The IRS's New Whistleblower Program - Another Enforcement Alert For International Business

The international business community has witnessed an

increase in US tax enforcement activity arising from individual

whistleblower claims filed with the US Internal Revenue

Service. One such instance recently came to light in press

reports about a former employee of LGT bank in Liechtenstein

who sold information to the IRS and other tax authorities

purporting to reveal the names of hundreds of taxpayers with

previously undisclosed assets. While the issue of the

disclosures made of LGT account holders has been public for

some weeks, the new information is that this individual is

represented by a US lawyer and is seeking a reward under an

enhanced IRS whistleblower program that will pay substantial

amounts, potentially millions, to informants who provide

information that leads to the collection of US tax, penalties

and other amounts.

The Liechtenstein matter is not an isolated event.

Newspapers last month carried another whistleblower story

involving a former employee of RaboBank Group, who allegedly

reported to the IRS that the Dutch bank had financed over 100

questionable transactions involving billions of dollars for

various multinational companies. Plaintiff's lawyers are

also seeking notoriety. In a press release issued by a US law

firm located in Washington, DC, the firm boasted that it had

filed a whistleblower claim in excess of $4 billion in May,

2008, and that it filed another claim in excess of $2 billion

in December, 2007, on behalf if its clients, hoping to recover

hundreds of millions of dollars from the US government.

Why the increase in whistleblower activity? The IRS has

always offered rewards to informants through the IRS'

"Whistleblower Program." However, in late 2006, those

rules were modified, making the rewards richer and the

likelihood of recovery more certain. As a result, whistleblower

claims have significantly increased in the past year as the

procedures for filing and collecting claims have been

clarified. Because the program seeks, among other things, to

entice corporate employees to come forward with information

about what they perceive to be tax fraud, every multinational

company with a US tax presence should be aware of its pertinent

provisions and some of the difficult legal issues that may

arise.

The 2006 Legislation

For over 140 years, US tax laws authorized the payment of

rewards to persons who provide information leading to the

collection of tax. The program was underutilized, however,

because informants had few rights, the IRS placed strict limits

on the amounts of rewards and, in practice, the IRS was

grudging in making payments either because it contended that it

already had the information or that the informant had

participated in the non-compliance activities.

In 2006, Congress saw the possibility of raising additional

tax revenue by enticing informants to come forward with

information that might lead to examinations or even criminal

investigations potentially culminating in the collection of

substantial amounts of tax, penalties and interest. The

preexisting reward program does remain in effect for small

claims. Under those provisions, information leading to the

collection of less than $2 million in tax, penalties and other

amounts, (or information that involves an individual with less

than $200,000 in income), may prompt a reward of up to 15%...