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Report Finds Some of World’s Biggest Companies Use Tax Havens to Avoid Taxes

International giants including Pepsi, IKEA and FedEx have saved billions in taxes by funneling money through Luxembourg, claims a report by the Washington, DC-based International Consortium of Investigative Journalists (ICIJ).

ICIJ, a global network of 185 reporters in 65 countries who collaborate on transnational investigations, reviewed 28,000 pages of leaked confidential documents to come up with its findings. According to the journalists’ report, big companies create a complicated accounting and legal structure that allows for movement of profits from high-tax countries to lower-tax countries – some with tax rates below 1 percent.

“The private deals are legal in Luxembourg but may be subject to legal challenges outside of the country,” says a Huffington Post article. The European Union has been going back and forth with Luxembourg over whether the country has to disclose tax deals that might violate European law.

As the EU probes continue, the multinational group the Organization for Economic Cooperation and Development is proposing new rules that would prevent companies from using common practices to shift profits into countries considered “tax havens.”

UBS Exec Acquitted of Helping Americans Evade $20B in Taxes

A former UBS AG executive Raoul Weil was found not guilty of conspiring with US clients to hide $20 billion from the IRS in secret international bank accounts. “Weil was the highest-ranking Swiss banker prosecuted under an IRS and Justice Department crackdown on Americans’ use of offshore accounts to dodge U.S. taxes,” reports the Associated Press.

The verdict comes as a blow to the US government, which has been increasingly pursuing international banks and Americans who use offshore accounts to dodge taxes. It also was surprising: In 2009 UBS paid a $780 million US fine for helping US citizens avoid taxes. The Swiss banking giant disclosed thousands of American account holder names, many of whom were later prosecuted by the IRS.

Testimony against Weil detailed the lengths to which the banker supposedly went in order to conceal wrongdoing. Weil allegedly kept sensitive client data under a “solitaire” game tab on an encrypted laptop with an emergency password that would delete any trace of the customer’s data if it was seen by the wrong person.

A DOJ spokesperson said that, despite the verdict, the US government will continue pursuing banks, and their executives, suspected of helping wealthy Americans avoid billions in taxes.

For more commentary on the verdict see Newsweek,  The Wall Street Journal and CNBC.

Trial Starts for Former UBS Executive in Tax Fraud Case

The trial of UBS AG’s former chief executive Raoul Weil started this week in Florida. He is accused of helping American clients avoid taxes and conceal $20 billion of US taxpayers’ assets in offshore accounts. Weil is the highest-ranked UBS executive to be prosecuted by the US.

The Swiss banker allegedly helped “black account” holders – American citizens who didn’t want their assets disclosed to the IRS – hide millions of dollars and charged them steep fees for the extra service. Weil and other UBS bankers used multiple credit cards, changed hotels often and avoided electronic communication with clients, claims the prosecution’s star witness, Hans Schumacher, who was a banker at UBS.

The trial is expected to last several more weeks. If convicted, Weil could face up to five years in prison. (Alleged Mastermind of UBS Tax Evasion Scheme Faces Trial)

NJ man sentenced to prison for $65 million tax scheme

A New Jersey man has been sentenced to 17 months in prison for filing more than 8,000 fraudulent income tax returns that sought $65 million from the government. David Pinski and a handful of others conducted the largest and longest running stolen identity refund fraud scheme to have been identified, and resulted in a loss of $12 million to the U.S. government.

Pinski obtained personal identifies of Puerto Rican citizens and used that information to file electronic 1040s. He and his co-conspirators then received the fraudulent tax refund checks, cashed and spent them. Some of the defendants gambled more than $250,000 at casinos, and “resided in a house worth more than $1.6 million” while supposedly working in a grocery store, says an article published by the Cliff View Pilot.

The fraud was discovered because the tax forms were filed electronically from a handful of traceable IP addresses.

