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.