Voluntary Disclosure Initiative

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.

Tax Analysts recently released a Chief Counsel Memorandum dated April 23, 2012, stating that the IRS cannot pay a section 7623(b) award on recoveries from the failure to report a foreign bank account commonly referred to as “FBAR” penalties.  While we believe Chief Counsel has this one wrong on the law and we will vigorously challenge any award determination for our clients that fails to account for FBAR collections in the collected proceeds base, the memorandum is a validation of the approach we have been taking from day 1 of our practice. 

A submission to the IRS Whistleblower Office should be about putting strong information forward with a full analysis of the law and suggestions for the best strategic manner for audit and collection.  We follow this concept in every submission we make.  Information that an individual has an un-reported offshore account should put you at the very beginning of your inquiry, not its conclusion.  WHY does the individual have an offshore account and HOW did she get it there?  There is a big difference between the grandpa taking several million “post-tax” dollars and stuffing them into a Swiss account hoping to eventually evade estate taxes and a U.S. business owner funneling “pre-tax” dollars offshore by taking fake deductions for costs charged by foreign companies that are ultimately owned by her.  The first case is primarily a failure to report FBAR case and we have consistently declined to represent whistleblowers who only have information about violations of Title 31.  The second case, however, is a great case for the IRS Whistleblower Program.  When people take pre-tax dollars and shift them offshore the highest and best case is the evasion of federal income taxes (a violation of Title 26 and 18) before those dollars even touched St. Somewhere.  Our first part of the submission would be about denying the deductions taken by the legitimate U.S. business.  The next part would involve attributing dividend income to the shareholder or through the unreported income of the CFCs.  After that is all said and done, then, and only then, would we go into possible reporting violations including FBAR.

Admittedly Oversimplified Crib Sheet

Title 18

Crimes and Criminal Procedure

Title 26

Internal Revenue Code

Title 31

Money and Financial Law, including the Bank Secrecy Act


Having just said that an un-reported offshore account case should not just be about FBAR violations, we still believe that FBAR collections do in fact fall under the mandatory award of section 7623(b).  Chief Counsel states four legs of its argument that FBAR collections are not award eligible; 1.) Section 7623 only allows an award on violations of Title 26 of the Federal Code; 2.) Section 7623(b) defines collected proceeds as only those proceeds collected under Title 26; 3.) FBAR collections, like criminal fines and penalties, are not available to the IRS and therefore cannot be used to pay an award; and 4.) Because there is already an informant award program for FBAR violations, those collections cannot also be eligible for a section 7623 award.  Each of these reasons are legally deficient and should not withstand judicial scrutiny.

We do not intend to post a hypothetical brief in opposition within a blog posting but will share a couple points.  With respect to the first two points of Chief Counsel we note that every authority cited by Chief Counsel notes that the internal revenue laws are classified GENERALLY to Title 26.  This qualification speaks volumes.  If the internal revenue laws are generally in Title 26 they must then sometimes be found outside of Title 26.  Even the I.R.M. provision cited by Chief Counsel notes that Title 26 contains “most” of the Federal tax law.  Not to dicker, but MOST does not mean ALL. 

As to the availability argument we do not know what to tell Chief Counsel other than reread the statute.  Section 7623 states that proceeds “SHALL be available,” for payments.  Our emphasis is placed on a different word than Chief Counsel’s – shall.  It does not matter where the money goes, Treasury’s General Fund, the Crime Victims Fund, or a lock-box on Commissioner Shulman’s desk.  Congress made the collections explicitly available.  Were that not the case, the statue would say “except Crime Victims Fund, etc.”  This fundamental tenant of statutory construction will be easily handled the first time the IRS is challenged on these grounds as we have stated about criminal fines all along.

Chief Counsel makes an interesting argument that because there is an informant reward program under Title 31 that preempts the award under section 7623(b).  The lean rationale is that section 7623(a) authorizes the Secretary of the Treasury to pay such sums as he deems necessary in cases where such expenses are not otherwise provided for by law.  Because those expenses are “otherwise provided for” under Title 31 the Secretary cannot pay the expense of a section 7623(b) award.  First and foremost, section 7623(b) does not say an award shall be paid only if there is no other reward program applicable.  Section 7623(b) requires the Secretary to pay an award of between 15 and 30 percent of the collected proceeds.  An example may help show the shortcoming of Chief Counsel’s position.  Let us assume that Whistleblower would be eligible for a mandatory award of $10-$20 million under section 7623(b).  Section 7623(a) states that the amount payable shall be paid from the proceeds of amounts collected where not otherwise provided for by law.  Title 31 has a $150,000 maximum award.  At best, Chief Counsel’s argument suggests that our hypothetical whistleblower should be paid $9.85-$19.85 million under section 7623(b).  That is the amount due that is not otherwise provided for by law.

We could go into greater detail on each argument and will do so if and when the time comes.  In the meantime we strongly urge those with information about offshore accounts to seek the advice of qualified tax attorneys before making a section 7623 submission to the IRS.  An FBAR only submission is inherently weak and probably already gobbled up in list disclosures.  Offshore accounts linked to other tax non-compliance are far more likely to be undisclosed by third-parties or through the Voluntary Offshore Disclosure Program

The latest round of the U.S. crackdown of tax evasion through the utilization of undeclared offshore bank accounts has the US significantly upping the stakes of the game.  The U.S. Department of Justice has indicted Wegelin & Co, founded in 1741 – which makes it the oldest Swiss bank, for helping former U.S. clients of banking giant UBS move their undeclared accounts to avoid detection by the IRS.  In anticipation of this indictment, Wegelin sold all of its other non-U.S. assets to a new bank, leaving the old bank only with a billion or so of toxic U.S. accounts.  Three of the Wegelin bankers have also been indicted, and this basically means that a U.S. law enforcement agency has effectively shut down a Swiss bank.  Amazing. 

Stories are also circulating that nearly a dozen other Swiss banks are trying to negotiate a settlement with the U.S. to avoid being indicted themselves.  Although Switzerland is probably the best known haven for U.S. taxpayers trying to stay off the IRS’s radar, it certainly is not the only player in that game.  It appears as if, however, that its game with the U.S. is coming to an end.