International Cooperation Against Tax Avoidance Growing

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There have been a few measures put in place this year that have the potential to drastically cut offshore tax evasion.  Indeed, a few years from now, 2014 may be called a critical year in the fight against multinational tax avoidance being waged by the world’s governments.  It will take a few years for the transparency and information sharing to take hold of course, but the measures have potential.

The Foreign Account Tax Compliance Act will certainly be an important tool for the United States to collect more taxes.  Last week, we posted information about FATCA for potential whistleblowers working at foreign financial institutions. Even though there may be a “transition period” before the IRS is willing to hand down large penalties to banks that have entered into an agreement with the U.S. Government to provide information about payments and assets of U.S. account holders, the large sanctions paid by banks this year concerning mortgage misconduct and forex fraud suggest that penalties and bank withholding will be coming.

There have been other developments as well. Perhaps the one with the most immediate effect for the United States was the revision made to the tax treatment of corporate merger inversions. The Treasury Department issued rules in September to restrict inversions after a number of corporations declared their intent to relocate overseas for tax purposes after merging with a foreign company. These companies included Burger King and Pfizer.

However, there has been at least one setback.  In the final tax whistleblower rules published in August 2014, the IRS excluded penalties for violations of the FBAR reporting requirements. IRS regulations provide for rewards when the individual’s information leads to collected proceeds. According to IRS guidance, collected proceeds includes only money collected from Title 26.  Because FBAR is required under Title 31, money collected for violations is not eligible for a reward.  This should leave open the possibility of rewards under FATCA, however.

The United States is not the only country facing tax avoidance by large corporations. It has become an issue in the European Union, Australia, India and other nations.  Australia, for example, has more than 100 multinational corporations it believes may be underpaying taxes.

Last week, the G20 countries agreed to implement information sharing about tax avoidance by corporations and individuals by 2018.  It will not be easy.  It took the United States four years to prepare for FATCA.

The European Union may not wait for a global solution.  It is already debating the appropriate tax rules between its member states following Luxembourg.  The EU’s probe into the use of Luxembourg as a tax haven led to the release of information concerning its widespread use for tax avoidance.  More than 300 companies including Pepsi, Ikea and FedEx have used the country to avoid taxes according to information released earlier this month by the International Consortium of Investigative Journalists.

If the momentum in favor of change continues, there could be substantial progress internationally in limiting the ability of corporations to move income to tax havens to avoid paying countries with higher tax rates.

Fear of Political Pressure Influences IRS Resistance to Whistleblower Cases

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In recent years, whistleblower cases have proven to be essential to the battle against tax fraud in the United States. In 2006, Congress passed a provision that would allow citizens to file claims with the Internal Revenue Service (IRS) to recover lost tax revenue that had been fraudulently withheld. The Tax Court could intervene on behalf of a relator, or whistleblower, but only in reviewing the awarded damages. Since Congress only authorized the review of the award rather than the merit of the cases, many are turned down by the IRS. One example of the IRS’ resistance to pursing whistleblower cases is in William Prentice Cooper, III v. Commissioner, 136 T.C. No. 30 (June 20, 2011). The IRS declined the relator’s request to pursue a case because the agency believed it did not meet the criteria required for litigation. The IRS cannot be expected to take every whistleblower case that comes through the door, but in the current climate of fiscal uncertainty, it could be worth millions to the government to re-evaluate certain cases and subject them to closer scrutiny.

As noted by Finch McCranie, LLP, whistleblowers have recovered $97 million for the U.S. government WITHOUT the help of the Justice Department. That is more than the combined salaries of both the members of the United States Senate and House, according to Pat Burns of Taxpayers Against Fraud. This was done without the Justice Department because the government declined to pursue the cases, even when presented with meritorious information. If the IRS has the opportunity to recover tax funds for the government, which it is required to do, why is the agency passing on the opportunity to increase the chances of a successful lawsuit?

The Internal Revenue Service says in its mission statement that it seeks to ensure that citizens meet their tax responsibilities and enforce the laws that Congress passes to ensure fairness and integrity for all. As a result, the IRS is subject to the mercy of Congress, even though its responsibilities are supposed to be nonpolitical.

This political control over the IRS also showed itself when the agency caved to Republican pressure over private campaign donations as gifts.

