Naked Capitalism: Our Corporate IRS

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Pro Big Corporate IRS: Agency Guts Whistleblower Program, Leaves Billions on the Table

Posted on October 24, 2014 by

It’s widely known among tax professionals that the US does little in the way of tax enforcement, and the little that it does do is directed against individuals and small businesses.

What is not so widely known is how deep the institutional bias is in the IRS in favor of letting big corporate tax cheats get away with it.

Conventional wisdom is similar to the rationalization of weak enforcement at the SEC: that the agency is afraid that if they go after big companies, they’ll have the penalties and fines challenged in court, and they’ll often lose by virtue of being outgunned by better lawyer (yes, Virginia, even if you have a solid case, that doesn’t mean you’ll win at trial). And top tax litigators are among the most highly paid legal talent. I’m not up on current rates, but in the mid 1980s, Sumitomo Bank fought the IRS on a $100 million assessment and won. Their attorney was a solo practitioner who charged $1000 an hour.

It turns out that the picture is vastly worse than that. In 2006, recognizing that the IRS was losing over $450 billion a year in revenue to tax evasion, Congress mandated that the agency establish a whistleblower office and pay whistleblowers 15% to 30% of amounts recovered from their filings. Unfortunately, as a whistleblower from the IRS’ Office of the General Counsel in New York has revealed, the IRS at its highest levels is opposed to implementing the policy.

This whistleblower, Jane Kim, makes it clear that in this letter, she is acting as a de facto spokesperson for an attorney that represents IRS whistleblowers. The missive, which we’ve embedded at the end of the post, presents three cases where the tax revenue lost exceeded $13 billion. Two of them looked to be particularly egregious. In one, a company set up completely sham foreign companies, with no operations whatsoever in any of these tax jurisdictions. Yet it claimed all of its profits were due to these phony companies and were kept permanently offshore (regular readers may recall that US technology companies who use Ireland and other low-tax domiciles to attribute their profits to “offshore” operations actually keep those “offshore” monies in US banks. For instance, Apple runs what amounts to a hedge fund to manage its “offshore” funds in Nevada). The effect of this scheme was that the company paid corporate taxes nowhere. That scam with that one company alone lost the IRS a purported $3 billion a year in revenues.

Another mind-boggling case involved a criminal case that was peculiarly shut down. The target had foreign brokerage accounts for US individuals. The target clearly knew it had reporting, withholding, and remittance obligations for foreign accounts, since it had come forward to ‘fess up an amnesty program for past abuses. Yet it was still engaged in effectively hiding offshore income of US clients by not keeping the required records. The case had advanced far enough that the DoJ was ready to empanel a grand jury, and was waiting for the final go-ahead from the IRS. The IRS closed the investigation because it went along with the target’s claim that there were too many accounts to be audited (huh?) and therefore it should be permitted to sample them. The target manipulated the “random” sample to hide the misconduct.

So why does this occur? The very top level of the IRS is opposed to the whistleblower program, and more broadly, is effectively in bed with large corporations. As the whistleblower’s letter points out:

The IRS Chief Counsel Donald Korb, under whose tenure the Office was created, openly expressed his views on this issue when stating, “The new whistleblower provisions Congress enacted a couple of years ago have the potential to be a real disaster for the tax system. I believe that it is unseemly in this country to encourage people to turn in their neighbors and employers to the IRS as contemplated by this particular program. The IRS didn’t ask for these rules; they were forced on it by the Congress.”

The letter, which I strongly encourage you to read, includes describing how the IRS adopted specific policies to vitiate the whistleblower program, such as refusing to pay awards if they resulted in the reduction of refunds, as opposed to paying additional taxes, even though the financial impact is the same.

The letter also describes how the IRS bends over backwards to cater to “favored” taxpayers, even going so far as to engage in retaliatory audits against IRS attorneys who publicize the IRS waving through tax scams.

This isn’t the first time Kim has alleged IRS misconduct; David Cay Johnston publicized other charges by Kim in Tax Notes Today, such as pervasive mismanagement of cases and failing to ride herd on abusive union stewards in its New York office. But these charges are vastly more troubling, since they indict the top level of the IRS.

Raw Story interviewed the whistleblower attorney who approached Kim after she made her charges of gross mismanagement and waste of resources. Her letter presumably represents the meatiest of his cases. He describes how the agency has been captured by large corporations:

…the private sector lawyer and ex-IRS attorney explained that since 1998, IRS restructuring has focused on bringing in “outside people.” This led to the employment of an extra layer of executives who were previously “partners from big accounting firms.” Citing active IRS criminal agents, the ex-IRS attorney said: “Almost every large firm or corporation has a person inside the IRS. It’s a revolving door, with the top two or three management layers all from big accounting and law firms, and this is why they won’t work big billion-dollar cases criminally. Private bar attorneys are, in effect, controlling the IRS. It’s a type of corruption – that’s the word used by one IRS agent I’m in touch with whose case was shut down by higher ups without cause.”

The incumbent IRS chief counsel, William Wilkins, was previously a lobbyist at the WilmerHale firm where for 21 years he represented and lobbied on behalf of private sector clients including the Swiss Bankers Association. Swiss banks UBS and Credit Suisse have faced penalties, hearings and convictions for helping wealthy Americans illegally conceal billions of dollars of taxable income.

Attorney James Henry, former chief economist at financial consultancy McKinsey, said that Wilkins’ firm “continued to represent the Swiss Banking Association throughout the 1990s and into the 2000s. Now Wilkins gets appointed chief counsel of the IRS in 2009, and he’s presiding over these whistleblower cases.”

So while we have Treasury attempting to defuse public ire over the latest high-profile form of corporate tax gaming, inversions, by relocating their headquarters overseas to a lower-tax domicile while not changing their US business, we have billions uncollected as a result of the IRS becoming a big-corporate crony. Kim has sent her letter to many of the right Congresscritters: Elizabeth Warren, Maxine Waters, Alan Grayson, Chuck Grassley, Bernie Sanders, Mike Lee, Rand Paul, and Ted Cruz. You can help her effort along by calling their offices, particularly if you are a constituent, and voicing your outrage over the IRS’ policy of “nothing to see here” on big corporate tax fraud. The Capitol Hill switchboard is 202-224-3121 or you can use this page at Congress.gov to find e-mail addresses and their district and DC office phone numbers.

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