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Are the Secret Police in Your Tax Department?

26 Jan 2012

Since the collapse of Enron, Congress has been ratcheting up laws encouraging insiders to rat out financial wrongdoers and tax cheats by offering substantial mandatory cash bounties for information leading to additional tax collections, penalties or other monetary sanctions. Modeled after the False Claims Act, permitting whistleblowers to file suits (called qui tams) on behalf of the United States against those who defraud the government and split the proceeds, mandatory bounties are a relatively new weapon of law enforcement in the financial world. Taxand US analyses the the issue of whistleblowing and how businesses could be affected.

In a recent high-profile whistleblower action involving claims of more than $2 billion accusing BNY Mellon of overcharging its customers for executing currency transactions, the Wall Street Journal has chronicled how the key informant squirreled away documents over a two-year period. Information provided included profiles of his colleagues such as "details about their families, personal problems and financial standing." According to the Wall Street Journal, the informant is eligible to share in as much as 25 percent of any recovery.

Taxand US provides an in-depth analysis of this issue in the full article

Taxand's Take

As the IRS whistleblower program gains traction, businesses will need to assess and limit their potential risk. Aside from greater vigilance, what else might a tax department do? Here are some ideas to explore.
  • Confidentiality and privilege - The IRS cannot use information offered by whistleblowers that is subject to certain doctrines of confidentiality and privilege.
  • Dealings with advisors - The IRS may not accept information from an informant who is a taxpayer's "representative."
  • Document retention and destruction - Drafts and analysis, including emails, that detract from the ultimate conclusion or would permit an auditor to begin thinking about alternate views should be reviewed and destroyed in accordance with each firm's document retention policy.
  • Internal audit - Should the internal audit function be expanded to evaluate the substantive issues dealt with by the tax department?
  • Golden handcuffs - Currently, there are no retaliation rules to protect whistleblowers under the IRS's program.

While none of these strategies are certain, they may help avert an unjust whistleblower audit.

Your Taxand contact for further queries is:
Martin Williams
T. + 1 212 328 8503

Taxand's Take Author