Paul L. Caron

Monday, February 23, 2015

IRS Review of Vanguard's Tax Structure at Heart of Whistleblower's $1 Billion Tax Claim

VanguardFollowing up on my previous posts (links below):  Philadelphia Inquirer, IRS Continues to Review Vanguard's Tax Structure:

The Internal Revenue Service and the Securities and Exchange Commission are still reviewing allegations that Vanguard Group Inc.'s unusual business structure operates in violation of federal tax law, according to attorneys for former Vanguard tax lawyer David Danon, who brought the allegations to the agencies' attention in 2013.

The IRS and SEC have not announced complaints against Malvern-based Vanguard and don't comment on possible ongoing investigations. Vanguard spokesman John Woerth declined to comment.

"The IRS has confirmed that Mr. Danon's submission remains open after two years. We believe that the IRS will be issuing a Notice of Proposed Adjustment to reflect this, if it has not done so already," Stephen Sorensen, a Los Angeles lawyer representing Danon in his IRS and SEC complaints alongside Milwaukee-based Brian Mahany, wrote in a recent letter to the SEC.

In the letter, Sorensen estimated the IRS tax adjustment Vanguard will have to pay will total more than $1.7 billion, which would require the company "to take money from its mutual funds to pay the past due taxes and penalties." ...

Danon says he, as a Vanguard tax lawyer since 2008, concluded by 2012 that the group had underpaid federal and state income taxes by more than $1 billion, by undercharging its own mutual funds for management services, ensuring it operates on a nearly break-even basis and pays little income tax. ...

At a Feb. 13 hearing before New York Superior Court Judge Joan Madden, lawyer Heidi Wendel, representing Vanguard, said, "We have very strong arguments that show Mr. Danon is completely wrong" about Vanguard tax frauds. Before having to air those arguments, Vanguard wants Danon's state case thrown out, alleging he violated attorney-client privilege and confidentiality rules by suing his former employer.

Asks Sorensen: "Why wouldn't Vanguard simply say - both to the judge and to the public - that it is not currently under audit" by the IRS, as a result of Danon's allegations If Vanguard could say the IRS approves of its tax structure, Sorensen added, "it would be game over" for Danon's complaint.

Prior TaxProf Blog coverage:

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