More on whistle blowing

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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 It has jumped to over $100B according to as yet unpublished US Government report.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?