We get absolutely deluged with hundreds of calls a day during tax return filing season about all kinds of fraud, particularly identity related scams and claiming child exemptions improperly.  In 2016, there was a 400% increase in tax related phishing and malware attacks, and 969,000 potentially fraudulent refunds claiming up to $6.5 billion. You may be unaware that you’re a victim until you try to file your taxes and IRS tells you something’s wrong.

Here are four common scams to watch out for this year:

  • Phishing—Fraudsters send fake emails to trick would-be victims into sharing personal data. The real IRS would never initiate contact with you this way.
  • Phone fraud—Identity thieves impersonate IRS agents. But, the real IRS states it will never call to demand immediate payment. You will first receive a mailed bill.
  • Tax preparer fraud—Use tax professionals? Watch out for emails that appear to be from them asking for private information. Delete and call your service directly.
  • Phony IRS agents visit your home—This scam often targets the elderly. Real IRS agents carry photo IDs, and will try to contact you before visiting.

The full list of the recently released “Dirty Dozen” tax scams can be found here.  As for claiming child exemptions improperly, the best defense is a good offence: file early.  Unfortunately, neither of these big problems make for good whistleblower claims under section 7623(b), the IRS whistleblower program we work with.  The Whistleblower Office does not handle the identity theft scams, that is handled by the Treasury Inspector General’s Office.  Claiming of exemptions for children is unfortunately not an issue the Whistleblower Office handles either, that has to be handled directly with the IRS in connection with the filing of your return.

What we do see a lot during tax season that the Whistleblower Office is interested in is non-filing of returns, positions being taken that are clearly non-compliant, abusive transactions, or anything that represents an underpayment of tax of more than $2 million of tax over the last three years.  If you have information about anything you believe may fit in those categories don’t hesitate to give us a call.

 

In the tax practitioner version of “Were I King,” nearly every one of us has had that moment where we smack our head at something the IRS does or does not do and think, “the IRS should just ….”  It is a form of armchair quarterbacking that is easy to do because the IRS, frankly, has a lot to improve upon.  We represent IRS Whistleblowers who provide high-quality information to the IRS about the underpayment of tax.  A lot of IRS Whistleblowers – we had nearly a quarter of all 7623(b) awards last year.  There are many things I would like to see the IRS do differently but when it comes to protecting the existence and identity of an IRS Whistleblower, I wouldn’t change a goddamn thing.  My apologies for the profanity but I felt it necessary to convey the shock, and gratitude, I have for the IRS’s protection of tax whistleblowers.

The IRS Office of Chief Counsel just released CC-2017-005, Approval Procedures for Identifying Whistleblowers.  The Notice provides a formal procedure for Chief Counsel Attorneys seeking approval to reveal the existence or identity of a whistleblower.  Not to bore you with the minute details but I will share the people that must sign-off: 1.) Counsel must find out if the whistleblower agrees; 2.) then Division Counsel must approve; 3.) Division Counsel will seek approval from IRS-CI Director of Operations; 4.) then the Director of the Whistleblower Office must approve; and 5.) Deputy Chief Counsel (Operations) must approve.

This Notice formalizes what has always been a very strict non-disclosure policy protecting IRS Whistleblowers.  Rarely is an IRS Whistleblower needed as a witness.  We have had it happen.  In a case where the target taxpayer was challenging the underpayment in Tax Court, IRS Counsel deemed the IRS Whistleblower essential to the case.  In writing, Counsel, informed us that the IRS was willing to drop the case if our client did not want to be identified as an IRS Whistleblower.  That level of dedication to the people helping you is nothing short of heroic in my book.  Our client agreed to testify, approval was received, and the case immediately settled.  Our client received a hefty award and left with the feeling that the IRS truly valued the client as a partner in the process.

CC-2017-005 is another step in the right direction by the IRS when it comes to protecting IRS Whistleblowers.  If you have information about the underpayment of tax and want to learn more about how the IRS formally, and informally, protects your identity contact us at 1-800-275-3332 or visit www.tax-whistleblower.com today.

