Many tax fraud cases also involve securities law violations.  For instance, corporations engaged in tax evasion may also be creating fraudulent financials or offering securities to investors by providing misleading or untruthful information.  The most common compliant categories reported by whistleblowers to the SEC in fiscal 2017 were Corporate Disclosures and Financials, Offering Fraud, Manipulation, and Insider Trading.

The SEC’s whistleblower program is moving full steam ahead according to the 2017 Annual Report of the SEC Office of the Whistleblower.  The Report highlighted the program’s growth, painted a rosy picture for awards into the future, conveyed the value the SEC places on whistleblower information, and underscored the SEC’s commitment to protecting whistleblowers through processes and through enforcement actions.

The SEC received over 4,400 tips in fiscal year 2017, an increase of nearly 50 percent since the program’s first full year in 2012.  In 2017, the SEC ordered awards totaling approximately $50 million to 12 individuals.  Although that award number is about $7 million less than last year, every indication is that the SEC’s whistleblower program is about to hit stride.  Three of the ten largest whistleblower awards were made by the SEC during fiscal year 2017.  Even more interesting than that is the SEC is preparing for a big year of awards in fiscal year 2018, as indicated by the following statement in the SEC’s Financial Report for 2017:

The SEC recognized a contingent liability for the year ended September 30, 2017 of $221 million, which represents a recognized liability for estimated whistleblower awards where the payment is considered probable.

This contingent liability for 2017 will likely include the largest individual SEC whistleblower award ever – an amount that currently sits at $30 million. 

The SEC’s annual report made crystal clear the value whistleblowers have added to SEC enforcement, stating “Whistleblower information has aided the SEC’s efforts to uncover and stop fraudulent investment schemes.” 

The annual report also highlighted the lengths the SEC will go to in order to protect whistleblowers.  The SEC whistleblower program permits whistleblowers to submit information anonymously through an attorney and in any event, by law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  However, the SEC also has weapons to protect whistleblowers and combat whistleblower intimidation and other tactics used by companies and individuals to deter persons from reporting to the SEC.  In 2017, the SEC brought two actions against companies for imposing restrictions in their employee separation and severance agreements that operated to deter whistleblowers from providing information to the SEC or partaking in proceeds of an SEC whistleblower award.  In another enforcement action, a financial services company agreed to a $500,000 civil penalty and to cease and desist from attempting to uncover the identity of a presumed whistleblower and requiring former employees to sign severance agreements that waived potential whistleblower awards. The annual report notes that the SEC will continue to review facts and actions to impede communications with the SEC “to ensure that whistleblowers can freely report information to the Commission and feel comfortable reporting wrongdoing without fear of reprisal.”

An SEC press release at the end of November announced awards of more than $8 million each to two whistleblowers, sending SEC enforcement actions involving whistleblower awards over $1 billion in financial remedies ordered against wrongdoers.

If you have information about large-scale tax underpayments or you would like to know more about reporting securities violations to the SEC anonymously, contact the attorneys at The Ferraro Law Firm today for a free consultation. 

In our experience the IRS is a peculiarly apolitical organization – despite the Lerner email scandal and the targeting of conservative groups for noncompliant tax exempt status claims, almost every position in the IRS is not motivated by or responsive to political considerations – but when we have a change of administration it means we have a new political people in the top tier at the Treasury Department, which runs the IRS.   Yesterday the new administration’s appointee as Treasury Secretary Steven Mnuchin was confirmed by the Senate, so the question you may all be asking is: as current or prospective whistleblowers, what does that mean to us?

Senator Grassley had the opportunity to question the nominee about his thoughts on the Program, and here is what he just said about Mnuchin:

As the author of the provisions improving the incentives for whistleblowers to come forward about large dollar tax fraud, I was glad to receive a commitment from Mr. Mnuchin in support of a strong IRS whistleblower function.   Whistleblowers have helped the IRS recover $3.4 billion that otherwise would have been lost to fraud.  Cracking down on big dollar tax fraud is a matter of fairness to the vast majority of taxpayers who pay what they owe.  The IRS has made progress in working with whistleblowers, but there’s more work to be done.

Previously Grassley said this about the nominee after his Finance Committee nomination hearing: “Mr. Mnuchin gave his assurance that he’ll work with me if confirmed to support tax fraud whistleblowers.” It is a positive sign to whistleblowers that we have such a show of commitment by the incoming administration.  This statute isn’t going to be eliminated, and if anything whistleblowers can expect to see the statute strengthened in the coming years with cooperation by Treasury leadership.

