Whistleblower Law Blog
Topic: Tax Fraud
New York continued to crack down on tax cheats under its strengthened False Claims Act (FCA), awarding a whistleblower more than $300,000 for reporting an out-of-state retailer’s failure to collect sales tax on high-end appliances it delivered to New York customers.
A U.S. Tax Court judge on Tuesday allowed three whistleblowers to hide their identities in court for reasons that ranged from death threats to a fear of professional ostracism.
The rulings by Judge Diane L. Kroupa appear to be the the first decisions publicly reached under the Tax Court’s Rule 345, which in 2012 established a formal procedure for tax whistleblowers to request anonymity.
What can whistleblowers do when the IRS Whistleblower Office denies them an award for helping the government to recover money from a suspected tax cheat?
They can do what Albert G. Hill, III, did — challenge the denial in tax court.
But such challenges are difficult without access to information that the IRS used to deny the award in its often-opaque decision process. In Mr. Hill’s case, the IRS took a common — yet extreme — position on taxpayer confidentiality, refusing to allow Mr. Hill to review documents from the administrative file of the taxpayer he had targeted.
This week the U.S. Tax Court ordered the IRS to hand over the documents under strict conditions — and, in doing so, provided a sensible model for how such appeals should be handled.
In an unusually blunt opinion, the U.S. Tax Court rebuked the Internal Revenue Service for continuing to fight award claims made by two anonymous whistleblowers — even as the agency was reopening the same claims in a related investigation.
In a dismissal order issued on May 10, 2013, Judge Maurice Foley slammed the IRS for providing “incomplete, misleading, and possibly inaccurate information” in the case.
President Obama’s proposed budget for fiscal 2014 includes good news for whistleblowers: Under his plan, the law finally would protect people who report tax cheats to the U.S. Internal Revenue Service (IRS).
A well-known New York City tailor pled guilty to tax-evasion charges and separately agreed to pay $5.5 million to settle a related whistleblower case brought under New York State’s False Claims Act (FCA).
The whistleblower, Vijay Tharwani, a former employee of the tailor, will receive $1.1 million of the settlement.
The case marked the first time the state’s recently strengthened FCA has been used successfully in a tax case; in 2010, New York became the first state to authorize citizens to sue tax cheats on its behalf.
On February 5, 2013, D.C. Councilmember Mary M. Cheh (D-Ward 3) presented the “False Claims Act of 2013” to the Committees on Finance and Revenue. This bill would extend the current False Claims Act which fails to apply to violations of the tax code.
The False Claims Act of 2013 would enable whistleblowers to receive a reward for providing the District with non-public information that assists the District of Columbia in collecting tax funds that it is owed. Under the proposed law, tax fraud whistleblowers would be eligible for a reward only if the D.C. Government succeeding in recovering the owed tax payments.
The propose law would allow the government and whistleblowers to file a tax-based claim under the False Claims Act if the tax fraud in question exceeded $350,000 and if the entity or taxpayer has an income in excess of $1 million.
The introduction of this bill in D.C. is significant as is part of a broader trend of states and local jurisdictions considering extensions of local whistleblower statutes. If D.C. passes this bill, it would join the State of New York, which recently passed a False Claims Act statue allowing qui tam recoveries for those who report significant tax fraud.
The Employment Law Group® law firm regularly represents IRS, SEC, and CFTC whistleblowers. Our whistleblower lawyers recently published an article, “Rewarding Whistleblowers for Disclosing Tax Violations to the IRS” for The CPA Journal.
On December 8, 2011, the United States Tax Court issued an opinion in Whistleblower v. Commissioner of Internal Revenue granting an IRS whistleblower’s motion for a protective order permitting the whistleblower to maintain his or her anonymity. The court stated:
We conclude that granting [the whistleblower’s] request for anonymity strikes a reasonable balance between [the whistlebower’s] privacy interests as a confidential informant and the relevant social interest, taking into account the nature and severity of the asserted harm from revealing [the whistleblower’s] identity and relatively weak public interest in knowing [the whistleblower’s] identity.
The U.S. Tax Court also discussed the long history of granting anonymity to whistleblowers, including the Second Circuit’s discussion of the informer anonymity privilege in Socialist Workers Party v. Attorney General (In re United States) as:
… an ancient doctrine with its roots in the English common law, founded upon the proposition that an informer may well suffer adverse effects from the disclosure of his identity. Illustrations of how physical harm may befall one who informs can be found in the reported cases. However, the likelihood of physical reprisal is not a prerequisite to the invocation of the privilege. Often, retaliation may be expected to take more subtle forms such as economic duress, blacklisting or social ostracism. The possibility that reprisals of some sort may occur constitutes nonetheless a strong deterrent to the wholehearted cooperation of the citizenry which is a requisite of effective law enforcement.
Courts have long recognized, therefore, that, to insure cooperation, the fear of reprisal must be removed and the most effective protection from retaliation is the anonymity of the informer.
Internal quotations and citations omitted. In the Tax Court’s first decision regarding anonymous whistleblower claims, the court ruled in favor of the anonymous whistleblower and established an important precedent for those future whistleblowers who expose their employer’s tax fraud.
- Tax Court Protects Anonymity of Whistleblower 14106-10W (forbes.com)
- Study Finds That Three-Quarter of Americans Would Blow the Whistle on Wrongdoing in the Workplace (employmentlawgroupblog.com)
- SEC Reports 334 Whistleblower Tips and 170 Enforcement Orders in First Seven Weeks of Whistleblower Award Program (employmentlawgroupblog.com)
- IRS Wants You To Report Abusive Tax Promotions Or Preparers (forbes.com)
The Internal Revenue Service (IRS) recently issued new rules that now permit whistleblowers to be rewarded for reporting a company’s illegal tax scheme that leads to ill-gotten tax refunds or credits. Under the IRS’s whistleblower program, whistleblowers can be rewarded up to 30% of the funds recouped in return for reporting tax fraud.
In today’s Wall Street Journal article titled “Whistleblower Bounties Pose Challenges,” Jason Zuckerman, a principal at The Employment Law Group® law firm, states that the IRS “needs to be more responsive” to whistleblowers claims. Zuckerman is referring to the IRS whistleblower program under which whistleblowers who report tax fraud can obtain a reward of up to 30 percent of any taxes collected as a result. While the IRS’s whistleblower program has been largely touted as a success at generating quality leads, the IRS has yet to reward any of the hundreds of whistleblowers who provided the agency with the information