I wrote a blog a few days ago on whistle blowing and tax, based on an email received from an informed commentator.
Response to the blog was informed, welcome and (odd exceptions apart) took the idea seriously.
The latest two responses are sufficiently interesting to require highlighting, focussing on the experience of tax whistle blower schemes in the USA. I suspect that both come from informed revenue authority insiders — but have no way of being sure. First, the so called Mr T Grasser from the USA:
Greetings from across the Pond. I was perusing whistleblower websites and stumbled across this one. May I compliment the author and commentators on the high quality of the articles and commentary though there seems to be some misperceptions as to how the US tax WB system operates. You are really on to something but, respectfully, many commentators are getting lost in the weeds. The first step is to have a program that rewards whistleblowers handsomely. The information will flow in and capture all sorts of avoidance and a fair amount of evasion, based on the US experience. For example, UK residents that claim non-residency (a la Mr. Guy Hand) would be a prime target. The reasons why the WB reports, snitches, rats, acts pro patria, don’t matter a whit: its about the quality of the facts. Any promoter, investment bank, bank client liason officer, accounting firm, etc., that presents a scheme or plan would be at risk because he has immediately made each member of his audience a potential WB. Every tax manager, accountant, lawyer, advisor is also a potential WB. Think how fast that would clean up the huge problem that undoubtedly exists in the UK. These schemes rely heavily on secrecy and how can there be any of that when the potential reward for turning in the client is so attractive?
I work in the area as a consultant and, which has now become a cottage industry in the US due to the extremely high mandatory awards (15-30% of the recovery). Through April 2009, the value of claims submitted to the US Tax Whistleblower Office (WBO) was about $65B. It has jumped to over $100B according to as yet unpublished US Government report. The actual figure that will be collected by the IRS will probably exceed this as WB tend to be conservative in their estimates so as not to misrepresent the value of claims to the IRS and thereby risk retaliation for wasting the US government’s time. So, WBs will be rewarded to the tune of minimum approx $10B to max $20B. Since there were approximately 1500 WBs that would average to between $7M to $14M per WB. Obviously, this is simple match and some claims are worth more and some are worth less, but the point I was trying to illustrate is the scope of the reward claims. I wager that there are similar claims that are lying in wait in the UK even if the volume of claims is not as high as in the US.
To make the situation worthwhile, legislation would need to set a dollar minimum limit. In the US this is $2M. This weeds out the small claims where the recovery is not worth the time involved. In fact, in my experience, to get the WBO office interested in the US, the value must be at least $20M of taxes avoided.
Transparency of the claims process is key to its success. The IRS was hostile to WBs. It makes them look bad for not catching the crooks before the WB walked in the door. However, that attitude has changed as the benefits of the glory of catching tax cheats has really turned their corporate heads. After all, it makes them not the WB (who remains anonymous) look good. They are not searching around looking for the issue-the specific WB information makes less not more work IRS agents, something remarked to me recently on a case. However, the process needs to be overseen by the courts to make sure WB don’t end up on the wrong side of Government wrath.
Rumour has it that the US WBO has been in secret discussions with HMRC for a number of months discussing the possibilty a UK WBO, based on some White Paper published by the Blair government.
Finally, remember if you have knowledge of US wrongdoing using for example, UK shell corporations or partnerships or trusts a reward may be waiting for you in the US! Of course the US would likely tax you on any reward, but 65 percent of a lot is also a lot. And then you could profess to live in Guernsey and begin the cycle all over again!!
In response the equally unlikely named Virtus non Stemma said:
Mr T Grasser, your contribution to this debate is very welcome, you are obviously able to give us - here in the UK - a rare insight into some of the workings of the US system. You did not say whether you are actually from the IRS or whether you are from one of the many legal firms that interface with the IRS - by representing the WB. Either way I believe you are an important commentator and hopefully you can tell us more about the US experience.
The figures that you give are really quite astounding. Claims of over $100 billion for the single year ended April 2009 would suggest a noticeable contribution to the US deficit, not just the actual annual tax gap. Is it further possible that you might actually mean the aggregate claim value rather than the uncollected tax itself? If the latter, then the situation is even more interesting as that would suggest uncollected tax in the region of $300 to $600 billions.