As noted by Dan Froomkin of the Huffington Post, in this case Republican members of the Senate Budget Committee and the House Ways and Means Committee believed that the IRS was pursuing a liberal agenda by auditing the gifts of donors who have contributed to 501(c)(4)s. They tried to justify their argument by noting that the provision the IRS cited had not historically been enforced. Even if this is the case, it only highlighted the IRS’ failures in the past, but not the present. When Congress passes a law, all of its provisions must be enforced by the IRS. If the provision for declaring gift contributions was never intended to be enforced, then Congress should not have included it in the legislation.

The IRS will always be subject to the laws of Congress, and as a result, the business of politics will get in the way of the agency’s ability to effectively carry out its mission. With Republican donors traditionally holding interests in private companies and firms, they are more inclined to put pressure on the IRS to decline whistleblower cases, seeing as they have the potential to have an adverse effect on these companies. Is it right to allow fraud to continue and additional government revenue to be lost as a result of political interests? More attention should be given to whistleblower since they are not only privy to information that could expose illegal actions, but also they could bring in the additional tax revenue that would help this country combat the devastating fiscal crisis that we are inching closer and closer towards today.

Egan Young, Attorneys-at-Law, represents whistleblowers nationwide. For a free confidential consultation, please call Eric L. Young, Esquire at (215) 367-5151 or email to eyoung@eganyoung.com.

Tax Court Rules Whistleblower Reward is Ordinary Income

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Despite arguments from whistleblowers to the contrary, the government continues to demand whistleblowers pay taxes on money awarded under the False Claims Act as ordinary income.

On Monday, the United States Tax Court held in Patrick v. Commissioner, 142 T.C. No. 5 (2014) that a qui tam award does not qualify as capital gains. If the petitioner had been successful, tax liability would have been reduced from the ordinary income tax rate to the lower capital gains rate. The decision reaffirms an earlier opinion on the same issue. See Alderson v. United States, 686 F.3d 791 (9th Cir. 2012).

The Internal Revenue Code treats rewards as ordinary income similar to wages and salaries for the purpose of calculating tax liability. Treas. Reg. §1.61-2(a)(1). An award from a qui tam lawsuit is considered a reward included within gross income. Roco v. Commissioner, 121 T.C. 160, 164 (2003).

Petitioner argued a qui tam award is instead a “gain from the sale or exchange of a capital asset”. 26 U.S.C. § 1222(1), (3). The Tax Court analyzed both whether a “sale or exchange” occurred and whether it is a “capital asset.” It rejected both contentions.

The Tax Court disagreed with the argument that the government purchases information from the relator according to a contractual right established in the False Claims Act. The Petitioner analogized to the transfer of a trade secret which is considered a capital gain. However, the court rejected the notion there is a transfer of rights to the Government.

The Tax Court also declined to find the petitioner had a property right which would constitute a capital asset. Petitioner advanced the contention that relators have a property interest in the information they disclose to the Government. In rejecting the argument, the Court declined to consider the information the property of the relator because they did not demonstrate “a legal right to exclude others from use and enjoyment” of it.

The ruling reinforces the importance of seeking the advice of a qualified accountant or tax lawyer after receiving an award under whistleblower laws.

McEldrew Young Purtell helps whistleblowers report fraud and misconduct to the government through the SEC, CFTC and IRS whistleblower programs as well as the False Claims Act. If you would like to speak to Eric L. Young or another attorney at McEldrew Young Purtell about becoming a whistleblower, please call 1-800-590-4116 or complete our contact form.

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Medtronic Settles With IRS Over Overseas Cash in Kyphon Acquisition for $330 Million

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Medtronic, a medical device company, has just settled a tax dispute with the Internal Revenue Service over the repatriation of overseas cash for its 2007 acquisition of Kyphon for $330 million. Medtronic used a mix of U.S. and overseas cash in order to pay for the $4.2 billion acquisition.

The dispute arose over the amount of the repatriated $3.3 billion in overseas cash that would be taxable. Taxation of cash generated outside the United States has become an issue because of the large amount of cash that some corporations have acquired through overseas operations. If they bring that cash back into the US, they will have to pay tax on it here, minus the amount that they paid overseas. Lawmakers have discussed a variety of measures to encourage corporations to repatriate their cash located outside the United States and bring it into the country.

