats.