Mitigating the Risk of Tax Whistleblowing — Navigating Canada’s New Rules TEI TORONTO CHAPTER
Toronto, Ontario March 20, 2014 TIMOTHY J. MCCORMALLY KPMG LLP Washington, D.C.
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member fi rms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Copyright for the specific content remains with the firm whose representative presents it.
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Objectives
Review developments relating to tax whistleblowing in popular media Review U.S. tax whistleblowing rules Review Canada’s new Offshore Tax Informant Program Review non-tax costs of whistleblowing Consider steps to mitigate tax whistleblowing risk
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Agenda
Tax Whistleblowers in the News
U.S. Tax Whistleblower Rules
Canada’s Offshore Tax Informant Program
Mitigating Whistleblower Risk
Appendix: Information on BEPS and Tax Transparency
Questions
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Tax Whistleblowers in the News
Not Just the News, but the Headlines
Whistleblowers in the News: Not just national security, but taxes.
Most prominent tax whistleblower is Bradley Birkenfeld. He’s the former UBS employee who secured a $104 million whistleblower award from the U.S. government for telling the Internal Revenue Service about his employer’s involvement in helping UBS clients evade their U.S. tax obligations.
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Tax Whistleblowers in the News
UBS Case Is Special, but not Unique — Other Headlines
Tax Whistleblower Gets $2 Million IRS Award: Lawyer (Chicago Tribune). Tax Informants Are On The Loose (Forbes). IRS Gives $4.5 Million Award to Tax Whistle-blower (Associated Press). First False Claims Act Recovery in New York, Whistleblower Awarded $1.1 Million (Corporate Crime Reporter). © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Tax Whistleblowers in the News
Letting the Facts Get in the Way . . . •
In 2013, Google officials were called before a U.K. parliamentary committee after Thomson Reuters published stories undermining the company’s claims about having no permanent establishment in the country. Tipped off by a whistleblower, TR reporters researched LinkedIn profiles of Google employees. • U.K. tax authorities defended its scrutiny of Google’s activities, but the whistleblower’s tips led to days of headlines such as “UK lawmakers challenge Google’s ‘smoke and mirrors’ on tax.” © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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U.S. Whistleblower Rules
Internal Revenue Code § 7623
Awards for provision of information relating to a violation of the internal revenue law. When amounts exceed $2 million, statutory award is between 15% and 30% of amount collected (reduced to 10% when information is publicly available). IRS has discretionary authority to grant awards for cases less than $2 million. Notice 2008-4: Guidance on filing claims. Regulations issued in December 2012. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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U.S. Whistleblower Rules
Awards, Even for Those Who Participated in Tax Evasion Scheme
The Whistleblower Office may reduce an award if informant “planned and initiated” actions leading to the underpayment. I.R.C. § 7623(d)(3). Where informant is convicted of criminal conduct related to underpayment, no award may be given at all. In September 2012, IRS announced $104 million award to Bradley Birkenfeld for information leading to $5 billion settlement between IRS and UBS Bank. (Mr. Birkenfeld served prison sentence for assisting certain individuals in hiding foreign bank accounts from IRS.) © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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U.S. Whistleblower Rules
Awards, Even for Those Who Participated in Tax Evasion Scheme
In October 2012, IRS awarded another whistleblower $38 million. Since enactment of 2006 amendments, there have been more than 1,900 tax whistleblowers, involving 10,500 taxpayers. Treasury Department’s Inspector General for Tax Administration reported that tips received in 2008 added up to $65 billion in unreported income. For six years ending September 30, 2013, IRS paid out approximately $230 million in whistleblower awards, including about $50 million in FY2013. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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U.S. Whistleblower Rules
Recent Examples Involving Large Companies
In-house tax professional indicted for participating in filing of false tax return after colleague raised internal concerns about research tax credit claim. The company, a government contractor, conducted internal investigation and subsequently referred matter to Justice Department. After jury trial, tax professional was acquitted of criminal charges under I.R.C. § 7206(2).
Tax department employee filed federal job-protection suit under SOX claiming he was reassigned (and denied certain compensation) after raising concerns internally about certain international transactions. Suit, which alleged “unlawful scheme to avoid over $2 billion in federal income tax,” was settled without any adjudication of underlying tax claims.
Tax department employee filed wrongful discharge suit under SOX and RICO alleging company misled IRS and hid tax shelter from outside auditor. (Tax at issue alleged to be $7 million.) Case dismissed and, in separate state case by the company, employee was found liable for defamation. (Separate internal investigation upheld company’s tax position.)
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Canada Gets Into the Act Harper Government Announces Tax Whistleblowing Program
Announced in March 2013 as part of the Government’s Budget, the Offshore Tax Informant Program is part of a larger Canada Revenue Agency program aimed at ending international tax evasion.
CRA is working out the details, but in January 2014 published a broad outline of the program on its website. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Canada’s Offshore Tax Informant Program Eligibility Requirements
The program contemplates CRA’s entering into a contract with the informant. The informant cannot be convicted of the tax evasion about which he or she reveals information and still receive award. The information must lead to an assessment or reassessment exceeding $100,000 in federal taxes. Payment will be made after the tax debt has been collected and all recourse rights associated with the assessed tax have expired. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Canada’s Offshore Tax Informant Program Eligibility Requirements
The award will be between 5% and 15% of federal taxes (i.e., not including penalties, interest, and provincial taxes). The non-compliant activity must involve foreign property or property located or transferred outside Canada or transactions conducted partially or entirely outside Canada. Payment will not be made to an individual who has been convicted of tax evasion related to the information provided. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Canada’s Offshore Tax Informant Program Eligibility Requirements
Unlike the current Informant Leads Program (ILP) (which does not pay awards), the new program will not accept anonymous submissions, although the identity of the informant will not be disclosed. o So-called Liechtenstein audits were prompted by informant tips. CRA currently receives approximately 24,000 referrals annually under the ILP.
