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Archive for the ‘Tax Fraud’ Category

Transfer Pricing Remains a Hot Button Issue

Tuesday, May 21st, 2013

This morning, the Senate released a scathing report regarding Apple’s offshore tax practices.  Among the allegations is that the company, through a complex transfer pricing scheme, kept a disproportionate amount of profits with its Irish subsidiaries, allowing the company to avoid sizeable U.S. tax obligations.  According to the report, from 2009 to 2012, Apple allocated $4 billion in R&D costs to its U.S. unit, which had $38.7 billion in profits, while its Irish subsidiary had $4.9 billion in R&D costs—and $74 billion in profits.

Similar allegations have recently been levied against other large, multinational corporations, such as Amazon, Google, and Starbucks.  In fact, the IRS has long been concerned that foreign-controlled US corporations are potentially “stripping away” profits from the United States through non-arm’s length pricing and potentially “abusive” financing structures.  Consequently, the IRS has designated transfer pricing as a key focus of its international compliance initiatives.  In the past year, the IRS has significantly ramped up its emphasis on transfer pricing enforcement, as it has put together an elite group of transfer pricing specialists to crack down on the unlawful practice.

Transfer pricing is a complex method often used by multinational corporations to lower their tax burdens in the United States. In a typical scenario, a parent company may set up a number of subsidiary companies all over the world and move goods, services, and assets from one to another.  Under Internal Revenue Code (“IRC”) §482, the appropriate transfer price between related parties is that which would have been bargained for and agreed upon but for the fact that the related parties had not been related, also known as an arm’s length transaction.  When choosing a transfer pricing method, a company must select the “best method,” defined as the “one that provides the most reliable measure of an arm’s length result.”  IRC §482.

In an unlawful transfer pricing scheme, however, arm’s length transactions are missing.  Instead, transactions are structured in order to shift profits from high tax countries, like the United States, to low tax countries, like Ireland, to lower their U.S. tax burden.

Pursuant to IRC 6662(e) and 6662(h), for those who violate the rules set forth in §482, there are two types of penalty thresholds which need to be considered; the valuational (transactional) threshold and the net §482 adjustment threshold.  Under §6662(e), if the valuation of any transfer price is 200% greater or 50% or less of an arm’s-length transfer price or if the net §482 adjustment for the particular taxable year exceeds the lesser of $5 million or 10% of the taxpayer’s gross receipts, then the penalty for exceeding the particular threshold is 20%.   Conversely, under §6662(h), if the valuation of any transfer price is 400% greater or 25% or less of an arm’s-length transfer price or if the net 482 adjustment for the particular taxable year exceeds the lesser of $20 million or 20% of the taxpayer’s gross receipts, then the penalty for exceeding the particular threshold is 40%.  Additionally, in cases where no transfer price was charged and/or no transfer pricing report was prepared, then the 40% penalty will generally always apply.

 

If you have knowledge of an unlawful transfer pricing scheme, or any other form of Tax Fraud, and would like to discuss the possibility of a whistleblower award under the IRS Whistleblower Program, please contact our whistleblower attorneys today. Kenney & McCafferty will consult with you about your case, without obligation. All communications with Kenney & McCafferty attorneys regarding your case are confidential and protected by attorney-client privilege.

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IRS Whistleblower Program: Under Attack. Again.

Friday, April 12th, 2013

**UPDATE**

On March 13, 2013, the United States Tax Court issued an order calling for an evidentiary hearing to determine whether Joseph Insigna ever received a determination from the IRS.  Order, Joseph Insigna v. Commissioner of Internal Revenue Service, No. 4609-12W (March 13, 2013).  In his petition to the Court, Insigna argues that, although he has not received a final determination letter from the IRS, his whistleblower claims “have, as a practical matter, been denied, and that he has therefore received a de facto rejection.”

In response, the IRS argues that Tax Court lacks jurisdiction to hear the matter because it has not, in fact, issued a determination on Insigna’s claim.

While both sides seem keen on arguing over whether Tax Court has jurisdiction over a claim in a situation when the IRS unreasonably delays in failing to issue a determination letter, the Order makes clear that the Court does not intend to reach that question unless it must.  Instead, the Court will first focus on whether Insigna did, in fact, receive a determination — even a de facto determination .

