Bramwell’s Lunch Beat: Whistleblowers Get Rewarded by IRS

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AccountingWEB
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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.]

Quick Links:

  • Happy 10th birthday to the computerized CPA Exam! (Going Concern)
  • Lawmakers move to revive tax incentives (The Hill)
  • UK savings ratio set to double under new EU accounting rules (Reuters)
  • Tax roundup, 4/7/14: Where’s my K-1? And why you should e-file that extension (Tax Update)
  • Tesla, taxes, and free-market hypocrisy (Forbes)
  • Not ready to file your taxes? Don’t stress out, file for extension (Forbes)
  • Tax-smart billionaires who work for $1 (Forbes)
  • One big step for tax reform (US News and World Report)
  • Why did your taxes jump so much this year? (Motley Fool)
  • How to tell if a merger rumor will come true (Quartz)
  • Tax preparers ready for a rush (Galesburg [IL] Register-Mail)
  • Savings bonds are giving me a tax headache (Fox Business)
  • Millions illogically dawdle until end to file for tax refunds (ABC News)
  • 3 popular refundable tax credits: Are they worth it? (Don’t Mess With Taxes)
  • Energy efficient home improvement tax break might be back (Don’t Mess With Taxes)

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Oh, I should add, unless you like dealing with a double-dealing black-hole of an organization, avoid the WB program like the plague. Unless you are one if the lotto-winner scarce recipients of an award, getting involved usually brings nothing but headaches and trouble at work.

The IRS Whistleblower program is moribund. It would almost be more productive to submit a WB tip into a black hole.

The IRS complains about a shortage of personnel resources but instead of leveraging WB's tips, it instead handicaps this potential source through sluggishness, incompetence and disincentivising policies.

If good enforcement is efficient enforcement, then why does the IRS systematically disincentivize one of the largest potential sources of information that will help them target large scale tax cheats?

Doing the right thing is essential to the orderly operation of a free and law-abiding society. Studies repeatedly show most white collar fraud investigations start with a WB's tip.

However, WB's can be forgiven for not martyring themselves and risking their family's well-being in an attempt to help law-enforcement, especially when there are so many WB's broken via fraudster retaliation and few properly functioning retaliation remedies, recoveries, or rewards nowadays through law (excepting for FCA qui tam relators) or tax enforcement bodies.

No potential WB who's seen what has happened to those who blew the whistle before can be blamed for deciding it is better to hang one's head and move on than to try and right a wrong. There are just too many disincentives, enforcement-fails, or corrupted initiatives (like the IRS WB program, which with every annual report to Congress, increasingly reveals itself as a pernicious pretentious charade.)

I am probably the poster child of what Sen. Grassley has feared coming to pass: The IRS WB initiative dying the death of a thousand disincentivising cuts by driving off that it was established to leverage.

Potential WB’s, like myself, who have taken an analytical wait and see approach to the development of the IRS’ WB program, can not be encouraged by the WBO’s 2013 Report (which itself runs less than 30 pages, a vast portion of which is copy/paste from last year’s report, is still wonderfully opaque and took 6 months to produce – talk about a prime indicator of the lack of vigor, attention and priority given to this program.)

Suffering retaliation from my employer, damage to my career and professional relationships, and my family’s well-being, by trying to prevent my management from perpetrating fraud, with no subsequent remedy available (as under FCA), has made me loath (translation: afraid) to approach the WB office given their track-record and that the IRS Chief Counsel’s proposed reward regulations seem to codify a game rigged against an expansive view of calculating WB rewards (and to add insult to injury, the IRS claws back massive portions of any long-delayed and scrupulously minimized rewards by deducting a Sequester Surcharge of 7.2% and then taxes the remainder at ~30%).

Anybody who has ever had a conversation with the WBO like I had, would be forgiven for thinking they had called into an ADD-affected college surf or pizza shop for the lack of professionalism and knowledge displayed by the folks that I spoke to. (This in severe contrast to my previous calls into competent helpful folks at the IRS’ general 800-number.)

(Continued)

Part 3/3)

The WB system as it is is being abused and frustrated by the IRS culture from top to bottom and from input thru output. What kind of committed and competent enterprise fails to pick low-hanging fruit (or foes) but just leaves it to rot? This is the result when the IRS closes WB files because of "lack of resources" or "too short statute of limitations" (despite having policies to extend the SOL with the TP's consent.

What should be a closed-loop virtuous cycle resulting in more and better WB submissions and less tax scofflawism, begins and ends with strong anti-retaliation remedies, fat incentives, seamless communication and expeditiously competent processing of WB’s tips, not the polar-opposite approach in use today.

Whether the current situation is mostly due to bureaucratic sluggishness, institutional enmity, leadership malfeasance, incompetence, overwork, or congressional neglect is hard to say, but each of these disincentives are in play and being placed before WB’s by both the IRS AND the Congress.

Unless real reforms and further optimizations of the protections, rewards and procedures relating to the Service’s WB program are (again) forced upon it by Congress, nothing will change in terms of IRS commitment and involvement or in terms of recovery and deterrence.

