Archive for August 2008
The Tax Whistleblower Reward Program will see its first primetime exposure in the criminal tax case of CEO Joseph Francis, whose company makes the “Girls Gone Wild” videos. Francis claims that his fomer top finance executive, Michael Barrett, turned him in to the IRS. Details of the Whistleblower case were revealed last month, in a petition that Francis filed in state court against Barrett claiming that Barrett is responsible for fraudulent deductions of $20,000,000. The state court suit comes in the middle of Francis’s fight against federal charges that he is responsible for the fraudulent deductions. If convicted, Francis faces up to 10 years in prison. Francis is scheduled to go to trial this fall. According to Francis, Barrett reported the alleged fraudulent deductions to the IRS “in order to split the profit with the IRS from taxes, penalties, and interest now due from [Barrett's] accounting mistakes.”
There are two important lessons to be learned from the recent developments regarding the Whistleblower Program and “Girls Gone Wild.” First, this is an example of the potential profit that former CFOs stand to gain for turning in their former employers who have underreported tax. Hopefully, the recent national coverage of the criminal trial of Francis will cause more former CFOs to come forward to claim their potential reward. Second, this example a blaring example of the importance of confidentiality. Barrett’s status as a whistleblower was not kept secret. Now, Barrett has to defend himself in a state court proceeding because of the “loose lips” of someone. Francis should not have known about Barrett’s status as a Whistleblower. Francis was not entitled to learn about Barrett’s status until the eve of the criminal trial under Jencks. The confidentiality of Barrett was not breached by the IRS or the Department of Justice, but instead could only have been breached by Barrett or his attorneys. Loose lips, sink ships.
In a shocking article reported by CNN (http://money.cnn.com/2008/08/12/news/economy/corporate_taxes/index.htm?cnn=yes) the Government Accounting Office (GAO) announced its findings that 68% of American firms do not pay tax despite reaping nearly $2.5 trillion in revenue. This is the sort of abuse that the Tax Whistleblower Reward Program is designed to curb. The study was requested by Sens. Byron Dorgan, D-N.D, and Carl Levin, D-Mich., in an attempt to determine if corporations are abusing so-called transfer prices. Transfer prices are charges on transactions between subsidiary companies within a larger corporate group. Companies may try to lessen their U.S. tax hit by improperly transferring income to foreign subsidiaries in countries with lower rates. “In an ever-increasing global economy, this type of abuse has become more and more widespread.” says Tom Pliske, principal of www.rewardtax.com. International laws and overly-complicated treaties prevent the IRS from effectively combating this type of abuse alone. Thus, transfer pricing issues, where U.S. income is diverted to other countries with a lower tax rate, are perfect targets for the Tax Whistleblower Reward Program.
As a principal of www.rewardtax.com, I am frequently asked by Whistleblower clients, who happen to be accountants, whether they are at risk for turning in a client for tax malfeasance. I read a very interesting article this week authored by Cara Patterson that was published by The Trusted Professional, the newspaper of the New York State Society of CPAs (http://www.nysscpa.org/ezine/ETPArticles/print/CP8708.htm). In the article, the author draws an honest conclusion that an accountant does not have the same handcuffs on reporting their clients’ tax malfeasance as, say, an attorney. The author also points out that it is nearly inconceivable that an accountant could be reprimanded or sued for malpractice for reporting the tax malfeasance of a client. The Office of the IRS Tax Whistleblower Reward Program has stated to me on numerous occassions that their biggest source of cases thus far is former tax directors or CFOs who separate from their former employer. In addition, the IRS has made it clear through various notices that they will accept all information from whatever source, and they will let the Courts decide whether certain information gained from privileged sources should be excluded as tainted evidence. I am very glad that the New York State Society of CPAs chose to publish this piece. It is high time that the accountant societies begin to question and discuss the issue of accountants who blow the whistle on their clients who commit tax malfeasance. Fear of reprimand may be keeping the majority of accountants from coming forward, yet, their silence is allowing unscrupulous taxpayers to continue to fill their pockets and further erode the tax base & taxpayer confidence.
Recently Senator Charles Grassley (R-IA) speaking of the Tax Whistleblower Reward Program praised whistleblowers for their courage and patriotism. Grassley, perhaps understanding economics, finances, Congress and the American people better than Reid, stated that “whistleblowers often risk their careers to expose fraud, waste, and abuse in an effort to protect not only the health and safety of the American people, but the federal treasury and taxpayer dollars.” Grassley, in making that statement was speaking of all federal whistleblowers in a speech he gave during National Whistleblower Week. But he also must have been thinking of the bill that he sponsored resulting in the IRS Whistleblowing Office and the enhanced Tax Whistleblower Reward Program.
However, ten years ago, Senator Harry Reid (D-NV) told Congress that the Internal Revenue Service was paying “snitches to act against associates, employers, relatives and others-whether motivated by greed or revenge-in order to collect taxes.” Reid discussed the tax informant program “as unseemly, distasteful, and just wrong,” as well as “a powerful incentive to anyone interested in becoming rich at the expense of a neighbor, former business associate, former wife, former husband.” Ten years ago, Reid was for abolishing the program.
How could two brilliant men be so different? Could it be simply a change in the times in the 10 year span since each made their statements, or is it simply the difference between what is right and what is wrong?
Despite what Senator Reid stated, I have had many clients with tax whistleblowing cases tell me that they were not interested in the reward, but that they “wanted to do the right thing,” that “everyone should have to follow the law,” or “that we each have a responsibility to make the world a better place.” Yes, both Senators make have points to be made. In the end, we must each ask ourselves, are we a Reid, or are we a Grassley?