The Wall Street Journal reports that the recently well publicized investigation by the New York State Attorney General is based on whistleblower information. The WSJ also reports that whistleblower claims have been made to the IRS and that those claims are "active."
The WSJ article is Reed Albergotti and Laura Saunders, Informer Sparked New York Probe (WSJ 9/12/12), here. Here are a few of the introductory paragraphs to whet your appetites.
New York state Attorney General Eric Schneiderman's probe of tax practices at private-equity firms is based on information from a whistleblower, according to a person familiar with the matter.
The investigation by Eric Schneiderman, pictured in March, has sent subpoenas to 13 private-equity firms.
The information came from someone who approached Mr. Schneiderman's office between roughly nine months and a year ago, this person said. Under the state's False Claims Act, the attorney general can investigate alleged fraud against the state based on a whistleblower's allegations.
The ongoing probe is examining whether partners at private-equity firms changed management fees into investment income to delay tax payment and pay less—or avoid taxes altogether. Some private-equity firms use so-called management-fee conversions, while other firms avoid them.
If Mr. Schneiderman files a lawsuit and wins, defendants could be liable for damages of as much as three times the taxes owed. It isn't clear when he will decide whether or not to proceed with a lawsuit.
At least two other whistleblower claims related to management-fee conversions have been filed with the Internal Revenue Service, which has the authority to pay whistleblowers up to 30% of proceeds collected in large cases. Such whistleblower cases usually take four to seven years to resolve.
An IRS representative declined to comment, citing taxpayer privacy laws.
Gregory Lynam, a lawyer at the Ferraro Law Firm in Washington, said he filed one of the IRS whistleblower claims in 2008 on behalf of a whistleblower. Mr. Lynam declined to identify the person but said the case still is active.The whistleblower award provisions of the Internal Revenue Code are found in Section 7623, here. The new provision effective in 2007 is subsection (b) which requires an award of a minimum of 15% of the "collected proceeds (including penalties, interest, additions to tax, and additional amounts)," Based on key factors, the award may go up to 30% of the same base. I suspect that there is a potentially very large reward for the fee conversions. Although I personally think the IRS could find fertile ground in the carried interests themselves, I suspect that the best way to do that would be with regulations which might or might not have retroactive effect. I won't go there now, because I think that the current issue is focusing on the fee waivers.
I should also note with regard to whistleblowers that the offshore bank activity / opportunity for whistleblowers seems to be heating up. I previous blogged that Bradley Birkenfeld who threw the light on the Swiss bank U.S. tax evasion activities (UBS in particular) received a reward of $104 million. See Birkenfeld Gets $104 Million Whistleblower Award (9/11/12), here. That should grab the interest of Swiss bank employees who might want to deliver up data to the IRS. And, other European tax authorities and politicians are showing a keen interest in obtaining similar data for their taxpayers and, like the U.S., might be willing to pay handsomely for it. See Katharina Bart, Apologetic Swiss banks sweat it out as U.S., Europe mull redress (Reuters 9/12/12), here. This excerpt after recounting the Swiss parries and thrusts with the IRS:
The going is equally sluggish closer to home. Crisis-hit European countries in need of extra income are delaying settlement with Switzerland as a flourishing trade in leaked bank client data tilts the talks further in their favour.
Those leaks are also complicating an agreed but as-yet unratified tax deal with Germany -- whose citizens hold an estimated 150 billion euros in Swiss accounts -- key to Switzerland's attempts to make amends in Europe.
Prosecutors in the German state of North Rhine-Westphalia said on Thursday they had new bank data with which to pursue tax evaders, strengthening the hand of opposition politicians who say Chancellor Angela Merkel is letting tax-dodgers off too cheaply and should re-word the agreement.
Germany has promised to stop buying data naming tax cheats when the new deal between it and Switzerland comes into force, but the latest incident suggests that may be an incentive for officials to drag their heels in ratifying the agreement.
It also underscores the position in which Switzerland finds itself: out of negotiating room.
"All Swiss banks can do now is wait it out," said Thomas Braun, founder and partner of fund management firm Braun, von Wyss & Mueller.