Pursuant to the whistleblower statute, Tax Court has jurisdiction only if there has been “any determination regarding an award.”  Id.  To that end, the Court noted that the statute “does not explicitly require a ‘notice’ of a determination, nor a written determination, nor even any communication of a determination.”

The purpose, then, of the evidentiary hearing is to determine whether a de facto determination has, in fact, been made.  To reach that conclusion, the Court will seek to determine “whether the IRS has completed its consideration of petitioner’s claim; what, if anything, the IRS is still doing with regard to petitioner’s claim; and whether the IRS expects to do anything in the future with regard to petitioner’s claim.”  Id.  Notably, the Court states that “[i]f there has been a cessation of administrative action, then a reviewable determination may have been effectively made thereby.” Id.

 

 

A former bank executive recently filed suit against the Internal Revenue Service claiming that the IRS owes him a reward for blowing the whistle.

Joseph A. Insinga filed a claim for an award with the IRS Whistleblower Office in 2007, one year after Congress passed a law establishing the Whistleblower Office.  Under the Tax Relief and Health Care Act of 2006, tax whistleblowers may receive an award ranging from 15% to 30% of the total taxes, penalties, and interest collected by the IRS, with the actual percentage awarded based on an informant’s contribution to the case.

Insinga claims that the IRS collected proceeds from the allegedly fraudulent taxpayers based on information that he provided, but he has yet to receive a response from the IRS regarding an award.  As a result, Insinga filed a claim in the United States Tax Court, claiming the IRS owes him a portion of the proceeds it collected based on his information.

According to his petition, for at least two years, the IRS led him to believe that an award was forthcoming yet, following purported payments by the targeted taxpayers in November 2011, the IRS changed its tune, informing Insigna that his claims “were on life support.”  Moreover, the IRS claimed that there were “other sources” of the information Insigna provided nearly four years earlier. The IRS subsequently informed Insigna that a final decision would be issued soon.  According to Insigna, that statement was made in November 2011.  Following nearly four more months of silence, Insigna filed his petition in or around February 2012.

The news of Insinga’s claim does not come at an opportune time for the IRS, which earlier last week was the subject of a scathing article on Forbes.com, critical of its failure to reward whistleblowers for valuable information.  According to the author, Erika Kelton, an attorney at Phillips & Cohen who represents whistleblowers before the IRS, the problem with the IRS whistleblower program is not the “quality of the whistleblower information that the IRS is receiving” but rather “the IRS itself and institutional resistance to whistleblowers within the IRS.”

In FY 2010 alone, the IRS collected $464.6 million from taxpayers under its whistleblower program, so it is clear that the information is out there.  The problem is that the IRS hands out too few awards, and takes too long to pay them.

It has recently been suggested that the IRS establish a website to monitor the status of its whistleblower claims.  Even if personal data was redacted in accordance with IRS regulations, the website would at least reassure whistleblowers that their claims are being processed.

Whistleblowers should be viewed not as a burden, but rather as a weapon in the fight against fraud.  After all, the False Claims Act recovered over $4 billion in federal funds in FY 2011.  Given that the annual gap between what is owed in taxes and what is paid is approximately $385 billion (and growing), the IRS would be well served to use the tools Congress provided when it established the whistleblower program and follow in the footsteps of the False Claims Act in an effort to eliminate tax fraud and the $385 billion gap.

If you have knowledge of Tax Fraud and would like to discuss the possibility of a whistleblower award under the IRS Whistleblower Program, please contact our whistleblower attorneys today. Kenney & McCafferty will consult with you about your case, without obligation. All communications with Kenney & McCafferty attorneys regarding your case are confidential and protected by attorney-client privilege.

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New York Sues Sprint for $300M Tax Fraud

Tuesday, April 24th, 2012

New York has filed suit against Sprint Nextel for more than $300 million.  Attorney General Eric Schneiderman announced the “first-of-its-kind” lawsuit against the company for “deliberately under-collecting and underpaying millions of dollars in New York state and local taxes on flat-rate access charges for wireless calling plans.”

The complaint alleges underpayments of more than $100 million, costing the State nearly $210,000 per week.

The lawsuit is the first ever tax enforcement action filed under the New York False Claims Act.  Twenty-nine states and the federal government have passed False Claims Acts, but only New York’s Act expressly covers tax fraud.  Under the NYFCA, the Attorney General may seek triple damages, plus penalties and interest.

