Is the IRS retaliating against its own whistleblower?

As found in this article in the Washington Post, the IRS is facing questions as to whether it is retaliating against one of its own attorneys whom allegedly blew the whistle on how the IRS failed to identify "a multibillion-dollar corporate tax credit scheme involving a source of energy informally known as black liquor."

According to the Washington Post, William Henck, an attorney working inside the IRS Office of Chief Counsel for over 26 years, (see the powerline blog for a first person account by Mr. Henck) publically questioned the IRS' policy on refundable biofuels tax credits designed to foster new technologies but were being used by paper companies to receive huge refunds for burning pulp byproducts (known as "black liquor") since the 1930s.  See Washington Post article that quotes Henck.

The latest article and Henck's own account reflect the IRS auditing the Henck's returns and the IRS placing Henck's status at the IRS in limbo with the IRS and Treasury Inspector General's (TIGTA) office failing to properly investigate whether Henck committed any wrongdoing.

This account by an insider at the IRS raises serious questions about the IRS' commitment to investigate tax fraud even when reported by an attorney among its ranks.  It echoes an account by Jane Kim, a 10 year veteran chief counsel attorney in the Small Business/Self Employed Division outlining abuse at the IRS which resulted in tax cheats getting away without paying their taxes.  See this Tax Analysts' article.

This story also raises questions how committed the IRS is to investigate claims raised by whistleblowers under its Tax Whistleblower Program.  Despite Lee Martin's (Director of the IRS Whistleblower Office) statements to the contrary (see this blog on statements made by Lee Martin during Tax Whistleblower Bar call), this account can and may already have a chilling effect on the number and quality of submissions to the Whistleblower Office.

Nonetheless, if you know of tax fraud or tax violations committed by an individual or a corporation, and wish to report the violations to the IRS, contact us to prepare your tax whistleblower claim.  The IRS pays between 15-30% of the collected proceeds (tax, penalties, interest and additional amounts) for specific and credible information the IRS uses to prosecute the alleged tax violators.

National Whistleblower Appreciation Day

FOR MORE INFORMATION, CONTACT:
Paul Lyons
National Whistleblower Center
(202) 759-0178
p.lyons@whistleblowers.org
http://www.whistleblowers.org

For Immediate Release

Whistleblower Day Celebrated by U.S. Senate and Three Federal Agencies

Washington, D.C. July 29, 2016.  The National Whistleblower Center commends the Council of the Inspectors General for Integrity and Efficiency, the Office of Special Counsel and the Occupational Safety and Health Administration for being the first three federal executive agencies to recognize National Whistleblower Appreciation Day.  The Agencies plan to hold a joint event at the Capital Hill Visitors Center on August 1, 2016, at 1pm.

In 2011 the NWC Executive Director uncovered the history of America's first whistleblowers. (see NYT Column, "The Whistleblowers of 1777"). Ten sailors and marines blew the whistle on misconduct committed by the first Commodore of the U.S. Navy, eventually triggering the Continental Congress to pass America’s first whistleblower law on July 30, 1778.

Whistleblower Day commemorates the actions taken by our Founding Fathers.  The U.S. Senate unanimously recognized July 30th as National Whistleblower Appreciation Day, and urged all federal agencies to commemorate this day. 

In a statement issued today, the NWC Executive Director, Stephen M. Kohn stated:

"The Council of IGs, the OSC and OSHA have taken an important first step in publicly recognizing the contributions of whistleblowers.  We strongly urge every federal agency to follow this lead.   We need to change the culture that views whistleblowers as the enemy.  Our Founding Fathers got it right when they fully supported the first whistleblowers who exposed misconduct, even when their disclosures occurred during time of war.

"We urge Congress to immediately pass pending legislation to close dangerous loopholes in whistleblower protection, including the FBI Whistleblower Protection Enhancement Act and the Whistleblower Augmented Reward and Nonretaliation Act (H4619 & S2591).

"Whistleblower Day is a time for all Americans to reflect on the contributions and sacrifices whistleblowers have made, and to TAKE ACTION to support whistleblowers.”   

 Related links:

National Whistleblower Day website
"The Whistleblowers of 1777" New York Times column
The full story of “The Whistleblowers of 1777 was first published in the The Whistleblower’s Handbook

Facebook and its Transfer Pricing Issues

In addition to Google having European leaders questioning the validity of its transfer pricing models and shifting profits from France, Facebook is also having IRS inquiries about its transfer pricing practices.

As noted in this Reuters' article, the IRS is looking at whether Facebook transferred its intangibles to its Irish subsidiary at too low of a price.  As stated in the Reuter's article, by raising the transfer price of the intangible to the Irish subsidiary, Facebook could have increased taxable profits in the US. The article quotes the complaint which alleges that Facebook may have understated the intangible by billions of dollars.  Facebook was advised in the transaction by Ernst & Young.

Recent news also indicated that Facebook has hired Baker & McKenzie to fight the IRS in this transfer pricing dispute.  As you will recall, Baker & McKenzie just won a major victory against the IRS in the Medtronic case.

In Medtronic, IRS challenged the profit split calculation paid to Medtronic's Puerto Rican subsidiary, by stating that the Puerto Rican subsidiary was nothing more than a contract manufacturer for Medtronic.  Medtronic claimed that its Puerto Rican subsidiary was instrumental in its efforts because it oversaw the quality of Medtronic's products.  The Court determined that IRS's method (valuing the Puerto Rican subsidiary as solely a contract manufacturer) was arbitrary and capricious and therefore IRS abused its discretion. However, the Court didn't stop there, it also stated that Medtronic's proposed model was a better approach (Medtronic chose a comparable transaction involving a competitor and argued that it was actually due a refund), but adjusted the model to better match Medtronic's business.  The Court ended up with the rate the parties had previously agreed to in prior settlements of their transfer pricing dispute.  See these articles: Wall Street Journal and BNA.

While it is refreshing to see that the IRS is challenging US Multinational Corporations at their use of transfer pricing, the question remains whether these challenges will be upheld.  See prior blogs regarding transfer pricing, inversions and earnings stripping.

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.