There is always going be a difference between tax due and tax actually collected, also the US appeals process is lengthier than it is here. There are a number of factors that would work to modify the eventual statistic. Not only that but the statistics themselves require very careful analysis as the year in which claims are made is not the same as the year in which the proceeds arrive.
Nevertheless the seriousness of this contribution to the US tax gap seems to be undeniable — and as one poster here has commented, it really seems to be a “no-brainer” for us. The UK economy is smaller and as you say the likely volume of claims would be correspondingly smaller. But like you I would guess that there are some huge amounts ready to spill out of the woodwork. Furthermore, because our HMRC are able to look back over 20 years in the case of deliberate concealment, the benefit in the first few years of implementaion could be quite interesting — to put it mildly.
So why aren’t we doing this. What is it that is different about the US.
Well, firstly you don’t seem to have such a powerful tabloid press. Taking your average figure of WB payments of between $7 to $14 millions per WB, it is easy to see a moral outcry along the lines of “Government pays 10 million pounds to Whistleblower!!!” — conveniently putting aside the fact that the government might have collected between 30 and 60 million pounds sterling (that it would otherwise have never seen) from that one WB alone. Let us imagine that the UK government were happy with say a mandatory minimum 2% inducement rather than the 15% minimum built in to the US system. We’d still be looking at this kind of headline even though the government were then collecting fifty times more than they were paying out to the WB.
Can you tell us how the US taxpayer perceives the US tax whistleblower program? Is it generally recognised that — like other serious crime where secrecy prevails — if you want to get the upper hand then you have to pay for information that would otherwise be unavailable. (When I mention serious crime, I am referring to large scale deliberate evasion aka tax fraud) Is it possible that the American public are less tolerant of “tax havens” than we are here? Now that the results are starting to come online, has public perception of the program changed? Does the government make any statements as to the overall benefit of the program, or are they likely to do so when the unpublished report you mention becomes available. The last report appeared in September 2009, so you are presumably referring to the next annual report due shortly.
Your point about the IRS being initially hostile to the WBO is interesting. I don’t know whether this would be the case here with HMRC if a “UK tax whistleblower program” was introduced as there are some very real incentives at the current time to moderate the program of public expenditure cuts. You make a very powerful point that the initial hostility because “it makes (the IRS) look bad for not catching the crooks” was quickly moderated when the benefits started to roll in and the sheer efficiency of the exercise became apparent.
Can you possibly expand upon the point you make about the “WB ending up on the wrong side of government wrath”? This may be a reference to some early problems you’ve had that we could learn from.
Hopefully you can assist further with this debate.
For my three penn’orth worth, I’d add firstly that I think a whistle blowing programme is worthwhile, second that it is ethical, and thirdly that it musty be funded by penalties — I’m happy for half of all penalties to go to whistleblowers — but not the tax itself.
Thoughts?
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Richard, good point about the WB getting a share of the penalty and not the tax. The only problem with that is that a goodly percentage of cases are likely to be settled by negotiation — in which case there would be no penalty and therefore no reward.
Furthermore, in the final reckoning, HMRC would then have an incentive to set the penalty to zero and offset it by taking a tougher line on some other facet of the investigation — simply in order to minimize WB payouts and political fallout etc. Not to suggest that HMRC would do that routinely of course, but to get the US result you would possibly need to have the kind of transparency that goes with the US system and anything that detracts from that will reduce the effectiveness.
I suspect that our Mr Grasser will re-iterate that unless the WB can see that – for his pains and personal risk – there is a clear and irrevocable financial reward that cannot later be modified in any way, then the UK wouldn’t get the same kind of result as the US is getting.
It might seem painful to have to pay a reasonable sized lump of collected proceeds over to a WB, but that is what is getting results in the US. There are an awful lot of people who are essentially public spirited, but to get most of them to act requires something else, as the US has proved. Once again, it is a case of “lesser of two evils”, a pragmatic approach to a real problem.
Comparing the numbers with the Annual Reports from the programme, your first commenter seems to have *very* large numbers.
The report is here:
http://www.irs.gov/pub/whistleblower/whistleblower_annual_report.pdf
and talks about total takings to the end of 2007 of a few hundred millions, pointing out that much of this (in 2006 and 2007) was due to outliers.
