Tax Whistleblower Action Claims $1 Billion Underpayment by Fortune 500 Company

Tax Whistleblower Action Claims $1 Billion Underpayment by Fortune 500 Company

A submission to the Internal Revenue Service Whistleblower's Office alleges that a Fortune 500 company represented by Ernst & Young LLP entered into a series of transactions to improperly reduce its taxes by more than $1 billion, two attorneys representing the whistleblower told BNA Oct. 11.

The two attorneys, Gregory S. Lynam and Scott A. Knott, both tax partners with The Ferraro Law Firm, Miami, said the Oct. 9 submission was the largest reported to the Whistleblower's Office to date. The two attorneys practice primarily in the area of whistleblower tax claims and federal tax controversies in the firm's Washington, D.C., office.

Under the recent modifications to Section 7623 of the Internal Revenue Code, the potential award in the case could exceed $300 million, the attorneys said. They said the identity of the whistleblower has been kept confidential to protect the individual and that the identities of the law firm, banks, and company are confidential at this stage to aid in the evaluation of the submission.

"It is not a public record," explained Knott. "The only time this would become public ... is if we file in U.S. Tax Court to challenge the IRS's determination of an award."

Lynam and Knott noted that the submission comes after an Ernst & Young employee pleaded guilty to one count of conspiracy to commit tax fraud (115 DTR K-2, 6/15/07 ), and four others have been indicted for their role in the sale of fraudulent tax shelters (104 DTR K-1, 5/31/07 ). Knott would not comment on the relationship between the submission and the indictments.

New Area of Practice

The Whistleblower Office was created by the Tax Relief and Health Care Act of 2006, enacted Dec. 20. Under the statute, if IRS proceeds with any administrative or judicial action brought to the service's attention by an individual, the individual must receive at least 15 percent, but not more than 30 percent, of the collected proceeds, including penalties, interest, additions to tax, and additional amounts resulting from the collection or settlement.

Because the statute allows IRS to choose reward whistleblowers at different levels, Lynam and Knott said they left their tax practices with other law firms in July 2007 to represent the whistleblowers and assist them in getting the largest awards possible. Lynam previously worked for Miller & Chevalier Chartered in Washington, D.C., and Knott was a member of Baker & McKenzie's Global Tax Practice Group in Washington, D.C.

"This was a unique opportunity that we felt we couldn't let it pass us by," explained Lynam. "It's a unique area of the law and we knew from our experience that there is a lot of underpayment out there. We felt we had something to contribute."

The attorneys said one of their primary goals was to ensure that their client's information regarding an alleged underpayment of tax was presented in a manner which was as useful as possible to IRS agents.

Lynam and Knott said they foresee a significant percentage of IRS award determinations ending up being appealed before the Tax Court.

"The reason an appeal could become a matter of course is that the IRS is limited by Section 6103 in the amount of information they share," Lynam said.

Because IRS is unable to reveal the amount it ultimately collected from a company under the section, a whistleblower will have to take IRS to Tax Court to find out what percentage of an award they received, and if it was less than the maximum award, they can challenge the determination of that amount, Lynam said.

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