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.

Germany Raids Deutsche Bank Over Dividend Arbitrage

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Deutsche Bank Frankfurt
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.

IRS Dirty Dozen Tax Scams for 2017

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The Internal Revenue Service is just over halfway done releasing its list of tax scams for 2017. The Dirty Dozen list has been an annual feature of the IRS website and garners a significant amount of media attention warning taxpayers to avoid the tax evasion techniques and fraudulent schemes listed. In recent years, the IRS has released one entry on the list daily in order to garner additional attention.

IRS Whistleblower Retaliation Protections Proposed in Senate

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Senators Chuck Grassley and Ron Wyden have proposed the IRS Whistleblower Improvements Act of 2017 in the U.S. Senate today. If adopted, the law will provide for (1) enhanced communications between the Internal Revenue Service and whistleblowers, and (2) anti-retaliation protections for tax whistleblowers. Both would be significant improvements to the IRS whistleblower program created a decade ago.

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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Thank You, Whistleblowers!

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Today is National Whistleblower Appreciation Day. We would like to take a moment to thank everyone who has come forward to report fraud and other misconduct over the years.

We know that the decision can be a difficult one and it may have unfortunate consequences on your family and career. We thank you for nevertheless doing the right thing.

On this day in 1778, the Continental Congress passed the first whistleblower law in the United States. It encouraged people in the service of the United States to report misconduct to Congress or the appropriate agency. More than 200 years later, we still rely on you to protect us from fraud.

Last year, there were a record 753 qui tam lawsuits filed under the False Claims Act. Thousands more submitted tips to the Internal Revenue Service and Securities and Exchange Commission. And an untold number informed their boss or company’s compliance professional about problems at their place of work.

There is still more to do, both to fight fraud and protect whistleblowers from retaliation. Your bravery continues to inspire us in our fight.

We also would like to thank Senator Chuck Grassley for his relentless support of whistleblowers. Senator Grassley was part of the testimony today about the False Claims Act at a House Judiciary Subcommittee on the Constitution and Civil Justice. His efforts have been instrumental in the advancement of whistleblower law.

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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.

Lawsuits Proceed Against Sprint, Citigroup Under New York False Claims Act

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There have been a number of big cases in New York dealing with tax law making headlines in the past few days. The False Claims Act in NY does not explicitly exclude false claims concerning taxes, as the Federal FCA does, so whistleblower seeking to bypass concerns about the IRS whistleblower program may file here as well to seek recovery for a smaller set of tax noncompliance.

Sprint

A decision from the New York Court of Appeals is allowing the State to proceed in its False Claims Act lawsuit against Sprint for damages of around $300 million because of unpaid taxes by the cell phone carrier. The company reportedly failed to collect more than $100 million in taxes from New York customers and provide them to the State. Attorney General Eric Schneiderman’s office is leading this litigation.

Citigroup

In another case out of New York State, a professor at Indiana University is proceeding with a whistleblower lawsuit claiming Citigroup owes New York State $800 million in taxes as a result of the TARP bailout. With treble damages, the amount sought in the lawsuit under the New York False Claims Act is $2.4 billion.

The case stems from a decision by the U.S. Treasury to allow deductions for corporate losses. The whistleblower published a discussion paper on the Treasury’s exemption in 2011. Citigroup applied the Federal exemption to its state taxes as well. According to the individual, the Treasury exemption was not proper under federal law and even if it was, New York was not required to honor it.

New York declined to intervene and prosecute the case itself, but the lawsuit can continue on behalf of the people of New York under the whistleblower law. If the Indiana economist is able to recover, he will be entitled to a percentage of the reward between 25 and 30 percent (standard in these types of cases).

Vanguard

To finish out the trio of big cases in New York, there is a whistleblower lawsuit against Vanguard for unpaid taxes. The case brought by a former in-house tax attorney, claims improper transfer pricing in violation of NY tax law. Last month, a report commissioned by the whistleblower’s attorneys was sent to the IRS and SEC detailing the billions owed by the company for its wrongdoing.

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IRS Whistleblower Awards Up Big in FY 2016

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In the 10th year since the creation of Internal Revenue Code section 7623(b), the Internal Revenue Service (IRS) Whistleblower Program issued 418 awards totaling more than $61 million (before sequestration), according to the annual report issued by the program’s Whistleblower Office to Congress. The total number of awards represented a 322 percent increase over fiscal year 2015. The monetary disbursement, however, was down from the more than $100 million paid out last year.

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