Historic Win for Tax Whistleblowers

FOR MORE INFORMATION, CONTACT:
Mary Jane Wilmoth
National Whistleblower Center
(202) 342-1903
mjw@whistleblowers.org
http://www.whistleblowers.org

Editorial For Immediate Release

Four-Year Campaign Results In Historic-Win For Tax Whistleblowers

On August 3, 2016 the U.S. Tax Court ruled that tax whistleblowers were entitled to a reward based on monies collected in criminal fines and penalties. This landmark decision reversed the position of the Department of Treasury that severely limited the “collected proceeds” upon which a whistleblower reward could be based.The decision ruled that two anonymous whistleblowers, identified only as Whistleblower 21276-13W and Whistleblower 21277-13W were entitled to a reward of $17,791,607.00, based in part on $54 million obtained in criminal fines and civil forfeitures for which the IRS had illegally claimed were outside the whistleblower reward program.

The decision is the accumulation of four years of advocacy by the NWC, led by its Senior Policy Analyst Dean A. Zerbe and its Executive Director, Stephen M. Kohn, both of whom have actively and effectively represented tax whistleblowers since undertaking the representation of Swiss banker Bradley Birkenfeld in 2009.

Since the rule stripping tax whistleblowers who disclosed evidence of criminal tax violations from obtaining a reward was first announced by the IRS/Dept. of Treasury, the National Whistleblower Center has waged an extensive campaign to reverse this illegal and dangerous ruling. For example:

November 29, 2012: The NWC filed an extensive brief to the IRS strongly urging the Service to reward whistleblowers who exposed criminal tax frauds.
February 19, 2013: The NWC filed an 84-page comment on the proposed IRS whistleblower rules, strongly opposing the criminal disqualification.
April 16, 2013: The NWC testified at the IRS rulemaking hearing opposing the criminal reward disqualification.
June 5, 2014: The NWC provides the Secretary of Treasury with and exhaustive 55 page scholarly article co-authored by Kohn and Zerbe explaining in detail the legal basis as to why the criminal reward disqualification was illegal and should not be approved by the IRS. A copy of this article, published in Tax Notes, is linked here.
Finally, Dean Zerbe and Steve Kohn, through their respective law firms, agreed to work with the legal team representing anonymous whistleblowers 21276/77-13W, in order to ensure that the IRS program properly implemented the whistleblower reward law, and criminal fines and penalties were included in any reward calculation.

The importance of the August 3rd Tax Court ruling, in case 147 T.C. 4, was explained in a June 13, 2014 Action Alert issued by the National Whistleblower Center, calling on the public to strongly oppose the IRS’s plan to block whistleblower rewards, if the tax crimes were so serious as to result in criminal prosecution, and the payment of criminal fines and penalties:

“The Department of Treasury is poised to approve a final rule that will have a devastating impact on the IRS Whistleblower Program. The Treasury Department, along with the IRS office of general counsel, have concocted a rule to exclude whistleblowers from coverage if the violation of law they report is criminally prosecuted. Tax fraud whistleblowers will only receive rewards for information that results in civil or administrative penalties. If a whistleblower has solid evidence of a major fraud that triggers a criminal prosecution, he or she will get nothing.”

“The proposed regulation undermines Congress’s intent that whistleblowers who report tax fraud be protected and rewarded.

This proposed rule, which we have learned is on the verge of final approval, could not have come at a worse time. The IRS and the Justice Department are effectively using the threat of whistleblower disclosures to force international banks to plead guilty to tax fraud violations for illegally harboring non-disclosed offshore accounts. If the proposed rule is approved, the threat that international bankers will become whistleblowers will become toothless.”

What is clear is that the August 3rd landmark ruling, effectively saving the international tax fraud whistleblower program, was the result, in large part, of a long-term campaign of the NWC and its leaders who conducted extensive research into the history and law behind the IRS tax whistleblower program, and thereafter engaged in an extensive public and legal battle to ensure that whistleblowers are fully protected.

This battle is not over. The Department of Treasury can still appeal the Tax Court’s landmark ruling. All Americans who want to hold the millionaires and billionaires who illegally stash an estimated $3 trillion dollars in offshore accounts accountable should join with the National Whistleblower Center in making sure that this key decision is upheld, and that the Department of Treasury change its current regulations to comport with the law.

In addition to the leadership Dean Zerbe and Stephen Kohn gave to this successful campaign, the NWC would also like to thank the whistleblowers who risked all to expose wrongdoing and the attorneys, staff and interns at the NWC who tirelessly worked on this campaign, and the members of the public who strongly supported these efforts.

Related links:

 Tax Court decision in Anonymous Whistleblowers 21276/77-13W, 147 T.C. 4 (August 3, 2016)
Zerbe and Kohn, “The Legality of the IRS’ Proposed Rule,” Tax Notes and Letter to Secretary of Treasury (June 5, 2014).
Sign up to receive updates about the NWC’s Tax Whistleblower Campaign, click here.

Could Congress be Gearing up for Real Tax Reform?

As noted in the Wall Street Journal, the Senate Finance Committee Democrats have named a new co-chief tax counsel.  Victor Fleischer, a law professor with the University of San Diego, was named the new co-chief tax counsel.  FYI, Fleischer is best known for a law review article which examines the taxing of private equity funds, and according to the Wall Street Journal, started the debate on how fund managers are taxed.  See the article here.  The WSJ article names several sources that commented that if Congress does choose to begin true tax reform, this post would be quite influential.

In case you didn't know, fund managers are paid via the "two and twenty" rule meaning that they take a two percent management fee and twenty percent profits interest.  Because the twenty percent profits are considered a partnership interest, the fund managers can convert ordinary income into long-term capital gain income.  What that means for the rest of us is that instead of paying tax as wages (brackets beginning at 0% up to 39.6% for the highest bracket) the fund managers get to pay a reduced tax rate of 20% for long term capital gains.

Does naming Fleischer to this post signal that Congress is serious about implementing tax law changes that will address the Tax Gap and complexity problems of the current code? And whose model will prevail, the Republican nominee (Donald Trump), or the Democratic nominee (Hillary Clinton)?  See previous blog reviewing the two plans.  Or will Congress be proposing a more radical model (i.e. Bernie Sanders' model, or Ted Cruz model)?  Time will tell, but at least Congress (the Democrats) seem to have a plan to address tax reforms by first selecting someone versed in explaining complex tax policies.

If you now someone who is not paying their tax liabilities, or is converting their tax liabilities from ordinary income to capital gains income to reduce their tax liabilities, you should contact us to file a tax whistleblower claim.  The IRS pays between 15-30% of collected proceeds (tax, penalties, interest and additional amounts) for specific and credible used by the IRS in prosecuting tax violators.

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.