Caroline Ciraolo, Principle Deputy Assistant Attorney General, Department of Justice Tax Division, made clear the importance of whistleblower counsel while speaking at the American Bar Association’s National Institute on Criminal Tax Fraud and Institute on Tax Controversy in Las Vegas.  Ms. Ciraolo discussed her announcement earlier this year that the Tax Division would be interested in receiving information from whistleblower’s counsel about mandatory award claims under section 7623(b) that have been submitted to the IRS Whistleblower Office if the claim involves a criminal tax matter.  Ms. Ciraolo cautioned that before bringing information to the Department of Justice that whistleblowers and their counsel should have serious discussions if the whistleblower participated in the reported conduct. 

It is important for whistleblowers to fully understand any consequences that they may have prior to providing information to the IRS, be it liability for additional taxes or potential criminal liability for certain actions.  As everyone’s situation is different this is something that should be discussed with an attorney prior to providing information to the government.

Ms. Ciraolo noted that the Tax Division will not be paying a separate award, nor will it be opening its own whistleblower office.  However, the channels that are used to submit information about civil tax underpayments to the IRS can still be used for criminal tax matters.

Today the Treasury Inspector General released a Report titled “The Whistleblower Program Helps Identify Tax Noncomplicane; However, Improvements Are Needed to Ensure That Claims Are Processed Appropriately and Expeditiously” about the IRS Whistleblower Program.  It contained some interesting statistical analysis of various processes relating to the inner workings of the Program but a quote from page 7 of the Report stuck out:

[A] majority of claim closures in FYs 2015 and 2016 (83 and 85 percent, respectively) are rejected or denied before going to an operating division field group for an investigation or examination, with only a small portion (2 percent each year) resulting in an award. Most claims were rejected because the allegations were not specific enough for the IRS to take action or denied because the allegation was below the threshold to justify resources for compliance action.

We understand that about 85% of the submissions that the IRS Whistleblower Office receives are pro se filings, and the problem is that often those claims are speculative or are not developed enough for the IRS to use them as a basis for taking action.  Of the remaining 15% on which the IRS does take action and passes the whistleblower’s information to the field agents for examination, approximately 2 out of every 15 are getting an award.   We believe a whistleblower’s odds of getting an award can be significantly higher [than 13.333%] for a thoroughly vetted submission with good facts and good law that are clearly laid out.  The hurdle of getting the IRS to take action in the first place is certainly a high one but then you have to deliver your information in a way that helps them win their case.

The TIGTA Report spent a lot of time looking at the procedures for the debriefing intake and the claim rejection processes, but in our view that is not the most material weakness of the IRS Whistleblower Program.  The biggest weakness is that under the current claim processing system it is still far too easy for the IRS field examination divisions to simply walk away from a good case even when the facts and the law are on their side.  Often people have a difficult time convincing the IRS to take even a slam dunk case, no matter how much it costs taxpayers if they give it up.  Our mission is to set forth a whistleblower’s information in such a way that it not only convinces the IRS to take action, but it forms the solid foundation of a winning case once they do decide to take action.

Today we saw another example of an employee (of Viacom) protecting her rights as a tax whistleblower under the Sarbanes-Oxley (“SOX”) and Dodd-Frank Acts*.   In a nutshell, retaliation against an employee of a company that is subject to these securities laws for whistleblowing is illegal.  For this reason we have been including language in our submissions to clearly fall under the SOX anti-retaliation provisions since the founding of our whistleblower practice in 2007.

In Vannoy v. Celanese Corp., ALJ Case No. 2008-SOX-00064, ARB Case No. 09-118 (ALJ July 24, 2013), an administrative law judge ruled in favor of a whistleblower who was fired after turning over confidential company data to the IRS.  As it relates to the tax whistleblowing that Vannoy did, the judge held that Disclosures to the IRS are Covered by SOX.  The judge said that a whistleblower “engages in protected activity when he or she complains about a violation of any “rule or regulation of the Securities and Exchange Commission” when the “information or assistance is provided to . . . a Federal regulatory . . . agency.” 18 U.S.C.A § 1514A. The statutory language does not in any way narrow the definition of “federal regulatory . . . agency” to include exclusively the SEC or the Department of Labor. There is nothing in the statutory language that limits the agencies to which a complainant may report information in furtherance of enforcement of laws that fall within the SOX’s coverage. It would be incompatible with the congressional intent to promote disclosures of corporate misconduct to narrowly construe the statute in such a way that only reports to the SEC warrant its protection.

