Bramwell’s Lunch Beat: Whistleblowers Get Rewarded by IRS

Where to find the web’s forensic accountants
Two websites, one of which also runs an exchange-traded fund (ETF), are designed to highlight companies’ hidden accounting strengths and weaknesses, Mike Hogan of Barron’s wrote on April 5.

The first is New Constructs, founded by David Trainer, an investment strategist who's on the investors technical advisory committee of the Financial Accounting Standards Board (FASB). The site provides an all-around long/short investing/trading advisory service, whose recommendations are based on forensic accounting of the 3,000 US-listed companies it covers. Its analysts dig through reams of mostly mind-numbing US Securities and Exchange Commission (SEC) filings and comb the Internet, seeking telling details sometimes hiding in plain sight, according to Hogan.

The second tracker of financials for the little guys is the Forensic Accounting ETF (FLAG), which offers investors an opportunity to make multiple long bets in one trade. It's one of a growing number of not-quite-active ETFs whose investing strategy is captured by an index – in this case, the Del Vecchio Earnings Quality Index, the article stated.

Index creator John Del Vecchio is a long-time forensic accountant and heads Index Deletion Strategies, a specialized research firm focused on financial statement analysis. He's also the author of a book, What's Behind the Numbers? Forensic Accounting buys shares of S&P 500 companies with high-quality earnings, while avoiding those with aggressive revenue recognition practices.

IRS doles out $53M to whistleblowers in 2013
The IRS last year paid out more than $53 million to whistleblowers who turned in friends, family, and coworkers, Christopher Doering of the USA Today reported on April 5.

In its annual report to Congress, the IRS said public tips led the agency to collect $367 million from people committing tax fraud, with just under 15 percent of that amount awarded back to whistleblowers. The report said the IRS doled out 122 awards during fiscal year 2013, according to the article.

The amount of money the agency annually gives to whistleblowers fluctuates depending on how much it collects. In 2012, the IRS paid out $125 million, but the year before it only doled out $8 million.

The IRS report said it received 9,268 whistleblower claims last year, up from 9,239 in 2012.

Caterpillar likely to face closer IRS scrutiny
James R. Haggerty of the Wall Street Journal reported yesterday that, according to some tax experts, Caterpillar Inc. is likely to face tougher scrutiny from the IRS after being grilled over its tax strategies during a Senate Permanent Subcommittee on Investigations hearing last week.

The subcommittee's nine-month investigation – involving examination of more than 150,000 documents and interviews with executives from Caterpillar and its tax adviser PricewaterhouseCoopers LLP – unearthed information not previously available to the IRS, according to Haggerty. As a result, said J. Richard Harvey Jr., a professor at Villanova University School of Law and a former US Treasury tax official, “I would hope that the IRS would circle back and take a look.”

According to the article, the tax strategy centered on reducing US taxes on the company's lucrative sales of replacement parts for excavators, bulldozers, and other machines outside the United States. Until 1999, Caterpillar's US operations bought CAT-branded parts from outside suppliers and sold them to a Swiss subsidiary, which then sold them to dealers. Starting in 1999, a newly created Swiss subsidiary, known as CSARL, bought the parts directly from the outside suppliers, removing Caterpillar US from the transaction and slashing US tax liabilities.

Reuven S. Avi-Yonah, a University of Michigan law professor who testified at the hearing, said in an interview afterward that the IRS could insist that CSARL pay higher royalties to Caterpillar US, among other possibilities. Those royalties are subject to US income taxes.

Lawsky said to probe Credit Suisse role in tax evasion
New York’s top banking regulator is investigating whether Credit Suisse Group AG’s private banking practices resulted in the evasion of state taxes, according to a person with knowledge of the matter, Greg Farrell of Bloomberg reported today.

Benjamin Lawsky, superintendent of New York’s Department of Financial Services, sent the Zurich-based bank a demand for documents last month, said the person, who asked not to be identified because the probe is confidential, according to Farrell.

Lawsky also petitioned the Senate Permanent Subcommittee on Investigations for material gathered during that panel’s probe of Credit Suisse’s private banking and wealth management business, the person said.

Federal prosecutors have been investigating Credit Suisse’s alleged role in helping Americans evade taxes for three years. The firm is one of about a dozen Swiss banks under criminal investigation by the US Department of Justice.

The subcommittee said in a recent report that 1,800 Credit Suisse employees helped Americans open 22,000 accounts, most of which were hidden from US tax authorities, the article stated. The report criticized the bank for failing to discipline senior executives and the Justice Department for not using all of its legal tools and for failing to get the names of individual account holders.

Tax extenders: The biggest budget buster you’ve never heard of
Steve Warnhoff, legislative director at Citizens for Tax Justice, wrote a blog for The Hill today on how lawmakers are leaving out a few key details from the tax extenders package that would stoke outrage if more Americans knew about them.

“For starters, tax extenders legislation is a package of so-called temporary tax breaks that primarily benefit corporations,” he wrote. “Congress is able to hide the true cost of these tax breaks by renewing them every two years. But the truth is, if allowed to continue indefinitely, these corporate tax breaks will balloon the deficit by $700 billion over the next decade.

“The hypocrisy in this is startling. For the last couple years, Congress has bickered over how much to cut spending to avert an alleged budget crisis,” Warnhoff continued. “Earlier this year, in fact, lawmakers refused to help the long-term unemployed unless the costs were offset somewhere else in the budget. Apparently this principle doesn’t apply to corporations as Congress is poised to enact tax extenders without regard to the deficit.

“Now is the time for Congress to end the hypocrisy,” he added. “If we cannot help the long-term unemployed and still have to live with the automatic spending cuts (sequestration) that were said to be necessary to control the budget deficit, then we also cannot afford deficit-financed corporate tax breaks.”

Hypocritical tax cuts
The editorial board of the New York Times on April 5 was also critical of the tax extenders package, saying that the Senate Finance Committee’s bill that calls for the government to borrow the entire $85 billion cost of the two-year reinstatement is “imprudent” and “hypocritical.”

“But ditching a few blatant or outdated giveaways did not make the proposal fair or sound. Worse, by the time the full committee voted, most of the rejected tax breaks had been restored. The final package is expected to sail through Congress later this year,” the editorial stated.

“When it does, it will stand as a testament to misguided priorities. The cost to reinstate the expired business tax cuts is eight times as much as the cost of the plan currently before Congress to renew federal unemployment benefits. Republicans insist on paying for these benefits, but so far, despite Democratic proposals of offsets, they have opposed resuming them.”

Camp’s turn
According to today’s Politico Morning Tax tipsheet, House Ways and Means Committee Chairman Dave Camp (R-MI) on Tuesday will convene the first in what he promises will be a series of hearing on what to do with the tax extenders. He plans to put the tax breaks through far more scrutiny than the Senate Finance Committee, which last week rubber-stamped a two-year renewal. Politico noted that Camp’s hearings could stretch through spring and into the summer.

[Click here for AccountingWEB’s article on the Senate Finance Committee’s vote to revise most of the 55 tax breaks that expired at the end of 2013.]

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