Are you Protected from Whistle blowers?
By Asher Rubinstein, Esq.
New laws are generous to whistle blowers, who are now incentivized to turn you in, in return for a payout. 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.
Recent examples directly relevant to our legal practice highlight the power of whistle blowers. First, the recent IRS success against UBS and the significant erosion of Swiss banking secrecy would not have come about without Bradley Birkenfeld, a UBS banker turned whistle blower, who came forward and exposed internal UBS policies and practices that were designed to facilitate non-reporting of offshore assets by US taxpayers. Although Birkenfeld is currently in jail because of his own role in facilitating tax fraud, he stands to reap millions of dollars as a result of the nearly $1 billion paid by UBS to the government when it admitted its role in aiding offshore tax fraud.
In addition, bank employees have stolen internal banking documents from HSBC and LGT Bank in Liechtenstein, and have sold this information to foreign tax authorities, resulting in tax fraud investigations and prosecutions in the US, Germany, UK and other countries.
As we wrote a year ago:
Taxpayers are not only at risk of discovery by the IRS; they face an increased danger of being turned in by private informants seeking recently enlarged rewards. . . . Foreign tax haven banks offer an opportunity for underpaid employees to get rich by becoming IRS informants. Additionally, taxpayers are at risk of being turned in by ex-partners, ex-spouses, ex-companions, ex-employees, litigation/arbitration adversaries, estranged children, or anyone else with a grudge who senses an opportunity to get even and get a reward.
The threat of whistle blowers is not limited to the offshore realm. If you have a non-compliant foreign bank account, it is vulnerable to a bank employee giving bank account information to the IRS, or to a foreign tax authority which later shares information with the IRS. The tax authorities of various governments all cooperate with each other. For instance, the German government shared the LGT information with multiple governments as far as India and New Zealand. But whistle blowers may also pose a threat much closer to home.
When should you be concerned? 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.
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, a whistle blower or creditor would not be able to threaten to report you.
- 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.
We must acknowledge the good that some whistle blowers do. When corporate abuses and criminals are brought to the attention of authorities, we all benefit. Yet when “telling the government on you” becomes a tactic for harassment or blackmail, we must stand up to the threat by rectifying any non-compliance, eliminating the threat and protecting assets from further vulnerability.