The take away is while the IRS whistleblower program had a good year, there is much more to be accomplished by the IRS to the implement the 12 year old Whistleblower Program. Changes must occur either voluntarily by the IRS in the administration of the IRS Whistleblower program, or statutorily by Congress enacting additional changes to the law (similar to the 2018 change) so that the intent of Congress is recognized by the IRS.Read More
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In the news recently, Mylan CEO, Heather Bresh, was called before the House Oversight Committee to discuss Mylan’s increase in prices of the EpiPen. In case you missed it, EpiPen prices have risen about 400% with a two pack of the lifesaving injection drug at a retail cost of $600.
According to CNN, Ms. Bresh’s testimony before the House Oversight Committee will state that Mylan only makes about $50 for each $300 pen. Money magazine also details how Mylan is trying to get EpiPen on the Preventative Medicines list, which would allow patients to receive EpiPen will little or no out-of-pocket costs, and so that insurance would have to pick up the cost.
What gets lost in the outrage over a drug price increase, is why the huge increase? EpiPen has been around a long time, and the process to create EpiPen hasn’t changed for some time, so why the huge increase, and why is Mylan only getting $50 profit from a $300 item.
One theory is Mylan has been increasing the demand of EpiPen through effective marketing practices. See this Bloomberg article. Another often not discussed aspect is transfer pricing, inversions and booking profits offshore. As stated in the 10-K for Mylan for tax year ended (tye) December 31, 2014, Mylan inverted from a Pennsylvania Company to a Netherlands company with its principal executive offices in Potters Bar, UK.
As previously discussed in this Blog, one of the key tools U.S. Multinational Corporations (USMNCs) utilize to lower its tax rate is to invert the corporate headquarters to a lower tax jurisdiction.
Also as previously discussed in this Blog, a second tool used by USMNCs is transfer pricing. In this case, as stated in this Time article, it costs Mylan about $30 to make each dose of EpiPen. Mylan likely has the drug filled in the Netherlands or another tax favorable jurisdiction, and then re-sells the drug at the $600 price for a EpiPen 2 pack back to U.S. distributors, thereby booking the costs in the tax favorable jurisdiction. See this primer on transfer pricing.
By using this method (transfer pricing) USMNCs can claim a lower tax rate than the applicable 35% tax rate. While I am not saying that Mylan utilizes transfer pricing, one indicator that Mylan may be utilizing transfer pricing is in its 10K, Mylan states that for 2014, Mylan only pays an effective tax rate of 4.2%. (FYI, the statutory rate is 35% for corporations in the United States.) Mylan also lists on is 10K that it approximately $693 million permanently reinvested in its foreign subsidiaries, which is how companies disguise on their 10K amounts they are holding offshore to avoid taxation in the U.S.
So this begs the question, why can Congress call Ms. Bresh to appear before the House Oversight Committee to discuss pricing, but the IRS can’t call Mylan to conduct an analysis of its transfer pricing or its inversion practice?
If you know of a corporation undervaluing assets in its transfer pricing models, contact our firm to discuss filing a tax whistleblower claim. IRS will pay an award between 15-30% of collected proceeds (tax, penalties, and interest) to whistleblowers who provide substantial and credible information used by the IRS in prosecuting the alleged tax violators.
The answer to this question is….not a clear yes or clear no. Like all of us, the IRS must follow the law. Whether it supports, or not supports, the tax whistleblower program, the IRS can only do what Congress has authorized it to do. In the end, its actions speak louder than words and give us a clue as to whether or not it supports the program.
The Whistleblower Program was amended and changed in 2006 with the enacted by the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, sec. 406, 120 Stat. at 2958. The Whistleblower statute (IRC § 7623) contains no more than 640 words and is subject to interpretation. Whistleblowers tend to interpret this statute broadly while the IRS interprets it narrowly. IRS justification might be that it interprets the statute very narrowly in fear that it might pay an award for which it does not have authority to do so.
As an example, the whistleblower statute, IRC § 7623(b)(1) states that the IRS shall pay an
The IRS, despite telling Congress and the American public that it supports the whistleblower program, obtained legal advice from the Office of Chief Counsel (IRS legal counsel), which advised it that “collected proceeds” did not include criminal penalties or civil forfeitures for which the IRS might be responsible for determining and collecting. This often occurred with cases involving taxpayers’ with offshore bank accounts (FBAR penalties) and other criminal tax matters.
In 2010 the Internal Revenue Manual was amended and in 2014, Treasury Regulations were issued that made clear that the IRS did not consider criminal penalties under Title 18 (Crimes and Criminal Procedure) or Title 31 (Money and Finance) collected proceeds and therefore, it would not pay an award on “collected proceeds” from penalties collected under laws other than the Internal Revenue Code.
In the recently decided case of Whistleblower 21276-13W, Petitioner v. Commissioner, 147 TC No. 4 (August 3, 2016), the United States Tax Court had no trouble in deciding that a whistleblower was entitled to an award based upon a criminal penalty and civil forfeiture that might be imposed outside the Internal Revenue Code (i.e. Title 26). The court determined that Congress did not intend to limit a whistleblower award should the IRS pursue an action, even if it amounted to a penalty which was not ultimately paid to the IRS.
Again, the actions of the IRS will dictate whether it supports the Tax Whistleblower Program. The IRS now has court authority (i.e. precedent) to support paying individuals that provide information to the IRS with respect to money laundering crimes, offshore bank accounts, etc. Will the IRS appeal the recent court’s decision? If the IRS intends to appeal the decision, it must file a Notice of Appeal within 90 days after the decision is entered.
Actions speak louder than words. Therefore, if the IRS does appeal the Court’s decision, Congress and the American public will be told loud and clear that the IRS does not support the Tax Whistleblower program. As a result, whistleblowers will be alerted as to whether their pending claims will be treated fairly or whether the IRS intends to continue to minimize a whistleblower’s reward.