Tax whistleblower news summary for week of June 16

The IRS announced changes to its offshore voluntary compliance programs this week, enforcing harsher restrictions on US citizens who deliberately dodge taxes through illegal actions, while easing penalties for citizens who unintentionally evade taxes. The revised programs include a 50 percent penalty on offshore accounts if there is publicity about the IRS or the Justice Department investigating a financial institution where the person holds an account. (IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance)

Tax whistleblower news summary for week of June 2

A U.S. Tax Court ruling this week keeps alive an IRS whistleblower case seeking a $9 million whistleblower reward. The whistleblower claims the IRS recovered $30 million as a result of information the whistleblower provided to the IRS. (United States Tax Court, Whistleblower 10949-13W)

Tax whistleblower news summary for week of May 19

Credit Suisse has agreed to pay $2.6 billion to the U.S. government, the highest fine ever paid in a criminal tax case by a bank. Credit Suisse pleaded guilty to helping U.S. taxpayers file false claims and evade taxes. Credit Suisse admitted to destroying documents and setting up fake accounts to help U.S. citizens avoid taxes. Another story: “Credit Suisse Fined $2.5 billion After Pleading Guilty to U.S. Tax Charge.”

The U.S. Tax Court will allow three IRS whistleblowers to remain anonymous as they appeal IRS decisions about their rewards. Two of the whistleblowers are allowed to maintain the seal on their complaints -- meaning their identities aren’t publicly known – because the judge agreed their fear of physical repercussions is justified. The third whistleblower argued that his identity should remain confidential to prevent financial retribution by the defendant. 

Tax whistleblower news summary for week of May 12

Credit Suisse, which has been under investigation by the Department of Justice, may pay up to a $2 billion fine to resolve charges of tax evasion. (Reuters)

Tax whistleblower news summary for week of May 5

A former Credit Suisse employee pleaded guilty to helping wealthy American clients hide untaxed income in Swiss bank accounts. U.S. authorities continue putting pressure on Credit Suisse to plead guilty to the same charges. (Reuters)

The IRS is investigating Caterpillar Inc.’s overseas transactions that saved the company over $2 billion in taxes from 2000 to 2012. (Bloomberg)

Lifetime Achievement Award for whistleblower work given to Mary Louise Cohen

The Taxpayers Against Fraud Education Fund honored Phillips & Cohen partner Mary Louise Cohen with the Lifetime Achievement Award for her work on whistleblower cases.

Cohen is responsible for “bringing some of the first and largest (False Claims Act) cases ever won or settled,” said TAFEF in an announcement Oct. 24, including a $302 million settlement against Quest Diagnostics. TAFEF called Cohen a “pioneer of False Claims Act litigation” who brought some of the first “qui tam” (whistleblower) cases and some of the largest ever won or settled.

Phillips & Cohen’s cases have helped the government recover over $11 billion in civil settlements and related criminal fines, making it the most successful law firm representing whistleblowers in the U.S.

Grassley urges IRS commissioner-nominee to change anti-whistleblower culture

Sen. Charles Grassley (R-IA), a long-time champion of whistleblowers and the creator of the IRS whistleblower program, has sent a letter to IRS commissioner nominee, John Koskinen, expressing hope that he will change the anti-whistleblower culture at the IRS.

Grassley is concerned that the IRS whistleblower program is being underutilized and harmed due to the dearth of whistleblower rewards and IRS agents’ reluctance to “fully utilize the whistleblower’s knowledge and expertise to identify and expose tax cheats.”

Whistleblowers often put their careers in jeopardy by coming forward with valuable information. Those who have filed whistleblower claims or are considering filing whistleblower claims have been discouraged by the lack of response from the IRS.

Grassley recommends changes to the IRS whistleblower program: Assurances that whistleblowers will be valued and treated fairly, regular use of the awards programs, encouraging rather than discouraging whistleblowers to come forward, and showing whistleblowers that it is worth risking their careers to report those who violate or skirt tax laws and regulations.

