IRS Funding Cuts Hurt Taxpayers

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Trying to save money, the federal government is cutting funding for the IRS. The result may be a loss of revenues costing taxpayers untold billions. By the end of Fiscal Year 2010, $330 billion dollars in federal taxes will remain uncollected. In context, $330 billion dollars represents nearly 9 times the projected savings of the recently agreed upon budget. However, in the recent budget agreement, lawmakers decided that no additional funds would be used to hire new IRS agents.

Although there is evidence that for every dollar spent on enforcing the tax code the investment results in up to ten dollars of revenue for the government. Politicians, fearing to align themselves with the tax man, have shown reluctance in supporting funding for additional IRS agents.

The idea is particularly troublesome in that the federal deficit continues to mount and broader compliance of the already existing tax code would help relieve the burden of an exploding deficit. Egan Young’s recent case is a prime example of the need for a strong IRS. An anonymous Whistleblower client of Egan Young received the very first mandatory tax fraud reward under the 2006 IRS Whistleblower rules. The program which had been in place since the end of 2006, had taken nearly five years to distribute its first mandatory reward. The IRS acting on the tip of the Whistleblower, and the advocacy of attorney Eric Young, netted in excess of $20 million in unpaid federal taxes. This recent case highlights the need for a strong IRS. $20 million from one case represents near 2/3 of the savings the federal government cut in its recent budget negotiations. The addition of IRS agents, resources for the whistleblower office, and increased investment in IRS infrastructure would be a nearly 10 to 1 investment in paying down the exploding federal deficit.

MNC Tax Overhaul on Government’s Agenda

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The White House and top lawmakers are discussing an overhaul for taxation of multinational corporations, according to the Wall Street Journal. The tax reform talks are happening as part of an effort to find funding for the highway bill and address various issues that have developed as US businesses earn cash overseas.

Overseas cash has become an increasing problem as corporations earnings are sitting offshore. If the businesses repatriate the cash into the United States, it will be taxed at a higher tax rate. Hundreds of billions are reportedly parked offshore to avoid paying U.S. taxes.

Additionally, cross-border reverse mergers during major acquisitions have become more popular in order to lower the tax rate of the resulting entity. They received the nickname corporate inversion. Until the IRS changed the rules to make them tougher and less profitable, they were going like gangbusters.

An overhaul of the system could allow the government to fund spending on highway transportation by imposing a one time tax on the repatriation of overseas cash. Among the other proposals discussed are the elimination of corporate taxes for earnings outside the United States.

If you have questions about this or another aspect of the IRS whistleblower program, feel free to contact one of our tax whistleblower attorneys via our contact form or by calling 1-800-590-4116.

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Accounting Fraud Cases Up in 2014

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Allegations of accounting fraud in securities class actions or SEC enforcement actions were up in 2014 compared to the prior two years, according to a report by Cornerstone Research. These cases involved auditing violations, weaknesses in internal controls or allegations of failing to follow US Generally Accepted Accounting Principles.

Class actions involving accounting issues grew 47 percent on a year over year basis and there was a similar increase in the number of enforcement actions filed by the Securities & Exchange Commission between the 2013 and 2014 fiscal years.  The increase in accounting cases was remarkable because the number of securities class actions filed remained roughly the same in 2013 and 2014.

A large number of the cases dealt with the restatement of financials. The percentage and number of these cases was at their highest level in seven years.

Accounting issues can be the basis for whistleblower tips to both the SEC and the Internal Revenue Service because they result in either inadequate disclosures to investors or the nonpayment of taxes to the government.  The government whistleblower programs may pay between 10 and 30 percent to eligible individuals for tips after a successful enforcement action and qualifying information which meets the rules for a reward.

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Reduced Budget Causes IRS To Open Fewer Criminal Investigations

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An annual report on criminal investigations in Fiscal Year 2014 released by the Internal Revenue Service today shows a 19% decrease in the number of investigations initiated due to reduced budget and staffing over the prior year.  This statistic doesn’t bode well for potential movement on cases initiated by tax whistleblowers.  It seems to be more evidence that the IRS whistleblower program will have a tough time proceeding to a successful resolution.