Why are allegations of tens of billions only giving outcomes of less than 1% of these amounts? Or are the numbers quoted unsound somewhere?
Not my specialism, so I’m just asking an obvious question.
Rgds
This comment has been deleted. It failed the moderation policy noted here. http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision on this matter is final.
Apparently the two annual reports available from the IRS have figures that relate only to the earlier “discretionary award” system, similar to the current (and relatively non-transparent) HMRC scheme. The mandatory 15% minimum scheme was introduced by the US government subsequently and it is this scheme which has resulted in the recent jump in the claims profile. The next annual report for the period to 2009 is due shortly, and as Mr Grasser implies will reflect the impact of the new scheme upon whistleblower activity. But hopefully Mr Grasser will return to this forum shortly to provide more detail.
Two points:
First, incentivising people (and their lawyers!) to bring claims with the prospect of huge rewards is part and parcel of the US legal system. It is, however, somewhat alien to us. We need to be careful to avoid creating an industry of people playing the system in search of those huge rewards.
Second, with the above caveat, a whistleblowing scheme targeting unlawful failure to disclose/pay taxes would be a good idea. Attempting to target lawful and properly disclosed “avoidance” is a non-starter.
Marc, I can’t see HMRC wanting to spend too much time investigating anything lawful, any more than the IRS would. Any attempt to target lawful avoidance isn’t likely to get past the initial enquiry – assuming some reasonable knowledge at the first port of call.
You do touch upon a potentially very interesting point however when you mention that aspects of the US legal system are alien to us. I quite agree with you and I’m sure that if the US system were to be adopted in the UK it would be toned down somewhat. I can’t see a mandatory 15% minimum of collected proceeds being acceptable for example, I would expect it to be quite a lot less than that.
I’d be very interested to know about these and other problems the US might have encountered and was rather hoping that our Mr Grasser would have re-appeared by now to let us have some detail. I believe that US practice involves having a network of lawyers who interface with the IRS by bringing legitimate claims to their attention. That obviously works to save the IRS having to deal with a large number of spurious claims with little chance of success.
Probably in the UK submissions would be made direct to HMRC, although I can see a further use for the legal system in enabling the WB to stay anonymous as far as HMRC are concerned until it becomes clear that the claim has substance. The US sets a lower threshold of $2 million taxes evaded, and as Mr Grasser states that becomes more like $20 million in practice.
I’m not sure how anyone would play the system, they will either be in possession of valuable inside information or they won’t, and it will quickly become apparent which they are. The overall requirements I suppose include the need to be able to identify genuine (evasion) cases at an early stage as well as the need to protect the interests of innocent parties etc.
@Virtus non Stemma
I think you’re right – any such programme is bound to be focussed on evasion
But do recall that undisclosed tax planning schemes in the Uk could be considered evasion!
Failure to comply with the tax avoidance scheme disclosure rules is certainly evasion (as is anything labelled “avoidance” which really relies upon concealment rather than law).
Defining avoidance is difficult. Defining evasion is easy!
Marc
Agreed!
I think it would probably be unrealistic to expect the WBs themselves to get it right every time as regards what is lawful avoidance on the one hand and what is evasion or avoidance by concealment on the other. Most WBs will come forward because they know or have a very good idea that taxes are being evaded in some way, but they might not know exactly where the concealment occurs for example. That’s the job of the IRS (or HMRC) investigator or possibly of an intermediary – if, like the US, the scheme allows for intermediaries.
If the WB gets it wrong, then no payout for him is the result, plus a little wasted time by HMRC. I believe HMRC would in most cases know pretty quickly whether something was worth chasing up or not. It would be interesting to know what percentage of claims in the US that start at IRS level actually go on to the stage of new or revised assessments as the result of the WB submission. The actual WB office in the US is apparently not much more than about a dozen people, so it could be that the pre-filtering process by the intermediaries is very efficient.
A whistleblower tax?
A number of issues have been raised during this short debate, one of which is the potentially contentious issue of the whistleblower being paid out of collected tax.
Richard Murphy is of the opinion that all newly assessed tax (together presumably with the back interest — which could be as great as the actual tax owed in cases going back 10 years or more) should go to the Treasury and that the WB should be paid only from penalties. And I made the point that penalties might not be imposed in many cases (negotiated settlements etc), and that this would therefore detract from the transparency of the scheme in that the WB would then have no certainty that he would be properly compensated for the risks associated with the uncovering of large scale tax evasion.