According to the complaint, beginning in 2005, Sprint, the third-largest U.S. mobile service provider, failed to collect and pay New York sales taxes on an arbitrarily set portion of its revenue from fixed monthly access charges.  The scheme was a part of a nationwide effort by the company to obtain an advantage over its wireless competitors, all of which have complied with the “extremely clear and unambiguous” state tax law, according to Schneiderman.  “Everyone else had no trouble figuring out what the tax law was – except Sprint.”  In executing its fraudulent scheme, Sprint repeatedly and knowingly submitted false records and statements to New York State tax authorities.

“By deliberately evading sales tax, Sprint cost state and local governments over $100 million that could have been used for critical services and much needed resources that our state and its citizens need given the challenging economic times we are in,” said Schneiderman.  The message of our office is clear – tax dodging is not acceptable and we will use every tool in our arsenal to make sure that taxpayers’ money is protected, and that honest businesses and consumers are not placed at a disadvantaged for collecting and paying their fair share of taxes.”

The State’s lawsuit was prompted by a whistleblower complaint from Empire State Ventures.  As whistleblowers, they may be eligible to receive up to twenty-five percent of any money recovered by New York as a result of information they have provided.

In response to the lawsuit, Sprint issued a statement denying the allegations:  “This complaint is without merit and Sprint categorically denies the complaint’s allegations.”

If you have knowledge of Tax Fraud and would like to discuss the possibility of a whistleblower award under the New York False Claims Act or the IRS whistleblower program, please contact our whistleblower attorneys today. Kenney & McCafferty will consult with you about your case, without obligation. All communications with Kenney & McCafferty attorneys regarding your case are confidential and protected by attorney-client privilege.

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K&M Presents Testimony on Whistleblower Program

Wednesday, May 18th, 2011

The IRS Building in Washington, D.C.

Linda Stengle of Kenney & McCafferty, P.C. presented testimony before the IRS on May 11, 2011, on its proposed definition of “collected proceeds.” The definition, if approved, would form the basis of calculating whistleblower awards.

The IRS had four people on a panel to hear the comments. They were Tom Kane, Senior Legal Counsel; Stephen Whitlock, Director of the Whistleblower Office; Alexandra Minkovich, Attorney-Advisor; and Kirsten Witter, Chief of the Service’s Ethics and General Government Law Branch. The panel asked questions of a few presenters, including Stengle. Tom Kane stated that NOLs should be considered to be ordinary deductions and were not relevant to an award calculation. Kane also said there should be no 2 year waiting period imposed in cases involving a closing agreement and that further guidance would be issued with regard to whether whistleblowers can obtain a portion of criminal fines.

Stengle pointed out irregularities in the public comment process ordinarily required when the IRS changes a major regulation. Specifically, the IRS issued its Whistleblower Manual in June 2010 without public comment and narrowed the definition of “collected proceeds.” Senator Grassley, the author of the statute mandating IRS whistleblower awards, criticized the Manual and said that several sections worked to deter whistleblowers from reporting large scale tax underpayment. Stengle echoed Grassley’s request that the manual be held in abeyance while substantive sections undergo public comment.

Four other attorneys presented testimony on the topic. Among other comments, Richard Rubin observed that the proposed rule addressed the inclusion of specific categories of recovery into the definition, but no actual definition for “collected proceeds” exists anywhere in the regulations.

All those who presented stated that the proposed definition for collected proceeds needed to be broadened. The panel members gave no indication of when the IRS plans to publish the final version of the definition.

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Posted in Abusive Tax Shelters, Corporate Tax Fraud, Employment Tax Fraud, Estate Tax Fraud, IRS Whistleblower Office, Money Laundering Tax Fraud, Offshore Accouts Fraud, Tax Fraud, Uncategorized, Whistleblower Protection | Comments Off

Corporate Attorneys and Investigators Represent the Company – Not Whistleblowers

Wednesday, May 4th, 2011

Corporate investigators and attorneys will protect the company. It's their job.

A long time corporate investigator recently shared his concern that whistleblowers look to corporate investigators and attorneys for help and protection when they blow the whistle.  Nothing could be further from the truth.  “There’s nothing I can do,” said the investigator.  “I’ve seen it over and over again.  They are going to get their heads cut off.”