There isn’t a direct corollary because whistleblowers don’t directly benefit from the work of the criminal investigations unit.  The IRS whistleblower program does not allow individuals to recover a percentage of the money obtained by the agency through criminal prosecutions.  It only covers civil enforcement actions according to the IRS rules.  However, if the criminal side is experiencing cuts and problems, the civil side is probably also dealing with insufficient resources.

Early last year, there were significant discussions in the media and pressure from Senator Chuck Grassley for the IRS to shape up and take action on whistleblower cases or risk losing them.  However, there haven’t been many articles discussing it since a bevy of activity that spring.  We should get a peek at the success or failure of the program over the past year soon.  We are still waiting for the IRS to release its annual whistleblower report recapping the program for the last fiscal year.    If a report with few rewards is released, there will probably be more calls for changes to the system.

The obvious place to turn for comparison is the SEC whistleblower program, which had a great year despite the fact that the Office of the Whistleblower has only been open at the securities regulator for three full years.  It made incentive awards to nine whistleblowers including its largest reward to date: $30 million to an international whistleblower.

There was some good news in the IRS report, though.  Despite the decrease in investigations, the criminal unit has worked on some of the largest cases of corporate misconduct over the past year, including the BNP Paribas, Bank Leumi and Credit Suisse investigations.  These investigations resulted in significant fines for the corporations engaged in misconduct, so there is still some hope that the IRS will take action in cases of tax evasion and corporate wrongdoing.

The staffing figures in the report just don’t look good, though.  They show a 3% decrease in the number of Special Agents and a 5% decrease in criminal personnel over the last year.  A chart predicting the number of Special Agents the agency through FY 2016 shows nearly a 40% decrease from the high in FY 1995.  If you remember from last year, Congress significantly cut the budget of the IRS in the Cromnibus bill for this year.  So if they had problems last year, there will probably be even more during this year.

Most telling in the report may be the fall in identity theft investigations between FY 2013 and 2014.  This is reportedly one area where tax fraud is exploding and the sharp decline in investigations is particularly troubling.

If you have questions about this post or have evidence of tax noncompliance, feel free to contact one of our tax whistleblower lawyers 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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IRS Whistleblowing Potential

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Trying to save money, the federal government is cutting funding for the IRS. The result may be a loss of revenues costing taxpayers untold billions. By the end of Fiscal Year 2010, $330 billion dollars in federal taxes will remain uncollected. In context, $330 billion dollars represents nearly 9 times the projected savings of the recently agreed upon budget. However, in the recent budget agreement, lawmakers decided that no additional funds would be used to hire new IRS agents.

Although there is evidence that for every dollar spent on enforcing the tax code the investment results in up to ten dollars of revenue for the government. Politicians, fearing to align themselves with the tax man, have shown reluctance in supporting funding for additional IRS agents.

The idea is particularly troublesome in that the federal deficit continues to mount and broader compliance of the already existing tax code would help relieve the burden of an exploding deficit. Egan Young’s recent case is a prime example of the need for a strong IRS. An anonymous Whistleblower client of Egan Young received the very first mandatory tax fraud reward under the 2006 IRS Whistleblower rules.

The program which had been in place since the end of 2006, had taken nearly five years to distribute its first mandatory reward. The IRS acting on the tip of the Whistleblower, and the advocacy of attorney Eric Young, netted in excess of $20 million in unpaid federal taxes. This recent case highlights the need for a strong IRS. $20 million from one case represents near 2/3 of the savings the federal government cut in its recent budget negotiations. The addition of IRS agents, resources for the whistleblower office, and increased investment in IRS infrastructure would be a nearly 10 to 1 investment in paying down the exploding federal deficit.

Judge Confirms $1.8 Billion Fine Against Credit Suisse for Tax Evasion

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My discussion yesterday about international cooperation against tax avoidance was particularly timely, I suppose.  Today, U.S. District Judge Rebecca Beach Smith confirmed the deal Credit Suisse struck in May to plead guilty to conspiracy to aid and assist U.S. taxpayers in filing false income tax returns with the Internal Revenue Service (IRS). The company will pay a total of $2.6 billion, including $1.8 billion to the U.S. Treasury.