A simple answer to this is to introduce a mandatory whistleblower penalty (or WB tax) that would be applied to the new or revised assessments where WB activity was involved and therefore paid only from collected proceeds but without damage to the revenue collected on behalf of the UK taxpayer.
So let us imagine this WB tax is a fixed £10,000 for each whole £1 million assessed. This level of £1 million might also be the minimum threshold for claims, equivalent to the US $2 million threshold. Proceeds below £1 million would not attract the WB tax.
Where does the WB tax go? Essentially it goes to the whistleblower. This arrangement preserves the essential transparency that the WB must perceive at the outset in order to have the confidence to act. Below the threshold he receives nothing, or perhaps a small discretionary reward as allowed by the current HMRC scheme.
But this is where it gets interesting and other possibilities can arise. In the US the WB ofice is very small, and this is because the IRS by and large do not deal directly with the whistleblower. The WB is represented by an intermediary (in the US this is a lawyer) whose job it is to identify suitable cases and present them to the IRS WBO. This network of lawyers act to filter submissions so as to keep the resulting IRS workload to a minimum, effectively privatising the initial stage of case identification.
In the UK and elsewhere, there is a potential network of tax accountants who specialise in setting up offshore arrangements and who may find that as the movement against unlawful tax avoidance or tax evasion gathers pace, it may be lucrative for them to engage with the scheme. This is not to suggest for one moment that these specialists in the UK and certain other jurisdictions such as Jersey are involved in any illegal activity. This is clearly not the case, but the net must surely be slowly tightening on what is allowable as HMRC and others act to make things more difficult for the industry.
But who is better placed than a tax accountant to efficiently assess whether a potential WB submission is worth pursuing? Furthermore the intermediaries would be paid out of the WB tax, so that the whole scheme would be funded by the tax evader. Suppose that 10% of the WB tax could be paid to the intermediary, then a case worth £100 million to the UK taxpayer would result in a payment of £900,000 to the WB and £100,000 to the intermediary.
So the whole program could be entirely self-funded, incentives are securely in place, the UK taxpayer would receive all the previously uncollected tax, interest and normal penalties, HMRC would need to take on very few extra staff, if any, and very high productivity would be the norm within the HMRC team (WBO) who interface with the intermediaries.
Lots of issues still need to be addressed. It would be unethical for an intermediary to act in a case that involved a former client. That’s easy to deal with — the WB goes to another intermediary. What happens if the evader appeals and the proceeds don’t arrive within the usual HMRC 30 day timescale.? Then allow a period of say 2,3 or even 5 years for the collection of all tax, back interest and existing penalties resulting from the WB submission.
Thoughts, anyone?
@Virtus non Stemma
I think you miss the point that negotiated evasion settlements in the UK do include penalties – and often very heavy ones
there will be ample available to pay WB out of those funds
Richard. No, actually I didn’t miss that point although I have to admit that I didn’t know that penalties were applied (or included) in every case of evasion.
But my suggestion moves on from there to deal with two further related issues. Firstly to find a way to properly compensate the WB for risks taken etc – at no cost at all to the taxpayer – and secondly to ensure maximum transparency such that the WB can know beyond any doubt that he will be remunerated in direct proportion to the amounts recovered, irrespective of the penalty.
Correct me if I am wrong but I believe that penalties can vary from 20% to 100% or even more. That would reduce transparency from the perspective of the WB. He cannot now be sure that the greater the financial or reputational damage to the evader – and hence the greater personal risk to himself – will automatically be followed by a proportionally greater compensation for taking that risk.
That certainty would only follow if the penalty was always exactly the same published percentage of the collected proceeds, and that cannot be the case with varying rates of penalty. The issue of back interest would then muddy the situation further as back interest might even double the damage done to the evader with no increase in the penalty and hence the WB compensation.
As Mr Grasser implied, transparency is everything. If a system is not going to simply pay out in direct proportion to the collected proceeds then transparency is inevitably going to be reduced.
I do agree with you however that if penalties were always applied, always at the same percentage, and always applied to both tax and back interest – then transparency would at least theoretically be preserved.