Paul L. Caron

Wednesday, March 16, 2011

IRS Pays Enron Whistleblower $1.1 Million

Enron Logo The IRS yesterday announced that it has paid a $1.1 million reward to a whistleblower for information that exposed an alleged tax fraud scheme by Enron. The reward represents the maximum 15% permitted under the statute. From the whistleblower lawyer's press release:

"Enron was able to inflate its book earnings due to abusive tax shelters allegedly set up with the help of Wall Street banks," said Erika A. Kelton, a Washington, D.C. attorney with Phillips & Cohen. "My client's knowledge of how Wall Street operates and his unflagging persistence in convincing the IRS to investigate Enron were instrumental in the government's recovery."

The whistleblower first provided the IRS with detailed information in 1999 about abusive tax shelters Bankers Trust and other Wall Street firms allegedly helped Enron create that allowed Enron to operate tax free while lying about its reported profits for years before Enron declared bankruptcy in 2001. The shelters, including one nicknamed "Project Cochise" and another called "Project Steel," involved artificial duplication of tax deductions so that Enron would generate fictitious pre-tax income on its financial statements. The tax fraud allowed Enron to evade taxes on more than $600 million of taxable income, resulting in more than $200 million of federal tax savings and the bogus reporting of over $300 million of financial accounting income. The IRS was able to recover only a percentage of taxes and penalties owed due to Enron's bankruptcy.

"If the IRS had pursued this information in 1999 when my client first informed them of these abusive tax shelters, the government might have realized the depth of Enron's problems and perhaps taken steps that might have helped avoid a total meltdown," attorney Kelton said.

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Tracked on Mar 16, 2011 6:51:34 AM


I beg to differ with Mr. Petti. The income was received or accrued under a claim of right, and under Section 61 all income from any source derived is taxable. And the loss carryback rules would not have meshed up neatly between or among the years of income and loss, so that there were obviously significant taxes owed notwithstanding the fraud being perpetrated in the claiming of bogus tax deductions against its actual income received (which was quite large). And this must have been particularly so once fictitious deductions were stripped from the returns. Surely if this had not been the case, the IRS would not have made the $1.1 million fink fee payment, which must have been attributable to at least $11+ million of collectible taxes, even after all the losses and claims were made and paid in much later years.

Posted by: Ed Dwyer | Mar 18, 2011 8:51:10 PM

Enron could not have had taxes due. They were actually losing money. It was the phoney accounting that made it appear that they were profitable. The company was bankrupt. They could not have owed taxes for the period considering whatever the effects of loss carry backs would have been and how they were applied once the accounting fraud was revealed. The informant might have supplied information that could have been used to expose the fraud. It is nearly certain that there was no tax due.

Posted by: Enron Screwee | Mar 17, 2011 11:19:48 AM

I wonder if this is taxable? Do they give with one hand and take back with the other?

Posted by: Steve Petti | Mar 17, 2011 8:19:03 AM

But then, there's the alternative scenario: Kelton, the whistleblower's attorney, discouraged the whistleblower from blowing the whistle too loudly lest there be others to share the booty with. Nah, wouldn't happen. Forget it.

Posted by: Granus | Mar 16, 2011 5:33:05 PM

Enron had 1,200 trusts. Exxon Mobil had 64. Chevron had 32. Do you think that
maybe, just maybe, someone wasn't interested in finding illegal activities?

Posted by: PTL | Mar 16, 2011 4:33:09 PM

“In providing all this information, my experience with the IRS has been extremely frustrating and discouraging,” he [the confidential informant] said. “What I have encountered is an agency that is resistant to and suspicious of confidential informants, that is, private citizens who are trying to do the right thing by coming forward and blowing the whistle on significant tax fraud.”

Yeah, but if you make $100 bucks selling some old junk at your local flea market, the IRS will be down on you in a flash in order to make an example of you. And just think, the same IRS, which can't be bothered to look into the $10 billion in fraudulent tax shelters exposed by this one whistleblower, is now entrusted by the ObamaCare law to monitor whether each American has fulfilled the individual mandate to get health insurance. As InstaPundit always says, we are in the best of hands.

Posted by: Chili Relleno | Mar 16, 2011 3:16:53 PM

And the lawyers get a third? Trial lawyers and public sector unions have a choke hold on the country through their minions in the Democratic party.

Posted by: Peej | Mar 16, 2011 2:42:20 PM

This is very very WRONG. Our government continues to give away TAXPAYERS money.
Similar to paying Randy Weaver $1 million when the person who ordered his wife to be murdered got away with no punishment but the taxpayers paid Randy $1 million

Posted by: bgarrett | Mar 16, 2011 12:52:35 PM

This reminds me of the SEC folks who refused to seriously investigate Bernie Madoff after they'd been alerted.

But don't worry - I'm sure that the new bureaucracies created by the last Congress will be FAR more successful at detecting fraud.

Posted by: Calvin Dodge | Mar 16, 2011 12:25:09 PM