“Support” from the new administration has to be tangible and results oriented to have any meaning.  Words are not enough.  For starters, the leaders at Treasury needs to work with and instruct their attorneys in the office of Chief Counsel to not take legal positions which damage the legitimacy of the Program.  For example, not resisting whistleblowers discovery requests for information from the taxpayer’s administrative file which would show how their information was used beyond what happened to the in the Whistleblower Office’s file; not limiting collected proceeds to be only those monies collected under Title 26 despite rulings by the Tax Court opinions to the contrary; and reconsidering sequestration on awards.  Most importantly the new Treasury leadership should through proper channels instruct IRS operational personnel take a long hard look at allegations of tax underpayments and fraud reported by whistleblowers and treat these losses to the government as the serious threat that they are.  Such claims of large scale malfeasance should not to be taken lightly and dismissed without proper due diligence.  Just because there is a serious limitation on resources at the IRS it does not mean that it is smart or proper to do less with whistleblower claims, to the contrary the data showing the higher return on agent time used in whistleblower cases suggests that the IRS should spend more time prosecuting whistleblower claims because they are one of the most efficient ways to use those precious resources.  Finally, “support” by the new administration is best shown by one thing: putting their money where their mouth is by timely paying awards to whistleblowers.

crsThe Congressional Research Service (“CRS”) updated a report on tax havens to reflect new revenue-raising estimates for proposals for reducing international tax evasion.  The report, updated last week, noted that estimates of revenue losses from corporate profit shifting are as high as $90 billion per year and may even be higher.  The report also said that corporate profit shifting “appears to have increased substantially in recent years” explaining further that “[e]vasion is often a problem of lack of information, and remedies may include resources for enforcement, along with incentives and sanctions designed to increase information sharing, and possibly a move towards greater withholding.”  In many ways, the IRS starts behind the eight-ball in tax enforcement efforts.  It is no secret that the information asymmetry that exists between the IRS and taxpayers is a major obstacle to collection efforts.  Even though the IRS has broad authority to demand information from taxpayers, they don’t always know what to ask for or where to look for the information they need.  This is precisely where whistleblowers can step in with key information that will level the tax enforcement playing field.  As corporate tax evasion continues to be hot topic politically and internationally, pressure is building on the IRS to collect taxes owed by tax evaders using a reduced budget and scarce resources.  Efficiently reducing the information gap between the IRS and tax evaders may just be a matter of the IRS turning to whistleblowers for enforcement help.

Proposed Treasury Regulations for the IRS whistleblower program were released on December 14, 2012.  These regulations cover many issues and deserve a complete reading; however, below is a short outline of what each section of the proposed regulations covers.

§301.6103(h)(4)-1, Disclosure of returns and return information in whistleblower administrative proceedings.

This section of the proposed regulations establishes that that a whistleblower administrative proceeding (as described in §301.7623-3) is an administrative proceeding pertaining to tax administration within the meaning of section 6103(h)(4).  Therefore, the Director, officers, and employees of the Whistleblower Office may disclose returns and return information (as defined in section 6103(b)) to the whistleblower (or the whistleblower’s legal representative) to the extent necessary to conduct a whistleblower administrative proceeding.

§301.7623-1, General rules, submitting information on underpayments of tax or violations of the internal revenue laws, and filing claims for award.

This section of the proposed regulations provides the general rules for submitting information and filing claims for an award.  This is the “who, what, when, where, and how” of submitting a claim for an award.  A whistleblower must follow these rules to ensure that their claim for an award is appropriately filed to ensure that the IRS Whistleblower Office will consider their claim for an award.  The proposed regulations in section 301.7623-1(e) states that the IRS will use its best efforts to protect the identity of whistleblowers.

§301.7623-2, Definitions

This section of the proposed regulation defines key terms used in the statute and the regulations.  The proposed regulations build on definitions in the current regulations and define additional key terms for section 7623.  These definitions will affect how the IRS Whistleblower Office interprets section 7623 and ultimately will makes award determinations based on these definitions.  How “proceed based on,” “related action,” and “collected proceeds” are defined will greatly influence the number of awards issued and the amount of those awards. 

Particular attention should be paid to the definition of “proceed based on” and “collected proceeds.”  The definition of “proceed based on” in the proposed regulations seems to be reading the word “only” into the statute and requiring that the IRS take action that it would not have taken but for the information provided to be award eligible.  This reading goes beyond the language of section 7623, which simply requires that the IRS use the whistleblower’s information in an administrative or judicial action in order for the whistleblower to be able to collect an award.  The proposed regulations appear to assume that the IRS would discover an issue simply because the issue was listed generally in an audit plan.  Hopefully, this narrowing of the statute will be addressed in the final regulations after hearing comments from the public.  Either way, we are confident that this regulatory expansion would not survive judicial review.