Because the judge found that Celanese had retaliated against Vannoy by firing him for being an IRS whistleblower and for objecting to what he perceived was the company’s illegal tax avoidance, the court awarded Vannoy with relief under SOX including: 1) all his back pay from the time of termination with annual raises, 2) forward pay in the amount he would have earned if he was still employed, 3) full attorney’s fees and costs, and 4) an additional monetary award for the distress the taxpayer put him through.  It is not public information whether or not the IRS also paid him as a whistleblower for the issue he reported.

Unfortunately some whistleblowers become targets of their employers when they internally blow the whistle on illegal tax positions taken by the company, which is what happened in the Vannoy case and is what is alleged in the Viacom case.  It is this fear of retaliation that leads many whistleblowers to simply report the non-compliance to government agencies first, rather than pursuing the internal company channels.  (Vannoy was an internal whistleblower first, then went to the IRS, whereas the whistleblower in the Viacom case appears to have only internally blown the whistle on the tax issue she believed was improper.)  Unfortunately, it appears that only through the reporting of these violations of law to the IRS or applicable Federal regulatory agency that these whistleblowers are offered the anti-retaliation protections of SOX, but the Viacom case may test the extension of such protections under SOX to internal whistleblowers. In other words, is it fair that if you report to the IRS you are protected, but if you report to your boss you can get fired?

The moral of the story though is that it does not pay to retaliate against tax whistleblowers who have reported their issues to the IRS.  Most companies already knew that retaliating against a whistleblower was a bad idea and that instances of known retaliation are very rare. We’ll keep an eye on the Viacom case and report back with developments.

 

*The Sarbanes-Oxley Act of 2002 as partially amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

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.

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.  

I bet that every person reading this blog – people with an interest in the IRS Whistleblower Program – has seen that the IRS has been under fire this summer due to the exempt organization application processing scandal, and is wondering how this situation impacts their tax whistleblower claim or the IRS Whistleblower Program.

Caveat: I’m not a political person.  Despite having practiced tax law in Washington DC for the first dozen years of my legal career, my interest in politics is largely limited to what changes Congress is going to make to the Internal Revenue Code.  I.e., amending section 7623 in December of 2006 caught my attention!  With that said, my first reaction to the current IRS scandal wasn’t: “how could that noxious but revenue-irrelevant situation have been allowed to develop without someone asking themselves how it would look politically once it came to light.”  No, my reaction was: “uh oh, this is going to cause serious problems the next time the IRS needs something from Congress.”  How right I was.

All tax whistleblower cases, and the success of the IRS Whistleblower Program along with them, are wholly dependent on the IRS enforcing the violations of the Internal Revenue Code that we bring to their attention.  We have said from day one that the biggest risk in any whistleblower case is that the IRS will not act on your information, or they will not act with sufficient tenacity and resources to carry the case through to a successful conclusion.  In short, we’ve said the old analogy applies: “You can lead the horse to water but you can’t make him drink,” and the Cooper and Cohen cases have confirmed that analogy applies here.  If the IRS doesn’t act on your information, you get no award.

Fast forward to this summer… the IRS blunders in the total-waste-of-enforcement-resources exempt organizations area, and now it needs next fiscal year’s budget approved by Congress.  Surprise surprise, now some outraged members of Congress want to cut the IRS budget by 30%.  Never mind the fiscal stupidity of cutting the IRS budget in the first place – because it is the principal collector of the money our civilization runs on –  this cut would decimate the IRS’s ability to enforce the Code.  Whistleblower cases could simply have to be abandoned for lack of enforcement resources, e.g. because there are no agents or lawyers available to prosecute the case. 

Now, most political experts will say that this massive IRS budget cut proposal will not be accepted, and the Senate has proposed a budget that restores the funding the House of Representatives wants to slash, but it still highlights the biggest risk that we all have, that the IRS will do nothing with a whistleblower’s information.  The IRS has unfortunately shown that it is willing to ignore whistleblower cases even while the nation is running huge deficits.  The excuses why don’t really matter, although we continue to believe that some IRS officials will ultimately be held accountable for intentionally ignoring specific instances of large-scale non-compliance, what matters is that to have any chance of success in this landscape a whistleblower has to do everything they can to make their case attractive to the decision makers at the IRS.  Those officials in the IRS who decide how their scarce enforcement resources will be allocated hold your case in their hands, along with many other cases competing for those resources.  Budgets that make those enforcement resources even more scarce are a huge threat to a whistleblower case.  Helping them pick your case in spite of that scarcity is what we continue to strive to do.