Becoming a tax whistleblower.

This article discusses some considerations a tax professional might evaluate before becoming a tax whistleblower.  Tax avoidance by major companies and the super wealthy is ubiquitous.  That’s a given.  Almost every tax professional has something they could report. But should they? 

First, the downside: whistleblowers get fired, ostracized, and sued.  Some end up in jail.  For example, UBS tax whistleblower Bradley Birkenfeld was the only UBS employee to go to jail after he showed the Justice Department that hundreds of UBS employees helped 19,000 US taxpayers hide $19B from the IRS.  UBS paid a $708M fine to avoid indictment, and the government didn’t go after any other UBS employee. This wasn’t an aberration, employees of corporations that commit crimes are almost never prosecuted whereas whistleblowers don’t get the protection of companies’ armies of lawyers and $100M settlements.  In addition to being attacked by the government, tax whistleblowers are attacked by major law and accounting firms.  These are powerful enemies.  Whistleblowers become unemployable in the careers they’ve spent a lifetime learning.  Global companies say they value integrity, but if you study their actions, they reward employees who hide crimes.  Examples of this are easy to find.  Just look at what happens to the senior employees of companies after major scandals.  Hint: very few of the people "in the know" are fired.  These same companies punish employees who reveal crimes.  Whistleblowers find their performance reviews instantly go from good to bad; they are investigated, excluded from good work and fired – almost every time.  I have not yet found a case of a major corporation intentionally hiring a whistleblower nor have a found a case of a publicly known whistleblower who gets a good corporate job.  For many whistleblowers, the decision to tell the truth about corporate crime begins a long journey to poverty.  So far, so bad.       

It gets worse.  Tax planning is fun; it’s creative work that requires learning about the world and solving puzzles.  It rewards curiosity and free thinking.  Once a tax planner understands a business, he can almost always change the facts and apply the tax laws in creative ways.  And the rewards are good.  In my case, whether I was getting a tax ruling in the Netherlands or meeting the US ambassador in Singapore, I constantly went to interesting places and did cool things.  I worked on deals in Cambridge, Moscow and Tokyo.  I hiked the alps on business trips to Switzerland.  I had drinks on a yacht in the Bahamas and dinners in Versailles. I flew in corporate jets, stayed in great hotels, and visited the world’s great cities.  I also learned something about how the world works: how bonds are priced on Wall Street, how oil is refined, and how corporate mergers work. International tax planning is a rewarding career.  Becoming a whistleblower puts all that in jeopardy.     

There are obviously tons of reasons not to blow the whistle.  Let’s look at why a tax planner might want to do so.  First, the entire enterprise is dishonest.  Most “tax planning” is, in fact, sophisticated tax cheating.  It usually boils down to something like helping a business pretend to earn money in a tax haven rather than where it’s actually earned.  This means the tax planner has to invent ways to ignore reality such as where the business has employees, factories and customers.  Instead, the tax planner builds a bogus story that insists the important factors are where contracts are signed or which subsidiary has “entrepreneurial risk.”  This dishonesty extends to dealing with tax authorities.  Savvy advisors ensure that, if the client is audited, the IRS won’t get accurate facts.  It’s all a sophisticated form of lying.  When the IRS asks for all documents relating to a tax plan, the tax lawyer defending the audit might provide the documents that help the client and then say, “the company has provided all the documents we can find.”  This sounds like it means the company has looked for the documents and provided all it can find.  It doesn’t mean that at all.  It means the person answering the question has provided all he wants to provide, and he has plausible deniability for the rest.  Misleading tax authorities is part of the job.  I did it, and so did almost every tax consultant and every company with whom I ever worked in my 26-year career as a tax professional.  

Most people think of themselves as honest.  They don’t want a career that requires them to lie to the government.  This seems like a good reason to blow the whistle.  Interestingly, the profession’s dishonesty generally isn’t a problem for most tax planners.  It’s not that tax guys are immoral; they have selective blindness.  They don’t see the dishonesty.  They are like the founding fathers who didn’t see the irony in stating that all men are created equal while owning slaves.  They rationalize.  

There is thus apparently little downside to being dishonest,  The government doesn’t pursue employees of dishonest companies, and tax planners can ignore the dishonesty altogether with a little self-deception.  Under these circumstances, for a tax planner to admit that his career is dishonest would just be borrowing trouble.  If, however, a tax planner insists on having the self-awareness to realize tax planning is a dishonest endeavor, he will need to find a replacement career before he jetisons his current one.  Children must be fed; mortgages must be paid.  

Could the IRS whistleblower program be the answer?  It offers a 15-30% reward for amounts collected as a result of information provided. That money could be used to fund a change of career.  The program also offers the promise of confidentiality so it should be possible to stay in the tax planning game until the tax planner is ready to make a change.  That would be an elegant solution: get paid to tell the truth and use the proceeds to finance a change to a more honest career.  

Regrettably, so far this elegant solution has not been a reality.  The IRS program only pays about 3% of claimants and, even then, it takes almost 10 years to do so. The total amount paid to whistleblowers by the program is relatively small (between $30M and $300M, the size of one large public company’s bonus pool).  And sometimes, as in my case, the IRS’s pledge of confidentiality breaks down.  In other cases, the IRS has required whistleblowers to choose between going public or dropping their claim in Tax Court.  The IRS has been criticized as hostile to the program.

So, currently the tax whistleblowing program doesn’t present a viable option for the people doing the real tax planning in this country.  For real tax planners, the cost of filing a whistleblower claim is high, and the likely reward is low.  Ironically, the cost to pretenders is low.  For someone with little to lose, filing the IRS whistleblower form is cheap and easy. That may explain the program’s 3% payment rate.  The IRS has a lot of junk claims.  

As long as the system continues to create huge disincentives for real tax planners to tell the truth, and as long as the IRS’s confidentiality protections lack substance, and as long as the IRS doesn’t pay whistleblowers reliably and timely, real tax planners will wisely stay away.  This calculus might be changing.  Congress just passed the Taxpayer First Act which strengthens IRS whistleblower protections.  It is too early to see if this will make a difference, but tax planners who want to “go straight” should keep watching.