The definition of “collected proceeds” continues to be an area that should be focused on.  The proposed regulations continue to claim that criminal fines are not part of collected proceeds; however, as discussed at length on this blog and elsewhere, this position goes against the language of the statute and the intent of Congress.  The definition of collected proceeds also touches on the inclusion of tax attributes in collected proceeds.  The preamble to the regulations goes into more detail illustrating that tax attributes that are used as of the date that the award computation is made will be counted as collected proceeds.  There does not appear to be a clear legal theory behind this cut off, but our discussions with various IRS personnel suggests this is an administrative compromise.

§301.7623-3, Whistleblower administrative proceedings and appeal of award determinations.

This section provides outlines of the administrative proceedings and appeal rights for award determinations.  The largest changes here are the creation of administrative proceedings for cases that do not meet the requirements of section 7623(b) (under §301.7623-3(b)) and claims that are denied (under §301.7623-3(c)(7)).  The creation of the administrative procedures for denied cases is likely to reduce the number of whistleblower cases filed in the United States Tax Court that are ultimately dismissed because the IRS did not use the information, did not detect an underpayment of tax based on the information, or collect proceeds based on the information.  The proposed regulations states that, “The Whistleblower Office will send to the claimant a preliminary denial letter that states the basis for the denial of the claim.”  §301.7623-3(c)(7).  This letter and administrative proceeding should provide claimants with a sense of closure as to what happened with the information that was provided. 

§301.7623-4, Amount and payment of award.

This section outlines the procedures that the Whistleblower Office uses to determine the award amount, including what factors are considered in determining the award percentage, what happens when there are multiple independent claimants, and when payment of an award is made.  In particular whistleblowers will want to look at §301.7623-4(c)(3), which discusses the Whistleblower Office’s application of “planned and initiated” for purposes of reduction or denial of an award.  If the Whistleblower Office determines that a claim for award is brought by an individual who planned and initiated the actions, transaction, or events that led to the underpayment of tax, the Whistleblower Office may appropriately reduce the amount of the award percentage that would otherwise result under section 7623.  Section 301.7623-4(c)(3)(ii) of the proposed regulations states when the IRS Whistleblower office is determining whether a whistleblower planned or initiated the scheme that the IRS Whistleblower Office will look at whether the individual “(A) Designed, structured, drafted, arranges, formed the plan leading to, or otherwise planned, an underlying act, (B) Took steps to start, introduce, originate, set into motion, promote or otherwise initiate an underlying act, and (C) Knew or had reason to know that there were tax implications to planning and initiating the underlying act.” 

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.

The Eleventh Circuit released Ware v. Commissioner, an unpublished opinion, in which the Eleventh Circuit upheld the Tax Court’s dismissal of the pro se taxpayers’ request for redetermination of their tax liability and their whistleblower claim.  The Eleventh Circuit upheld the decision of the Tax Court to dismiss the taxpayer’s whistleblower claim because the Tax Court found that there was no evidence that the taxpayers filed a Form 211.  As there is no record of a Form 211 being filed, the IRS did not consider their claim for an award.  As the IRS did not consider their claim for an award, the IRS did not issue a final determination on their claim for an award and thus there can be no appeal of a determination to the Tax Court. 

This case serves as a reminder that the procedures for submitting a claim for an award must be followed.  The Eleventh Circuit does not give any details about the information that the taxpayers provided to the IRS.  The Eleventh Circuit simply states that the taxpayers’ last argument is that the Tax Court failed to consider their whistleblower claim.  However, the Eleventh Circuit states that the Commissioner asserts that the taxpayers never filed a Form 211.  The Eleventh circuit goes on to state that, “As a result, the Secretary did not issue a determination on a whistleblower claim, and the Tax Court could not hear the case.”  The Eleventh Circuit simply looked at the Treasury Regulations that describe the procedures that must be followed to file a claim for an award.  “Under § 7623, the Secretary of the Treasury may pay a reward to an individual for bringing information to the IRS about the underpayment of taxes.  A whistleblower must file a Form 211: Application for Reward for Original Information.  26 C.F.R. § 301.7623-1(f).” 

Decisions such as this serve as a reminder that the ensuring that proper procedures are followed is just as important as the information that is provided.  If a whistleblower fails to file a Form 211, then the whistleblower has not made a claim for an award.  An attorney can help ensure that a whistleblower meets all of the procedural hurdles throughout the process.  If you have provided information to the IRS without properly filing a claim for an award, you should contact an attorney who can discuss how you should proceed in order to protect your claim.

