TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, September 21, 2012

Fleischer: Are Whistleblowers the New IRS Business Model?

NY Times DealBookNew York Times DealBook:  A Strategy of Tattletales at the IRS, by Victor Fleischer (Colorado):

No one likes a tattletale. But tax whistle-blowers sure are getting compensated for the animosity they evoke.

Bradley Birkenfeld, a former UBS banker, was awarded $104 million for bringing information to the IRS about tax evasion strategies at the Swiss bank. The New York attorney general’s investigation into private equity management fee conversions appears to have originated from a whistle-blower claim. Dean Zerbe, a former legislative aide on tax issues, now works at the National Whistleblowers Center, which has claims outstanding on $25 billion of tax underpayments.

Are whistle-blowers the new IRS business model?

Enforcement of tax laws requires finding a fair and effective way to overcome the information asymmetry between taxpayers and the IRS. The government starts off at a disadvantage. While the IRS has broad powers to demand information from taxpayers, it doesn’t always know what to look for. Furthermore, because of privacy laws, private individuals, academics, reporters and public interest organizations cannot effectively serve as watchdogs.

Relying on whistle-blowers is one approach. The ramped-up IRS program is still new. Building on the success of the False Claims Act at rooting out fraudulent Medicare billing practices and similar scams, Congress in 2006 increased the awards to whistle-blowers. They can now receive up to 30 percent of the taxes collected. ...

In my view, whistle-blowers or qui tam actions will remain a small part of the overall tax enforcement strategy. Relying on whistle-blowers means providing bounties to insiders willing to turn against their clients or employers. The strategy relies on bad blood — a crumbling business partnership, office politics, a divorce or some other source of conflict — to bring information to the government’s attention. In many cases, the IRS will have to team up with someone with unclean hands or a hidden agenda. Moreover, whistle-blowers will target black-and-white cases of tax fraud, while many aggressive tax planning techniques reside in the gray.

Meanwhile, changes in corporate governance and accounting have ushered in a quiet revolution in corporate tax compliance. It’s hardly the stuff of headlines, but the changes have proven effective in changing the mind-set of corporate executives. ...

For further reading on tax whistle-blowers, see Dennis J. Ventry Jr., Whistleblowers and Qui Tam for Tax, 61 Tax Lawyer 357 (2007).

For further reading on schedule UTP, see Bret Wells, New Schedule UTP: Uncertain Tax Positions in the Age of Transparency, 63 Baylor Law Review 392 (2011).

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