Investment officer goes to prison for creative, fraudulent tax shelter

A Virginia investment firm officer who thought he found a creative way to defraud the IRS was sentenced to 54 months in prison yesterday for implementing a fraudulent tax shelter for KPMG clients.

 

Michael Parker, chief operating officer of TransCapital Corp., promoted and implemented from 1998 through 2006 a tax shelter called the Sale Leaseback of Tenants Improvements Strategy (SLOTS), ultimately helping client corporationss to deduct more than $240 million from their corporate income tax returns.

Parker, working with others, formed single purpose entities to buy leasehold improvements from the SLOTS clients. These leasehold improvements were appraised in such a way to reflect a higher value on the clients’ books than the sale price.

Parker admitted that he conspired to defraud the IRS and withheld information about the transactions from his clients. At least eight SLOTS shelters were transacted for corporate clients. The Kroger Co. was identified as having done the largest transaction, claiming over $178 million in deductions.

           

Parker said the SLOTS transactions were simply devices to conceal financing deals.  Schemes to manufacture deductions continue to be a high-risk-shelter strategy.

IRS needs to do more to make tax whistleblower program successful

Statistics in the Internal Revenue Service’s annual report to Congress on the IRS whistleblower program for fiscal year 2012 reflect whistleblowers’ frustration with the IRS.

In FY 2012, only 332 whistleblowers submitted information about tax violations exceeding $2 million – the threshold for the reward program. That is down from a high of 472 in FY 2009. As Sen. Chuck Grassley(R-IA) noted, “. . . the delay in awards and the way the IRS treats whistleblowers might be contributing to the leveling off of whistleblower cases.”

Only five claims have been paid under the tax whistleblower program Congress created in 2006, the report said. The program promises whistleblowers rewards of 15 percent to 25 percent of what the IRS collects based on their information when recoveries exceed $2 million. A Phillips & Cohen client received one of the few tax whistleblower rewards made in FY2012 under the previous IRS whistleblower  program, which limited rewards to a maximum of $2 million.

By creating obstacles to whistleblower rewards and failing to embrace the whistleblower program, the IRS is missing out on an opportunity to narrow the $450 billion gap between what is owed in taxes every year, and what is actually paid.

It is ultimately the taxpayers and the federal treasury that will pay for this failure to foster a successful whistleblower program.  If the IRS would do more to give whistleblowers the confidence to come forward, rather than make it increasingly difficult to receive rewards or even information about their claims, then the IRS would make substantial recoveries.

Grassley calls for changes in proposed IRS whistleblower regs

Sen. Chuck Grassley (R-IA) is disappointed with the proposed regulations for the IRS whistleblower program, he told the Treasury Department and the Internal Revenue Service in a recent letter. He believes -- as do we -- that the new regulations fail to realize the full potential for recoveries under the whistleblower program.

Grassley said the  IRS whistleblower program should be designed to encourage whistleblowers to come forward and to mobilize their own resources, much like the successful False Claims Act.

Instead the proposed IRS regulations, if adopted, are likely to discourage whistleblowers. They narrow the definition of the kinds of recoveries that are eligible for reward, exclude certain kinds of recoveries altogether and  broadly define the limitation for “planners and initiators” of the fraud. The latter, Grassley fears, could be used to “arbitrarily reduce awards to whistleblowers.” The law is intended to reward whistleblowers; limiting the scope of eligible recoveries is at odds with that goal.

The proposed regulations do little to address one of the chief sources of complaints about the program: the lack of communication between the IRS and whistleblowers. Grassley also said “the IRS should establish regulations for utilizing its contract authority” so that the IRS can use whistleblowers and their counsels and resources to assist in the recovery of funds, much like the way the Justice Department does in False Claims Act cases.

In the early years of the False Claims Act, there were similar problems. But those were overcome, and it is now the federal government’s most successful anti-fraud program The IRS whistleblower program could follow a similar path if the agencies draw on the experience and advice of people like Grassley when they draft the final regulations. 