We had a good client ask us the other day about the status of case we had filed together about two years ago. I thought the question was a very good one, so with names omitted I’d like to share both the question and my answer. First some background: the whistleblower client is not an insider of the taxpayer, so we have no visibility into what the IRS is currently doing with the case after two years – other than that the claim is still open with the Whistleblower Office – because the IRS is prohibited from telling us those “confidential taxpayer information” details pursuant to section 6103.

 

Question:

If you had to make an educated guess, where do you think things are in the process?

 

My Answer:

By the Submission + 2 year date the IRS has had more than adequate time to evaluate a claim and determine whether or not they want to use the information in an audit of the taxpayer. If they decide not to use it after that evaluation, which averages a just under year in duration from the Submission date, then the claim is typically rejected within a couple months. We obviously did not get a claim rejection in that timeframe, which makes us believe they made a decision to use the information . When they decide to use the information, from that point they have to either add the issue/information to an existing audit, or schedule a new audit of the taxpayer. When that audit actually commences is highly variable depending on the taxpayer, when their last return was filed, what the applicable periods of limitations are, how busy the agents are who would do the case, etc. Figure it will take at least a couple months for them to start a new audit, probably more though.

 

IRS Audits – once they have commenced – regularly take a year or two, and I’ve seen some take much longer. Note that most business audits cover multiple years, so they have a lot of ground to cover and that’s also how the IRS stays “current” … meaning that they get audits done before the section 6501 statute of limitations expires. If they don’t get the audit done before the statute is set to expire for one or more of the years, then they will ask the taxpayer for an extension of the statute on a Form 870. I put “current” in quotes because in practice these extensions happen all the time. In my prior job representing Fortune 500 taxpayers I’d regularly be working on an audit for a year for which the return was filed more than 3 years prior (that’s the end of the normal section 6501 assessment statute of limitations). If and when I took those taxpayers to IRS Appeals or litigation, we were then usually 3-6 years out from when the return was filed. The moral of the story is that tax cases can be a long road, and even at the Submission +2 year date we’re probably still closer to the beginning then we are to the end.

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. 

The decision of the Tax Court in Whistleblower 14106-10W  v. Commissioner  should encourage tax whistleblowers that their identity will be protected if they choose to avail themselves of their judicial appeal rights under section 7623(b)(4).  The Tax Court issued its rules governing whistleblower actions on October 3, 2008.  In response to the previously proposed rules for these cases, The Ferraro Law Firm submitted comments to the Court regarding the importance of protecting an informant’s identity by allowing anonymous filings and filings under seal.  The Tax Court acknowledged in those concerns in its explanation to Rule 340, and this case is the first test of those rules.

The decision of the Tax Court in this landmark case obviously shows that the Court carefully considered the balance between a whistleblower’s need for protection of his identity with the public’s right of access to court records.  We are happy the court concluded the identity of the whistleblower should not be disclosed.  However, whistleblowers may feel that those award determination appeal rights have been gutted by the Court’s further holding that an affidavit by the IRS which states “we didn’t use your information” is enough to satisfy the Court on a motion for summary judgment that the whistleblower is not eligible for an award.

Because section 6103 generally prohibits the IRS from disclosing information about a taxpayer to a whistleblower, including any information about what the IRS has done with a whistleblower’s information, most whistleblowers who are not insiders of the taxpayer will have no evidence of what the IRS did with their information, if anything.  Non-insider whistleblowers were therefore relying on their judicial appeal rights to act as a check and balance to be able to verify that they were properly awarded under section 7623(b), because section 6103(h)(4) would permit that taxpayer confidential information to come to light in a judicial proceeding.  The holding of the Tax Court in this case may dash a non-insider whistleblower’s hopes of finding out what really happened with their information because the Court didn’t let the whistleblower issue discovery to find that out.  Insiders, on the other hand, will have plenty of evidence to get past a motion for summary judgment on this issue so they are not affected by this part of the Court’s decision.

The whistleblower in this instance may have lost the case, but he won an important victory for all tax whistleblowers.  It was a victory for other whistleblowers because (i) the Tax Court recognized the importance of protecting the identities of whistleblowers by creating a standard which will protect their anonymity, and (ii) the Tax Court followed their holding in Cooper v. Commissioner that a “no award” letter issued by the IRS is a determination under section 7623(b) that the Court has the jurisdiction to review, which should finally put that issue to rest.