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Canada’s Offshore Tax Informant Program Differences between U.S. and Canadian Rules
In the United States, whistleblower awards range between 15% and 30% of the amounts collected, whereas in Canada, the award is only between 5% and 15%.
In the United States, an award is only available where the “collected proceeds” exceeds $2 million, whereas in Canada, the threshold is $100,000.
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Canada’s Offshore Tax Informant Program Differences between U.S. and Canadian Rules
In the United States, the award will be based on the total amount collected by the IRS (i.e., including interest and penalties), whereas in Canada, it will be based only on the amount of tax recovered.
In the United States, the program is statutory, whereas in Canada, it is administrative and contractual.
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Canada’s Offshore Tax Informant Program Policy Questions
OTIP is aimed not only at tax evasion but at efforts by “high-income taxpayers who attempt to evade or avoid tax using complex international legal arrangements,” without acknowledging tax avoidance is legal. OTIP is not alone in conflating tax evasion and aggressive tax avoidance. Daily media reports — augmented by government hearings and hyperbole — feed a growing perception that tax avoidance is depriving costing governments of significant revenue at a time of high deficits and debt levels. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Canada’s Offshore Tax Informant Program Policy Questions
CRA has tools to pursue and prosecute tax evaders, especially given trends in tax transparency and more exchanges of information by tax authorities, including those spurred by the OECD’s BEPS project. o Auditor General’s Fall 2013 report reviews Liechtenstein audits and other efforts to address undeclared offshore income (including volunteer disclosure agreements). o 43 Liechtenstein audits led to 23 reassessments, generating $24.651 million in federal tax, interest, and penalties. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Canada’s Offshore Tax Informant Program Policy Questions
CRA has tools … (continued) o Foreign Income Verification Statement (Form T1135). o Information exchange with Australia, U.K., and U.S governments. Tips from whistleblowers can prove a distraction, diverting attention from areas that can better use CRA’s limited resources.
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Mitigating Whistleblower Risk
Non-Tax Costs Can Be Substantial Even assuming whistleblower’s claims do not lead to additional tax liability or penalty, costs to company could be substantial: Financial: o Legal and other fees incurred in responding to merits of tax claims. o Legal costs and possible monetary damages if retaliation (or unlawful discharge) is alleged, either under general employment law principles, Sarbanes-Oxley Act (SOX), or Racketeer Influenced and Corrupt Organization Act (RICO). o Consulting fees paid to crisis management, government affairs, or public relations firms relating to claim.
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Mitigating Whistleblower Risk
Non-Tax Costs Can Be Substantial (continued) Human Resources: o Decline in employee productivity and morale, both within and outside tax department. Reputational: o If whistleblower’s claim becomes public — for example, by leak to media or suit for unlawful retaliation — company could find its name in headlines. Even if claim does not become public, company’s credibility with IRS, CRA, or other governmental bodies could be impaired. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Mitigating Whistleblower Risk
Don’t Make Matters Worse — Avoid Actual or Perceived Retaliation. Confirm Adequacy of Company’s Ethics Hotline and Tax Department Awareness of Procedures. Review and Revise Tax Department Procedures and Practices. o Demystify Tax. o Set Proper Tone at the Top; Listen to Your Team. o Train Your Team. o Review Performance Standards. o Review the Company’s Policy for Making Disclosures to IRS and CRA. See Michael P. Dolan & Timothy J. McCormally, Which Way the Wind Blows: Mitigating Whistleblower Risk, 139 Tax Notes 1537 (June 24, 2013). © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Appendix – Information on BEPS and Tax Transparency http://www.kpmginstitutes.com/taxwatch/insights/2013/tax-transparency.aspx
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
Appendix – Information on BEPS and Tax Transparency http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/beps-taxnewsflash.aspx
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
Speaker Biography Timothy J. McCormally is a Director in the Washington National Tax practice of KPMG LLP. He served as Executive Director of Tax Executives Institute from 2002 to 2013, and as the organization’s top lawyer for the previous 19 years. Mr. McCormally received his B.A. degree from the University of Iowa and his J.D. degree from Georgetown University Law Center. Throughout his 30-year tenure at TEI, he was editor of The Tax Executive. He has contributed to that magazine, Tax Notes, Tax Adviser, and other tax periodicals, and has spoken at programs sponsored by TEI and other organizations, including NYU’s State and Local Tax Institute. He lectures extensively on tax ethics and is co-author of a recent article for Tax Notes on best practices to mitigate the risk of tax whistleblowing. His article entitled “The Language of Tax: Cautionary Notes for the Tax Reform Debate,” was published in the March 10, 2014, issue of Tax Notes. Timothy serves as a Fellow of the American College of Tax Counsel, and is a recipient of TEI’s Honorary Membership Award as well as the First Annual Tax Policy Award of Quinnipiac University. For three years in a row while at TEI, Timothy was named one of the top ten most influential people in the sphere of global taxation for three years in a row by the U.K. publication Tax Business. In 2014, Mr. McCormally was appointed to the Internal Revenue Service Advisory Council. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Thank you! Timothy J. McCormally KPMG LLP
[email protected] 1.202.533.3079
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