The investigator said he knew that whistleblowers, no matter the merit of their report, would be skillfully and systematically terminated with a substantial paper trail to support management’s actions.

“They look to me for help,” he said.  “I work for the company.  I tell them that, but they don’t seem to understand.”

Neither did CEO Ian Norris of Morgan Crucible Company.  Morgan Crucible came under government investigation for an international price fixing conspiracy.  CEO Norris began a campaign to obstruct a grand jury investigation, and he shared details of his campaign with Morgan Crucible’s attorney.  When the government learned of Norris’s obstruction, it charged Norris with corruptly persuading, and attempting and conspiring to corruptly persuade, others with intent to influence their testimony in grand jury proceedings.  Morgan Crucible waived its attorney client privilege and granted permission for corporate counsel to testify.  Norris fought the testimony, saying the corporate attorney also represented Norris in his individual capacity and was prohibited from testifying. 

The Third Circuit disagreed, but found that communications about scope of representation were ambiguous.  Ultimately, the court ruled that Morgan Crucible, alone, held the right to waive attorney client privilege, and the attorney testified.

The attorney testified that Norris, in front of counsel, disseminated a false cover story and scripts about the price fixing and encouraged everyone, including counsel, to relay the false information to investigators.  The attorney said he did not know the information was false.

Attorneys and investigators should provide employees with explicit explanations about their role in investigating allegations of fraud within a corporation.  They often do not, for a variety of reasons.  Bottom line – employees need to take steps to protect themselves when they report corporate misconduct internally. 

For a free consult about whether you have a potential government fraud claim, call K&M today.

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Posted in Corporate Tax Fraud, Employment Tax Fraud, False Claims Act, Money Laundering Tax Fraud, Offshore Accouts Fraud, retaliation, SEC Whistleblower Program, Tax Fraud, Uncategorized, Whistleblower Protection | Comments Off

Tax Whistleblowers Must File within 30 Days of No Answer Letter

Tuesday, April 26th, 2011

30 Days to File IRS AppealsIn Friedland v Commissioner (T.C. Memo 2011-90), the United States Tax Court dismissed the IRS whistleblower’s appeal because it was not filed within thirty days of the date of the “no answer letter” sent to Friedland by the IRS Whistleblower Office.  The Tax Court reiterated its ruling in Cooper – the “no answer letter” constitutes a final determination of a whistleblower claim.

Murray Friedland, a CPA, reported two corporations for tax violations in September 2009.  On November 13, 2009, the IRS Whistleblower Office sent Friedland a letter explaining that it had reviewed and evaluated the claim and then said that prevailing law prevented it from explaining why a claim would be denied.  Friedland found the letter confusing.  He sent additional information about his claim to the Whistleblower Office, and he called for an explanation.  The WO responded with three letters, one memorializing a conversation in which Friedland was told that he could write to the US Court of Federal Claims.  The letters also confirmed that the WO would not change its determination about Friedland’s claim.

Friedland followed the suggestion of the WO and appealed to the Court of Federal Claims.  The Court of Federal Claims dismissed the appeal on May 26, 2010, because the CFC does not have jurisdiction to hear IRS whistleblower appeals.  On June 18, 2010, Friedland filed an appeal with the Tax Court.

Friedland filed his appeal 217 days after the date of the first letter, the “no answer letter.”  As decided in previous Tax Court rulings, the “no answer letter” is notice of a final determination that the IRS is denying the claim.  Whistleblowers have thirty days from the date of the no answer letter to file their appeals.  Because Friedland filed 217 days after the date of the no answer letter, the Tax Court ruled that it had no jurisdiction over the claim because it was filed too late.

With regard to Friedland’s obvious confusion about the appeal process, the Tax Court said, “We recognize that petitioner may have relied on the erroneous advice of the Whistleblower Office in filing his initial appeal with the Claims Court. . . We sympathize with the petitioner.  We cannot expand our jurisdiction, however, even where the Commissioner provided bad advice.”

Kenney & McCafferty, P.C., has successfully represented IRS whistleblowers, even before the passage of the 2006 whistleblower statute. For knowledgeable and trustworthy representation, contact K&M for a free assessment today.

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IRS Goes Viral?