Until something drastically changes, nothing can change for citizens such as myself that see the personal risks as too great to come forward. I am very disappointed in my government's administrative and legislative branches for practicing bait-and-switch and demolition via neglect respectively.

The failure of the WBO program (and this points directly to the dolts, where found and as appropriate, in the Commissioner’s Office, the Chief Counsel’s Office, the WB Office and the rest of the IRS’ bureaucracy in general) well reflects my mashed-up adage of:

“He who knows the price of everything but the value of nothing,
Is destined to be both penny-wise and pound foolish”

This is the ethic that has killed the IRS WB Program.

Thanks and regards,
the erstwhile hopeful IRS whistleblower,
FCA Aficionado

Part 2)

Despite the departures of former Chief Counsel Korb (who famously said “The IRS didn’t ask for these rules; they were forced on it by the Congress”), former Commissioner Schulman and former Director of Enforcement and disgraced Commissioner Miller, it is hard to see any kind of sea change in the institutional resistance or the bureaucrats' apparent viewpoint that, sans whistleblowers, they already possess all the tools necessary (and given infinite time) to find all non-compliances.

Despite the ascension of self-avowed "whistleblower fan" Koskinen to the Commissioner's chair, is difficult to detect new institutional enthusiasm for, or a desire to cooperate with, a resource that solely benefits the public fisc. Rather, it feels as if slow-walking and deliberate barriers are intended to discourage that resource from embarrassing the Service by reminding the public that some frauds are not possible to discover, contour or prosecute without the help of a WB.

Even that grand old man, the congressional patron of WB’s everywhere, Sen. Grassley, released a very mild statement on the WBO's lackluster 2013 report. It seems as if the Service (in a strategy of frustration, fatigue and waiting-out biological inevitability, or maybe just plain bungling and dumb luck) has finally bested this old warhorse and he is giving up.

Much rhetoric is devoted to the importance of the WB programs, but over the last 4 years, there are so few successes and no real actions to optimize legislation to improve protections and incentives and to remove barriers. Sure, Sen. G. has coerced commitments from IRS honchos by putting holds on nominees, but such tactual action is non-sustainable opportunism and can't replace strong strategic legislation. (Nor does it obviate the growing impression that the Service is engaged in a form of malicious compliance while the Congress has run out of gas.)

Suggestions for Improvement:
1. Anti-retaliation remedy for any WB making a new submission to the WBO. As under FCA allow WB to be made whole if WB acted in good faith to prevent fraud and suffered as a result of this (regardless of whether there are collected proceeds). Don’t subject this provision to a shorter statute of limitations than the crime it is related to.
2. Force the Service to utilize an expansive reward compensation and Related Proceeds calculation scheme, rather than the stingy and disincentivizing scheme that seems sure to drop any day now;
3. Communications outreach plan? From the organization that seems so adept at hiding its lamp under a bushel? (Go to the IRS’ homepage, where is the link to the WBO?). Best communications outreach are strong protections and incentives for potential WB’s as well as delivering on these in a very generous and timely way. Good would be for Mr. Whitlock to start by hanging out his shingle on the IRS’s homepage (as per SEC’s example) and 1040′s, and to robustly declare the WBO as “Open For Business”;
4. Fix the code to:
a) index all penalties for inflation (effective back to the date the penalty was enacted);
b) increase the penalty for tax fraud from 75%, to parallel the civil treble damage fines used under the FCA;
c) require the Service to amend WBO submission Form 211 to incorporate by reference the responsibility for each WB (and counsel) to be bound by the obligations of the Service’s 6103(n) non-disclosure agreement. Revise the “infrequent and unusual” language from the JCT to authorize “frequent and normal”, to eliminate this as a justification by the IRS for avoiding using 6103(n) NDA’s, and promote “frequent, normal and expected” as the IRS’ new rules for WB engagement;
d) make deep engagement and utilization of the WB in investigations a part of each IRS employee’s compensation package.
e) revise the tax code to name and shame those brought to justice as a result of a WB’s input. Such action should not be reserved to only those tax scofflaws who have been brought to justice under criminal statutes. Downstream benefits: 1) tax-fraudster deterrence, 2) WB encouragement, and 3) Improved WBO annual report due to less aggregation of data);
f) building on e) above, require the WBO to write a synopsis of each recovery due to a WB tip and release these as a press release, then include these in a case-study manual for potential WB’s, such that individuals can be made aware of how schemes are perpetrated be in the lookout for such activity;
g) limit the Service’s discretion for reducing or eliminating fines, fees, penalties and interest for tax scofflaws brought to justice due to a WB’s input;
h) revise the Victims of Crime statutes to allow WB’s a share of all fines, recoveries, restitution ordered due to a criminal prosecution in conjunction with a WB’s input;
i) revise IRC to eliminate taxation of WB rewards (if we want to encourage a universal ethic that whistleblowing is socially beneficial, eliminating this 30% hit should apply to all government-sanctioned WB rewards.);
j) enact legislation exempting WB rewards from the 7.2% Sequester Surcharge.

(Continued)