PROPOSED REGULATIONS BENEFICIAL TO WHISTLEBLOWERS

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For the last 144 years, the IRS has been providing tax whistleblowers with compensation for information leading to the recovery of additional taxes paid by the identified defrauding taxpayer.There were two major flaws to the IRS program that served to deter individual whistleblower from reporting the fraud: 1) the rewards were discretionary with no basis of appeal and 2) the information provided by the whistleblower had to lead to “additional taxes paid.”These flaws caused numerous whistleblowers to reconsider bringing allegations of fraud to the IRS’ attention.To most, the uncertainty of a reward did not outweigh the risks associated with blowing the whistle.

In late 2006, the landscape concerning tax whistleblower cases changed dramatically.Under the direction of Sen. Grassley, the IRS strengthened the existing program to provide for mandatory rewards with a right to appeal.This was a victory for whistleblowers nationwide.The new program has served to foster more submissions regarding alleged tax cheats.However, under the new program, the whistleblower could still only recover “additional taxes paid” as a result of the information provided by the whistleblower.This was very problematic as information received from a whistleblower which directly led to a denial of a refund or a reduction in deductible losses was not eligible for reward.To no surprise of the legal community handling these cases, the IRS Whistleblower Program establish in 2006 has yet to pay a single reward.

The proposed regulations are a major step in the right direction.If approved, the regulations will provide tax whistleblowers with the right to recover from the “denial of refunds” as well as a “deduction in losses” that can be attributed to the information provided by the whistleblower.These proposed regulations are more in line with the spirit of the law when it was drafted in 2006.

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Brandon J. Lauria, Esquire, represents tax whistleblowers nationwide. If you feel you may have information concerning individual or corporate tax fraud, please call (215) 367-5151 for a FREE attorney consultation.

A Growing Problem in Tax Fraud: Identity Theft

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There is a new target for identity thieves: the Federal Government. The thieves are using personal information to file a fraudulent tax return with the IRS on behalf of the identity theft victim. If the IRS doesn’t recognize the fraudulent return, it may refund money to the identity thieves and label the taxpayer’s return a duplicate that it shouldn’t accept. In order for the IRS to resolve the error, establish the victim’s identity and deliver them any refund owed, it might take up to 180 days.

It is a growing problem. Only 15 percent of complaints to the FTC concerning identity theft involved tax returns in 2010. Last year, the percentage of tax identity theft cases had reached 43 percent. Over the next five years, the Internal Revenue Service’s inspector general estimates that more than $20 billion in fraudulent refund claims will be made by identity thieves.

The problem is especially prevalent in Florida, the state with the largest identity theft problem. The U.S. Attorney covering South Florida, Wifredo Ferrer, told the Associated Press, “This is the fastest growing and most pervasive problem we are seeing.” His office formed a strike force to target the perpetrators in 2012 and have since prosecuted 270 defendants filing fraudulent tax returns claiming more than $450 million in refunds.

A Government Accountability Office report released near the end of 2013 found that the IRS prevented more than one million stolen identity tax refund claims a year in calendar years 2012 and 2013. The fraudulent claims asked for $12 billion during calendar year 2012 and $8 billion in the first nine months of the 2013 calendar year. The report acknowledges that the precise amount of fraudulent claims paid isn’t known.

The FTC hosted a series of events around the country in January to raise awareness about the problem as part of Tax Identity Theft Awareness Week. The IRS is also taking the problem seriously. They now have more than 3,000 employees dealing with issues involving identity theft and have trained 35,000 more to recognize the fraud and help those affected.

McEldrew Young Purtell Merritt represents IRS whistleblowers reporting tax fraud under the whistleblower program. For a free confidential consultation, please call Eric L. Young, Esquire at 1-800-590-4116 or complete our online contact form.

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Tax Court Can Review IRS Awards for Information Provided Before and After 7623(b)

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The United States Tax Court has jurisdiction to review IRS whistleblower awards issued involving information provided before and after the passage of the Tax Relief and Health Care Act of 2006. The tax whistleblower received a discretionary reward from the IRS under section 7623(a) and appealed the award determination. The decision is available at 144 TC 15 (Whistleblower 21276-13W v. IRS).

The individual provided information to the IRS between June 2006 and fall 2009. The effective date of I.R.C. sec. 7623(b), the IRS’ mandatory reward program for cases involving more than $2 million in dispute, was December 20, 2006. A Form 211 was filed in 2008 and then resubmitted in 2011 for an award under section 7623(b). The government had sought dismissal of the petitioner’s appeal.

The Commissioner of Internal Revenue sought dismissal on jurisdictional grounds, arguing that because information was provided prior to Dec. 20th, the whistleblower was not entitled to appeal the award to the tax court. The Court denied the motion to dismiss, holding that the Tax Court can review award determinations when there are allegations that the whistleblower provided information both before and after the enactment of section 7623(b).

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.  Our law firm offers a free, confidential initial legal consultation with a lawyer for whistleblowers.

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IRS LB&I Now Has 24 Issues for Tax Examinations

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The IRS Large Business & International Division (LB&I) is launching eleven compliance campaigns to target potential tax issues at the nearly 300,000 taxpayers within its jurisdiction. When a regulator announces that it will spend resources for investigation and enforcement in a particular area, it can be a good signal that it will look carefully at any credible whistleblower tips.

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.

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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Germany Raids Deutsche Bank Over Dividend Arbitrage

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Deutsche Bank Frankfurt

A criminal tax fraud investigation into dividend arbitrage by Germany raided Deutsche Bank’s Frankfurt headquarters in what is shaping up to be a very bad year for the German bank.

Just two days ago, its co-chief executives resigned due to investor frustration over the bank’s performance. In April, it agreed to pay a fine of $2.5 billion to resolve investigations by the U.S. and British governments into LIBOR manipulation. In May, it was fined $55 million by the SEC for misstating financial reports during the financial crisis to hide risk in its derivatives portfolio.

German officials were reportedly at the Frankfurt office throughout the morning collecting documents from the bank. “People close to the investigation” told the Wall Street Journal that it dealt with dividend arbitrage trades.

German prosecutors have been looking into the cum/ex trades because financial institutions reportedly obtained fraudulent tax benefits in the hundreds of millions of dollars. Changes in tax rules largely ended the transactions in Germany in 2011 when the loopholes were closed and they became less profitable.

The Commodity Futures Trading Commission and the Federal Reserve Bank of Richmond are both reportedly looking into matters related to dividend arbitrage. The CFTC has reportedly sent inquiries to five banks: Bank of America, Goldman Sachs, Citigroup, Deutsche Bank and Morgan Stanley. The Richmond Fed looked into the trades at Bank of America, which is within its jurisdiction since it is based in Charlotte. I haven’t seen any public media reports about Internal Revenue Service investigations in this area yet.

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.

IRS Continues Reduced Whistleblower Awards Under Sequestration

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If you receive an IRS whistleblower award during the next two years, you will get less than the percentage you are awarded by the Internal Revenue Service. As a result of budget bills imposing sequestration on federal agencies, IRS awards for FY2015 are being reduced 7.3% and FY2016 awards (from October 1, 2015 to September 30, 2016) will be reduced 6.8%, which is the federal budget sequestration rate for the next fiscal year.

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.

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