Thursday, April 14th, 2011

One of many IRS YouTube offerings.

Not exactly, but the IRS has introduced its own YouTube channel, along with an array of audio products to help taxpayers take advantage of tax benefits available in the American Recovery and Reinvestment Act. People can visit the site at www.youtube.com/irsvideos. The IRS YouTube channel caters to people of different backgrounds by offering videos in English, Spanish, and American Sign Language.

One video teaches viewers how to use the IRS Withholding Calculator. The IRS suggests that people who have more than one job or working spouses should especially check their withholding to ensure neither too much nor too little is being withheld. People can use the calculator to help determine if they should make adjustments. Another video of interest discusses the role of an interim appeals office and what taxpayers can expect from that office.

In another attempt to make the tax code more transparent to today’s filers, the IRS has also launched an ITunes podcast site featuring information about ARRA tax credits.

Unfortunately, the IRS tax whistleblower program has not been the subject of a YouTube video, at least not one produced by the IRS. However, interested tax fraud followers can go to YouTube and type in “irs whistleblower.” One of the results listed will be a video of an IRS Whistleblower Conference panel discussion starring K&M’s lead partner Brian Kenney.

Of course, if you would like to learn more about the IRS whistleblower program, there’s no need to look at YouTube at all. Call Kenney & McCafferty at 215-367-4333 for a free consult today.

 

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IRS To Hold Hearing on Definition of Collected Proceeds

Monday, April 4th, 2011

The IRS Should Target Large Corporations for Tax Fraud

The IRS has set May 11, 2011, as the hearing date for public comment on proposed regulations REG-131151-10 on the payment of rewards for whistleblowers. Chief among the areas of interest is the new definition of “collected proceeds.”

The proposed regulations do not make it clear whether corporations alleging a Net Operating Loss that is reduced by whistleblower information would result in an award for the whistleblower. Large corporations routinely rely on highly sophisticated tax experts to help them reduce their cash tax liability. The IRS’s proposed change in definition of “collected proceeds” appears to target individual taxpayers but fails to clearly identify large corporations who evade taxes. Tax underpayment by corporations, not individuals, should be the focus of the IRS. Corporations represent the greatest opportunity to capture much needed tax dollars for the US Treasury. Those blowing the whistle on large corporations should be incentivized to the same extent as those blowing the whistle on an individual taxpayer.

People who want to present oral comments at the hearing must submit a written outline of their comments to the IRS by April 19th. Each speaker will be allotted 10 minutes. The hearing will be held at the Internal Revenue Building at 1111 Constitution Avenue, NW, in Washington, D.C.

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Galileo – History's Greatest Whistleblower?

Tuesday, February 15th, 2011

Galileo faces the Inquisition

February 15, Galileo’s birthday, is a fitting time to reflect upon Galileo’s experience with blowing the whistle on the Ptolemaic theory, the long held belief that the Earth was the center of the universe and that the sun and the planets orbited the Earth. Galileo today is called “the father of modern observational astronomy” and “the father of modern physics.” Stephen Hawking stated, “Galileo, perhaps more than any other single person, was responsible for the birth of modern science.” Most people don’t realize that Galileo was tried by the Inquisition for his advocacy of Copernicanism, found guilty of heresy, and spent the rest of his life under house arrest.

As brilliant he was, Galileo did not understand the environment in which he was operating, and he failed to adhere to rules and constraints placed on those attempting to advance scientific theories in the 1600s. His support of heliocentrism offended the Catholic church. The church admonished Galileo, who thought he would be clever and work around the constraints that had been placed on him. After being chastised, Galileo waited years to publish Dialogue Concerning Two Chief World Systems, but he didn’t follow the rules. To publish, he needed papal permission and formal authorization from the Inquisition. He didn’t get them. Had he followed the rules, Galileo probably could have avoided trial and arrest. Instead, Galileo was:

*   Found “vehemently suspect” of heresy.
*   Sentenced to formal imprisonment, which was later commuted to house arrest.
*   Had his publication, Dialogue, banned.
*   Forbidden to ever publish again.

After his death, the world eventually lauded his contributions, but Galileo died without acclaim and in isolation.