Former IRS employee outs whistleblower

The arrest last week of former IRS employee Dennis Lerner stands out for a particular reason to Taxfraudblog.com: The government said he had revealed the identity of an IRS whistleblower.

Such a breach of whistleblower confidentiality by a government employee is unprecedented.  As Special Agent Robert O’Malley of the Office of the Treasury Inspector General for Tax Administration (TIGTA) said, “Any allegation of corruption, self-dealing, or inappropriate disclosure of confidential information is a potential violation of the public trust and could erode the public’s confidence in the American system of tax administration.”

Lerner was charged with breaching conflict of interest laws and illegally divulging privileged IRS information. 

He worked as an international examiner for the New York IRS office from 2010 to 2011, during which time he headed the audit of an international bank that was launched on the basis of whistleblower information regarding nearly $1 billion in unreported income.  Lerner left the IRS in the fall of 2011 and went to work for the same bank he had audited while at the IRS, which the New York Times reported was German Commerzbank.

While working for the bank, Lerner continued to unethically seek out information regarding the IRS investigation, and revealed the identity of the whistleblower to his new employer, violating IRS whistleblower confidentiality, according to the government.  

For more information on whistleblower protection and IRS whistleblower rules, see here. 

IRS awards UBS whistleblower $104 million

The IRS awarded $104 million to UBS whistleblower Bradley Birkenfeld Tuesday.  In 2007 Birkenfeld played a key role in alerting the U.S. government to the ways the Swiss bank, UBS, was encouraging clients to evade taxes in the U.S.  Following Birkenfeld’s tip, UBS agreed to a $780 million settlement with the Department of Justice, and turned over information on some 5,000 Swiss accounts to the IRS. 

Largely as a result of Birkenfeld’s cooperation and the subsequent investigation of several Swiss banks, the IRS launched its first Offshore Voluntary Disclosure Program in 2009.  Over 33,000 Americans have since participated in the program and the IRS has recouped approximately $5 billion in back taxes and penalties.   

Such a substantial whistleblower reward recognizes the value of Birkenfeld’s contributions to the IRS investigation.  ErikaKelton, a whistleblower attorney at Phillips & Cohen LLP, noted the significance of the reward in a Bloomberg article.  Kelton said, “The government acknowledged that without him or someone in his position, offshore evasion at UBS would still likely be going on.” 

Kelton also noted that although the record of IRS whistleblower program has been discouraging for the past few years, Birkenfeld’s reward bodes well for the momentum of the program.  “This is a powerful statement that things are moving and whistleblowers are welcome and they’re open for business,” said Kelton. 

Despite landmark financial penalties in the recent $3 billion GlaxoSmithKline settlement, some maintain that fines are not enough to discourage unethical behavior and malfeasance in corporate conduct. Rather, responsibility must be placed upon individuals in order to effect long-term change.

A recent New York Times article discusses individual criminal prosecution and barring pharmaceutical executives from taking part in Medicaid and Medicare programs as more effective means of reforming the industry. The article states that

"...to institute real change, executives must be prosecuted criminally or barred from participating in the Medicare and Medicaid programs, an action known as 'exclusion.'

This has occurred in only a handful of cases, and rarely in a case involving a major pharmaceutical company. In 2011, four executives of the medical device company Synthes were sentenced to less than a year in prison for conducting clinical trials that were not authorized by the Food and Drug Administration."

The GlaxoSmithKline settlement involves a “corporate integrity agreement,” which places emphasis on the role of individual company leaders in illegal activity and punishes their involvement. Part of this agreement is an “executive financial recoupment” program that calls for the withdrawal of bonuses and other financial incentives when executive and/or their employees are found guilty of participating in unethical or illegal behavior.

Phillips & Cohen attorney Erika Kelton, who represented two key whistleblowers in the Glaxo case, approves of this agreement as a step in the right direction. Kelton says that this “creates pressure and it creates an element of responsibility."

For more information on the role of whistleblowers in the GlaxoSmithKline settlement, please visit http://www.glaxowhistleblowers.com/.