This week, in an annual report to the US Congress, the IRS announced that last year it paid out 122 whistleblower awards totaling $53 million. That is an average award of nearly $435,000.
People are thus incentivized to “blow the whistle” and report to the IRS the alleged tax misdeeds of other people. The report to Congress also revealed that the IRS received 9,268 whistleblower claims last year. Whistleblowers are not only motivated by the financial awards, but also to “get even” with their adversaries, whether former business partners, spouses, employers and the like.
The IRS is authorized by law (Section 7623 of the Internal Revenue Code, the “Informant Claims Program”) to reward whistle blowers who report tax violators. If the information provided by the whistle blower is used by the IRS, the whistle blower may receive up to 30 percent of the additional tax, penalty and other amounts collected by the IRS. In addition, the identity of the whistle blower is protected by the IRS (at least until the whistle blower becomes a necessary witness in a tax prosecution). Reports to the IRS can also be made anonymously.
In addition, under Section 922(a) of the new Dodd-Frank Act, whistle blowers are now empowered to report information to the SEC. If the whistle blower report leads to enforcement action resulting in sanctions greater than $1 million, the whistle blower may receive a payment of 10 to 30 percent of the sanctions.
Why should you care?
As we wrote, if threats exists from, e.g., a spouse, business associate, employee, etc. who may feel motivated to contact a government authority such as the IRS or SEC, and share potentially damaging information about you, your business, your assets or your finances, you should take preemptive action to mitigate the potential consequences. An asset management attorney can help avoid these problems.
What can you do? Make sure your house is in order.
- Run a self-tax audit. Is there reason to go back and alter past tax returns to disclose previously unreported income, foreign accounts, improper deductions taken, etc.? Should you file tax forms or reports that should have been filed but were not, e.g., for involvement in foreign accounts, ownership of foreign trusts or offshore corporations? Preemptively addressing these issues before they are brought to the attention of the IRS could result in lower fines and penalties and avoidance of criminal prosecution. As we have long-counseled, any of these threats – – whether from weakening bank secrecy laws, exchange of information by governments, from renegade bank employees, or an angry business partner or former spouse – – are harmless if you are tax-compliant. Correcting past tax non-compliance would serve multiple purposes: make good with the IRS, lower potential penalties and punishment, and eliminate the tax blackmail card that a nasty creditor might play. If you bring your tax matters into compliance, the threat of a whistle blower or creditor would be pre-emptively mitigated.
- Protect your assets. Don’t leave your assets exposed to potential claimants and litigants. Protect your assets proactively, before legal action against you, rather than defensively, in response to an action already commenced, when your asset protection options may be limited.
A second reason why whistle blowers may impact you is if you have any unreported assets offshore, whether bank accounts, real estate, business interests or interests in foreign trusts or other foreign entities. As we have written before, many foreign accounts have been exposed by bank employees within the banks themselves, who have, in multiple cases over the past few years, stolen internal bank information and handed that bank information over to foreign governments. In many cases, governments pay millions of euros for that information. Those governments then use that information for tax investigations and prosecutions, and also share that information with other foreign governments.
As reported in the Wall Street Journal this week, speaking about the arrests of three Cayman investment advisors who were charged with facilitating tax fraud by Americans, “an official at the Justice Department said the sting should serve as a warning about offshore accounts. ‘The Cayman case illustrates that we have ways of getting information that people don’t know about’ . . . the Government receives account information from many sources, including whistleblowers hoping for monetary rewards.’” (Wall Street Journal, April 4-5, 2014, “The Next Offshore Target”)
It might be said that the entire unraveling of Swiss banking secrecy over the past few years can be attributed to a single causative event: UBS employee Bradley Birkenfeld coming forward to the US Government and revealing how UBS lured wealthy American clients to open accounts at UBS in Switzerland and how UBS then advised the clients on how to keep the accounts secret from the IRS, and how the bank earned high fees for managing the accounts. So began DOJ’s civil and criminal cases against UBS, UBS paying $780 million in penalties, and UBS revealing the names of some 5,000 Americans with non-compliant accounts at UBS. Dozens of these Americans have since been criminally prosecuted for tax fraud. Birkenfeld’s whistleblower award was $104 million. He went to jail for thirty one months, but only Birkenfeld can decide whether those months were worth $104 million.
If you have unreported foreign assets, you must address your risk of being revealed to the IRS by a whistleblower. Contact us for a confidential consultation.
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