Whistleblowers should learn from Galileo’s mistakes. No matter how brilliant a whistleblower may be, it is impossible for everyone to know everything. There is no substitute for experienced legal advice when one decides to blow the whistle. Galileo originally had many supporters who could have guided him the intricacies of the papacy’s rules for publication. He didn’t ask, and he thought he had the situation well in hand. He was wrong.

If Galileo could not figure out how to maneuver through the intricacies of successfully blowing the whistle, who can? Fortunately, whistleblowers today have Kenney & McCafferty to call for expert advice. Whistleblowers should educate themselves on the pros and cons before blowing the whistle. If you want to report fraud against the government, save yourself some headaches. Get a free consultation by calling Kenney & McCafferty today.

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Get Smart about Whistleblowing – Retaliation is Human Nature

Monday, February 7th, 2011

In 2008 Judith Moldover, Senior Staff Attorney of the Lawyer’s Alliance of New York, stated, “[R]etaliation is human nature.” Moldover made the statement to a group of human resources professionals at a conference sponsored by the Society for Human Resource Management. As one who spent most of her career defending employers, Moldover warned the HR crowd that retaliation claims would increase because there is an almost “irresistible urge to strike back” against employees who complain about problems or who file lawsuits against their employers. Kenney & McCafferty speaks every day to victims of retaliation. Perhaps because retaliation is so ingrained, employees who speak out against fraud, waste, or wrongdoing should expect their bosses to retaliate against them. The only thing employees can do is smarten up. Figure out if you are a likely target of retaliation as early as you can. Assess whether you have a viable whistleblower claim. And, think twice about making any further reports to your boss.

If you believe your boss is genuinely trying to improve the workplace and wants your input, make good faith reports of problems, at least once or twice. Some employers will do the right thing, and some will even be grateful. Many will not. As Moldover points out, no one likes to hear about problems, and most employers would rather hear that their departments or companies are running well than hear a report of non-compliance or a misuse of company funds. Sometimes a whistleblower can assess the workplace environment and get clues about how a particular supervisor will react to reports of fraud, waste, or abuse.

Suppose you make a report. How does your boss react? Does your boss correct the wrongdoer, or give him more support? Does your boss try to blame the problem on you? Does your boss try to diminish your value to the company somehow? Does your boss suddenly give greater weight to petty workplace problems of yours when those were previously tolerated? Does your boss suddenly give you demeaning work assignments? Does your boss allow others to be rude to you? Are your resources taken away, while wrongdoers get more resources? Does your access to the boss decrease? Does the wrongdoer get more access? Is the wrongdoer emboldened somehow? Does your boss suddenly chastise you in ways that never happened before? Are you passed over when it comes time to hand out plum assignments? Signs of retaliation can be subtle or obvious, but when whistleblowers look back, they often realize that they had observed specific small behaviors that indicated they would be punished for their efforts to address fraud. If your boss shows signs of retaliation against you, even in small ways, step back, and assess the situation.

Unfortunately, most whistleblowers are people of high integrity and perhaps undue optimism. They see little, subtle signs of retaliation like those described above, but they don’t want to be involved in covering up fraud, or they just can’t bring themselves to gloss over a co-worker’s misconduct. Sometimes, they just have too much faith that their companies will appreciate their efforts. By the time the hapless whistleblower contacts an attorney, it’s too late. The well meaning, smart, trustworthy supporter of the company has experienced high level retaliation – attacks on reputation, bad performance appraisals, demotion, and perhaps, loss of job. Despite well publicized reporting protections, retaliation can take many forms, and even in serious, obvious cases, it takes a long time to be made whole when an employer retaliates against you. Think twice before making that report to a boss who doesn’t want to hear it.

Of course, many employees don’t have much choice about whether or not to report fraud, waste, and abuse. Compliance officers, auditors, attorneys – these and many other occupations require one to take action of some sort when encountering fraud. All employees can and should take steps to protect themselves when reporting misconduct and illegal behavior. In cases where government money is involved, even indirectly, the whistleblower should get legal advice early. A workplace insider who reports government fraud can be an important asset to government prosecutors in a False Claims action, for example. A terminated employee is often less valuable.

K&M would like to help you assess whether you have a viable whistleblower claim and what steps you can take to protect yourself in the process of addressing government fraud. If you know of government fraud in your workplace, and you suspect even a hint of possible retaliation, call K&M for a free, expert consultation today.

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