If there was a Credit Suisse whistleblower, we could know in the next year.  Credit Suisse will pay a fine of $1.136 billion and restitution of $666.5 million.  There is also the potential for a civil tax assessment.  The IRS whistleblower program pays a reward of between 15 and 30 percent of the amount collected to eligible whistleblowers in cases qualifying for §7623(b).  Similar to the Dodd-Frank programs, it also authorizes payments for “related actions”.  I haven’t taken a complete look at this issue here, but at first glance it seems that the $715 million payment to the New York Department of Financial Services could lead to a payment as a related action.

However, the IRS may not pay off on the full amount because some of it will be considered a criminal penalty.  The agency has declared criminal fines off limits to the program – they are not “collected proceeds” that can trigger a payment.  So there may not be the potential for a $500+ million award that is theoretically possible with a settlement of this size.

In February, Credit Suisse agreed to pay $196 million to settle charges the company provided services to U.S. clients while not appropriately registered in the country.  It followed that up with the settlement at issue here in May.  Here is the original press release from the DOJ in May as well as the SEC press release in February.  The latest press release is located here.

This is the second major tax case against a Swiss bank to be settled.  The 2009 settlement with UBS resulted in a penalty of $780 million to the IRS and an additional $200 million to the SEC.  It also resulted in the largest award ever to a tax whistleblower, $104 million to Bradley Birkenfeld.

Credit Suisse now holds the honors for the largest penalty in a criminal tax evasion case with the United States.  However, UBS may soon be able to reclaim its spot as #1 in the world for a tax fine.  France has also been pursuing the company for its efforts to help clients avoid taxes and the settlement amounts being discussed in the media range up to $6 billion.

The confirmation of the CS settlement extends the large fines that have been imposed on financial institutions in the 2014 calendar year.   Most recently, the CFTC imposed a $1.4 billion penalty on 5 banks for currency market manipulation.  The DOJ collected $24 billion in Fiscal Year 2014, and that doesn’t include the money from the $16 billion settlement with Bank of America.

IRS Revises Rules for Basket Options

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The IRS has revised a rule on basket options that allowed hedge funds to avoid billions of dollars of taxes. The new IRS guidance applies retroactively, applying to transactions through January 1, 2011. The taxpayers claiming the tax strategy in the past will be required to file amended returns and pay additional taxes. If they don’t, whistleblowers could report them to the Internal Revenue Service through the § 7623(b) program.

Last year, a U.S. Senate Permanent Subcommittee on Investigations reported that at least 13 hedge funds were using basket options as a tax shelter. Deutsche Bank AG and Barclays Bank PLC were selling the instruments to the hedge funds. The Subcommittee’s information suggested that tax avoidance from 2000 to 2013 exceeded $6 billion.

These financial institutions used the basket options to change tax treatment of their short-term stock trades. By exercising the options shortly after one-year had passed, they could capture the lower tax treatment from a long-term capital gain. The option structure and bank actions appeared to transfers the assets to the bank when in reality the hedge funds were in total control over the assets, trades and profits.

If you have questions about this or another aspect of the tax 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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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.

Deutsche Bank and BNP Paribas Settle Offshore Tax Evasion Cases

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The Swiss divisions of BNP Paribas and Deutsche Bank AG have agreed to resolve Justice Department investigations into their role in offshore tax evasion by American customers. BNP Paribas agreed to pay nearly $60 million and Deutsche Bank agreed to pay $31 million.

A Review of Recent Clean Energy Fraud

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We have discussed the potential for whistleblower actions grounded in the protection of the environment and compliance with environmental laws here before. Most depend on the unique circumstances of the case and the fraudulent scheme in order to fit within one of the whistleblower programs. With the Trump Administration in office, it is unclear how long these programs will continue in action. But to the extent that there is evidence of a fraudulent scheme that is unlawfully taking millions from taxpayer dollars, we would be interested in hearing about it.

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