The Internal Revenue Service paid $38 million on a whistleblower claim made by a client of the Ferraro Law Firm for providing information about a tax avoidance scheme perpetrated by one of the nation’s largest corporations, the firm announced Oct. 26.
The names of the whistleblower and the corporation were not revealed by Ferraro, which praised the Service for not tipping its hand to the company involved about the whistleblower’s identity during the discovery process. Claimants have been worried about protecting their identities, and that IRS might inadvertently reveal them.
“The target corporation doesn’t even know that it had a whistleblower, and they should never know, because the IRS did not inform the taxpayer that they had help from us on the sophisticated tax issues involved in this case,” Gregory Lynam, tax partner with Ferraro said.
Ferraro said it was not authorized to comment on the specifics of the tax issues that led to the award, but it did say they were more akin to aggressive corporate tax planning than outright fraud, and the award IRS made was commensurate with the factual and legal allegations of its submission to the Service.
The award keeps the momentum in an IRS trend toward quicker payouts of whistleblower claims, Scott Knott, tax partner with Ferraro, told BNA Oct. 29.
“This award proves that the IRS program works,” Knott said. “We knew what the timeline was within which IRS should have paid, and they did what they were supposed to do.”
IRS Previously Moving Too Slowly
However, Knott pointed out that the timeline IRS observed was the one it set up itself, which many whistleblower representatives, including Knott, have complained was too slow. The claim that
resulted in the $38 million award to the Ferraro client was first presented to IRS in 2008.
In September, UBS whistleblower Bradley Birkenfeld was the first to receive a major award from the Service—$104 million—the largest IRS award to date (176 DTR G-4, 9/12/12).
Whistleblower representatives said that award basically took the lid off a logjam of pending IRS whistleblower claims. They largely attributed the quicker pace to a June memorandum from Steven Miller, IRS deputy commissioner for services and enforcement, directing the IRS Whistleblower Office to get claims to the field within 90 days (121 DTR G-3, 6/25/12).
Previously it took an average of 362 days to get claims to agents, according to congressional testimony.
Whistleblower representatives said IRS has not been timely in paying awards, has dragged its feet on paying partial claims where it has already recouped taxes, and has limited awards based on who“planned and initiated” the action that led to underpayment of tax.
By law, IRS must pay an award of between 15 to 30 percent of the amount it collected from the tax whistleblower.
While the precise amount of the award was $38 million, the amount of tax IRS collected from Ferraro’s client also was not revealed.
The company involved was in the top half of the annual Ferraro 500 list, which reorders the Fortune 500 companies based on the size of those companies’ uncertain tax positions.
“It is routine for companies in the top half of the Ferraro 500 to have set aside reserves of hundreds of millions or even billions of dollars for tax issues that it thinks the IRS would win if they were challenged,” said Lynam.
Knott said there is often a correlation between the relative size of profits and revenues and reserves. If the reserves are huge in relation to profits and revenue, it can often be a red flag, he said.