Medtronic agreed to pay $275 million to settle the allegations and another $54 million in interest. The company’s settlement does not resolve its dispute with the IRS over transfer pricing that arose from transactions in 2005 and 2006.

If you have questions about this or another aspect of the IRS whistleblower program, feel free to contact one of our IRS whistleblower attorneys via our contact form or by calling 1-800-590-4116.  Our law firm offers a free, confidential initial legal consultation with a lawyer for whistleblowers.

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Shell Corps Used in Offshore Tax Evasion Targeted

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The war against international tax evasion took another step forward yesterday with President Obama proposing a federal registry of the owners of all companies created and operating in the United States to aid in the elimination of anonymous shell companies.

Key Whistleblower Changes in Bipartisan Budget Act

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The Bipartisan Budget Act of 2018, passed overnight and signed this morning by President Trump to end the second federal government shutdown of this year, includes two key provisions for whistleblowers previously introduced by Senator Charles Grassley but removed from the January budget deal.

Fraud and Whistleblower News for Monday, March 31

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The Supreme Court denied the cert petition in Nathan v. Takeda today. The petition questioned the Court of Appeals decision with regard to the Rule 9(b) heightened pleading requirement for fraud.

False Claims Act Against Bankrupt Companies – WSJ:Judge Gives $2.3 Billion Hawker Whistleblower Suit New Life
Whistleblowers can pursue their False Claims Act lawsuit against Hawker Beechcraft despite its bankruptcy, according to a ruling in federal court in New York. The whistleblowers alleged that the U.S. Navy and Air Force purchased more than 300 aircraft with defective parts from the company. They argued that the lawsuit was an intentional fraud and a debt to a domestic government unit that should not have been discharged. Last year, a bankruptcy judge ruled that liability from the lawsuit was extinguished by the Chapter 11 bankruptcy plan. Beechcraft was purchased by Textron following bankruptcy.

Currency Manipulation – Bloomberg: Swiss Antitrust Regulator Probes Eight Banks Over Alleged FX-Rigging
The Swiss Competition Commission, known as Weko, says it is investigating foreign exchange rate manipulation at UBS, Credit Suisse, JPMorgan Chase, Citibank, Barclays and a few other banks. At least a dozen regulators are now investigating collusion in currency trading.

Securities Fraud – CNBC: Years later, SEC fraud trial over Texas tycoons to start:
The Securities and Exchange Commission will start jury selection in New York today for the $550 million fraud trial of Samuel Wyly and the estate of his late brother, Charles Wyly. They are accused of committing securities fraud and insider trading. The SEC started investigating the Wyly brothers in 2005.

Medicaid Fraud – New York Times: Settlement in Medicaid Fraud Case Worries Health Providers
A New York Times article expresses concern that increased enforcement efforts against Medicaid providers might cause more doctors and medical practices to stop accepting Medicaid patients. The article cites a recent enforcement action against Carousel Pediatrics by the Office of Inspector General in the Texas Health and Human Services Commission. The percentage of physicians in Texas accepting Medicaid have declined substantially in the past ten years because of Medicaid rate cuts.

IRS Whistleblower Program – Pittsburgh Post-Gazette: Telling for Dollars: Tipsters get few payments in IRS program
The Pittsburgh Post-Gazette reported on the lack of rewards coming out of the IRS Whistleblower program. There have only been 38 recoveries from the 33,000 whistleblower tips the IRS received in the past five years. The IRS paid out $50 million in Fiscal Year 2013 according to the head of the IRS Whistleblower Office, although the majority of the payout went one whistleblower receiving a $38 million dollar award.

Collected Proceeds Debate Continues in IRS Whistleblower Cases and Congress

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The Justice Department has appealed a decision by the U.S. Tax Court last year to provide an IRS whistleblower reward based upon a criminal fine and civil forfeitures. The Government’s appeal to the D.C. Circuit attempts to reverse a favorable decision for whistleblowers on the definition of collected proceeds used in the terms of the IRS whistleblower program.

First IRS Whistleblower Office Reward

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The “Whistleblower”, who wishes to remain anonymous (hereinafter referred to as “Mr. Doe”), worked as a CPA in the accounting department of a Fortune 500 financial services firm. While carrying out his basic job responsibilities, Mr. Doe discovered that his employer failed to properly disclose the extent of its tax liability and also claimed tax credits in excess of permissible amounts. Mr. Doe initially reported these accounting errors to company management. However, to his dismay, the Company decided not to correct the accounting errors discovered and, to make matters worse, the company made a conscious decision not to inform the IRS who was in the midst of performing a large case examination. By withholding this information from the IRS, Mr. Doe determined that the Company had committed tax fraud in the form of an underpayment totaling in excess of $20 million.

