Revisiting the Threat from Whistleblowers; Are you Protected?

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.

  1. 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. 
  2. 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.

Please see our related articles:

Theft of HSBC Banking Data Further Exposes Threats to Offshore Banking Secrecy

Renegade Bank Employees Further Erode Offshore Banking Secrecy



The Care and Feeding of Family Limited Partnerships (FLP)

FLPs are complicated structures, and we want you to implement your FLPs properly.  Carelessness and failure to abide by formalities may lead to a creditor undoing, or the IRS challenging, many of the benefits of an FLP.  Thus, we present this reminder to clients who have established FLPs.

Keep accurate records of transactions, investments, sales of property, etc.  Keep these records separately from your personal records.  Keep records of distributions from the FLP to the partners.  The simplest repository of a partnership’s financial records is the partnership’s bank account check register.  It is often most convenient to keep all records in the FLP binder. Continue reading

Expect More Tax Audits, More Aggressive IRS in 2012

Expect More Tax Audits, More Aggressive IRS in 2012
by Asher Rubinstein, Esq.

As I sat down to write this article, I re-read my December 2009 article “Get Ready for a One-Two Punch: More Taxes and More IRS Audits“. I realized that with the exception of adding a few more contemporary examples, the article had already been written. The point of that article – – that the IRS and State tax authorities are both increasing the scrutiny of tax filings and aggressively pursuing taxpayers for deficiencies and penalties – – is just as apparent, if not even stronger, in 2012.

The IRS recently reported that one in eight taxpayers showing more than $1 million in income were audited during 2011. This is the third consecutive year showing an increase in audit rates at this income level (which, I humbly submit, makes my 2009 article rather prescient). The IRS also stated that much of the increase in audits is attributable to its crack down on foreign accounts.

The increase in audits has been picked up in the press. For example,

More IRS Audits Coming Your Way (Forbes, January 12, 2012);

IRS Audits of High Earners Increase Sharply (Wall Street Journal, January 5, 2012)
(noting that the IRS increased field audit rates by 34% between 2010 and 2011 for taxpayers with income exceeding $200,000);

U.S. IRS Audited Record Millionaires in Fiscal ’11 (Bloomberg, January 5, 2012)

What should you do? We repeat the advice we offered previously.

First, work with competent, experienced tax counsel, who utilize proven, tax-compliant strategies.

Second, have tax counsel conduct a “friendly audit” – review your financial activities, bookkeeping and record keeping procedures, and accounting practices to uncover and correct sensitive areas before they are discovered in an IRS audit. Become essentially “audit proof”.

If you are being audited or investigated by the IRS or a state tax authority, hire legal counsel with a proven track record of success against the government. Rubinstein & Rubinstein, LLP has been advocating on behalf of taxpayers for close to twenty years. Our attorneys have extensive experience in the representation of clients before the IRS and before state tax departments. Such representation has included:
“the review and analysis of tax returns and underlying documentation;

  • representation at audits;
  • representation in Voluntary Disclosure initiatives;
  • negotiation of Offers In Compromise, abatements of penalties and/or interest and installment payment plans;
  • protest and/or appeal of determinations of tax deficiency and tax assessments; and removal of tax liens;
  • representation of clients in civil and criminal tax investigations;
  • litigation on behalf of clients before the U.S. Tax Court.

As the Government – – at the federal, state and local levels – – attempts to raise revenue, it calls upon more tax collection and enforcement, and aggressive IRS and state action in pursuit of maximum taxpayer dollars. Against this context, you need tax lawyers who can help you legally and effectively lower your tax bill. And if you are challenged by the IRS or by a state tax authority, you need effective legal counsel to fight back on your behalf.

Please also see the following related articles:

Asher Rubinstein Interviewed by Reuters About Tax Audits

What to do if the IRS Comes Knocking On Your Door

Effectively Representing the Client in a Voluntary Disclosure of a Foreign Account



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