Mr. Doe originally filed his tax fraud whistleblower case pro se in April 2007, after the newly formed IRS Whistleblower Office opened. After having been contacted and interviewed early on, years went by during which time Mr. Doe received no information of feedback from the IRS. Mr. Doe became concerned that if the IRS conducted an investigation and recovered back taxes as a result, that his claim to a reward under the new whistleblower program may not be assured. It was then that Mr. Doe retained Eric L. Young, Esquire, an Egan Young founding partner, to represent him.

Mr. Young, an experienced whistleblower attorney, assessed the case and determined not only that Mr. Doe’s allegations should be of significant interest to the IRS, but that the case appeared to not have been properly docketed by the IRS Whistleblower Office. Mr. Young proceeded to work with the IRS’ Whistleblower Office by resubmitting Mr. Doe’s claim and assuring that a “Claims Number” was assigned by the Whistleblower Office — something that did not occur before Mr. Young assumed representation in this case.

After securing a Claims Number for Mr. Doe’s claim, Mr. Young proceeded to provide all of the original case documents and information to the IRS Whistleblower Office, further exposing the Company’s substantial fraud. At the same time, Mr. Young determined that an investigation had ensued and over the course of his representation, both he and his associate, Brandon J. Lauria, Esquire, maintained close contact with the IRS Whistleblower Office in order to assure that Mr. Doe’s allegations were investigated and that his right to a reward would be protected in the event of a recovery by the IRS.

Mr. Doe’s decision to retain Mr. Young and his law firm paid off. On April 7th, 2011, Mr. Doe received the first-ever mandatory whistleblower reward (as confirmed by the IRS Whistleblower Office) in the amount of $4.5 Million. Although the IRS code provides that rewards may range from 15 to 30 percent of the IRS recovery, Mr. Young’s representation and the Whistleblower’s cooperation directly led to an enhanced reward of 22 percent!

SEC and CFTC Gain, IRS Loses in FY 2015 Budget Bill

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The Senate passed the $1.1 trillion budget bill on Saturday evening and President Obama has signalled that he will sign the budget for Fiscal Year 2015 later this week.  As Congress allocated resources in the Consolidated and Further Continuing Appropriations Act for 2015, both the CFTC and SEC got significant increases.  The IRS, on the other hand, lost 3 percent of its budget.

The bill is important because it provides funding for the agencies charged with enforcing the nation’s whistleblower laws. As only the False Claims Act allows qui tam lawsuits, whistleblowers to the Internal Revenue Service, Securities & Exchange Commission, and Commodity Futures Trading Commission are dependent upon enforcement actions brought by the government agencies. Their ability to have the resources to take on some cases may be dependent on their budget and personnel.

The  also repealed the swaps push out rule from the Dodd-Frank Act and prohibits federal payments to corporations which prohibit whistleblowers from reporting fraud, waste and abuse to the U.S. Government.

Here’s a more extensive discussion of each aspect mentioned above:

CFTC

The CFTC budget for Fiscal Year 2015 was increased to $250 million. It will receive $35 million more than the $215 million it got in FY 2014. The nation’s derivatives regulator sought an additional $30 million for a total budget request of $280 million. The request primarily called for more personnel at the Commission.

The CFTC has faced problems with declining employee morale due to its inadequate budget over the past few years. The percentage of people who would recommend the CFTC as a good place to work fell from 64 percent last year to 45 percent this year. Overall job satisfication at the agency has declined substantially from 2010, when Dodd-Frank was passed.

The CFTC budget has been constrained by certain legislators as they attempted to prevent implementation of parts of the Dodd-Frank Act. CFTC Chairman Timothy Massad essentially stated that the low budget put the agency in regulatory triage. Even at the higher levels for 2015, Senator Debbie Stabenow, Chairwoman of the Senate Committee on Agriculture, Nutrition and Forestry, called the budget inadequate to allow the CFTC to do its job. Derivatives trading has grown from a $500 billion business to a $700 trillion industry without a corresponding increase in CFTC funding.

SEC

The SEC received an increase of $250 million in its budget for FY 2015 from FY 2014 levels. Its total FY 2015 budget will be $1.5 billion, $200 million short of the agency request of $1.7 billion. The budget request for a total increase of $450 million sought to hire additional employees, invest in technology solutions and complete rulemaking required by the Dodd-Frank Act and the JOBS Act.

IRS

The budget deal cut IRS funding by three percent to $10.9 billion for 2015. The reduction in funding by $345.6 million will need to come from an agency that has already reduced spending by more than $1 billion because of budget cuts since 2010. The FY 2014 level was $11.29 billion.

President Obama asked for Congress to provide the agency with $12.477 billion. The IRS Oversight Board estimated that the President’s budget would allow the U.S. Government to collect an additional $2.1 billion in revenue and avoid the loss of $360 million a year due to identity theft. Every dollar decrease in IRS funding allows roughly $7 in taxes to go uncollected.  With implementation of FATCA proceeding, the budget decrease does not come at an opportune time.

One aspect of the President’s budget proposal not in the final bill: The Treasury Department’s request for IRS whistleblower protections against retaliation. This section has been removed by Congress annually for the past few years.

Dodd-Frank Swaps Push Out

The SEC and CFTC budget increases can be attributed to a deal made to repeal section 716 of the Dodd-Frank Act. The section was commonly referred to as the swaps push out rule. It required banks to move derivatives trading out of their federally insured subsidiaries. The financial health of subsidiaries protected by federally insured deposits allows them significant advantages while trading and could put federal funds at risk. The measure was largely written by Citigroup in advance of the 2015 deadline for implementing the section of the law.

The reversal of the swaps push out rule was one of the most controversial aspects of the entire budget. Its addition to the law used the impending deadline for government shutdown. Senator Elizabeth Warren (D-Mass), who was involved in the creation of the U.S. Consumer Financial Protection Bureau, nevertheless marshalled a tremendous amount of opposition to it. A White House statement opposed the section but did not indicate that President Obama would veto the bill because of it.

Confidentiality Agreements

Employment agreements have proven to be a common tool used by employers to attempt to restrict whistleblowers. Congress took a step in the right direction with the bill by restricting payments to corporations which prohibit reporting waste, fraud or abuse to the Federal Government. Money from the FY 2015 budget can not be paid to corporations requiring employees to sign confidentiality agreements that prevent them from blowing the whistle.

The provision reads:

SEC. 743. (a) None of the funds appropriated or otherwise made available by this or any other Act may be available for a contract, grant, or cooperative agreement with an entity that requires employees or contractors of such entity seeking to report fraud, waste, or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contractors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a Federal department or agency authorized to receive such information.

It is great to see Congress take a step in the right direction with the insertion of this section into the budget. The section may create additional litigation under the False Claims Act as it operates as a condition for payment to federal contractors. Companies which violate the law by imposing one of these agreements on its employees could be subject to treble damages under the False Claims Act if they misrepresent the compliance of their employment contract with this rule in order to receive payment on their government contract. In addition to businesses fulfilling government contracts, it also implicates the health care industry because hospitals or other health organizations with these contracts would not be able to receive funds from Medicare.

The SEC has also already taken aim at this practice in the securities industry. According to the Washington Post in March, the SEC opened an investigation into confidentiality agreements created by KBR that potentially violate Rule 21F-17(a). The rule prohibits any action to impede an individual from communicating with the SEC about a possible securities law violation including enforcing, or threatening to enforce, a confidentiality agreement.

There has been several calls for changes to this employer practice. In October, eight U.S. Representatives on the House Committees on Financial Services and Oversight and Government Reform (OGR) urged the SEC to take additional enforcement actions against corporations using workplace secrecy agreements to chill whistleblowing.

Other Items of Interest to Employees

There were also small increases (less than $1 million) to the EEOC and OSHA budgets. The OSHA budget had sought an appx. $3 million increase in the amount of money for enforcement of whistleblower protections from retaliation and an appx. $30 million increase in the funding for the Wage and Hour Division to protect workers from FLSA violations related to worker misclassification, overtime and other pay rules. I haven’t independently verified it in the bill, but according to one report I have seen, wage and hour enforcement got an extra $3.2 million dollar increase and whistleblower protections had a small, less than $1 million increase.

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