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Whistleblowing – Do A Public Service And Earn Up To $600 Million

whb_caterpillar0131-300x199It is not unheard of for companies go to extreme lengths to avoid paying taxes. From the collapse of Enron to the leaking of the Panama Papers, stories of corporations violating laws to avoid taxes are constantly in the news. Fortunately, a little-known law has given the U.S. government a powerful tool to uncover these crimes, recover ill-gotten gains, and reward the “whistleblower” at the same time.

The False Claims Act, aptly nicknamed Whistleblower Law, rewards citizens for informing the government when they have evidence of corporations committing fraud. Under the False Claims Act, these whistleblowers are eligible to receive 15 to 30 percent of the amount the government recovers.

Bradley C. Birkenfeld, a former banker at UBS, received a $104 million whistleblower reward for revealing Swiss banking secrets that allowed the IRS to recover billions of dollars in unpaid taxes. Though Birkenfeld had to serve time in prison for his part in the wrongdoing, his reward was the largest to date. A current case against construction equipment giant Caterpillar is poised to pay out nearly six times that sum. 

Daniel Schlicksup, a former accountant for Caterpillar, first expressed concerns about a shady tax scheme the company was using years ago. Now, the IRS claims Caterpillar owes at least $2 billion in back taxes. If the company pays this in full, Schlicksup could make between $300 and $600 million dollars.

Schlicksup’s story began over two decades ago when Caterpillar dramatically restructured to raise its profits. The company had claimed for many years that its Geneva, Switzerland office was responsible for 15 percent of its replacement part sales, with the other 85 percent of those sales based out of the United States—and liable for a tax rate of slightly under 30 percent. After the restructuring, the Geneva office was credited with 85 percent of replacement part sales—where the tax rate was under six percent.

For a company to restructure in this way, there must be a justification beyond tax cuts. In the words of U.S. tax law, a corporate structure must have clear “economic substance” that shows a substantial impact on the entity’s assets or pretax profits. That was precisely what worried Schlicksup. In 1999, he let Robin Beran, who orchestrated the changes, know that he worried the Caterpillar restructure didn’t seem to have a clear reason beyond the tax breaks.

No one paid attention to Schlicksup’s worries in 1999. But he kept bringing them up, over and over again, throughout the years. In 2008, he sent a memo to two of his superiors, stating his concerns once more. Four months later, Schlicksup’s position was eliminated and he was transferred from accounting to IT.

As a result of this treatment, Schlicksup filed a whistleblower claim with the IRS and a complaint with the Occupational Safety and Health Administration stating that Caterpillar, his employer, had punished him for expressing concerns about “improper and illegal conduct.” The next year he also filed a retaliation lawsuit against the company and several of its executives in federal court, which made his allegations public.

With evidence he provided, the IRS determined that Caterpillar had understated its income by over $3 billion in 2005 and 2007-2009.

The IRS still must determine how much Schlicksup contributed to the case and, in turn, how much his reward will be. However, it seems likely that it will surpass Birkenfeld’s to become the largest whistleblower reward in history.

Oh, and the whistleblower on the Enron case? She was awarded $1.1 million. Not bad for doing a public service!

Sources:

Gruley, Brian, David Voreacos and Joe Deaux. “The Whistleblower Behind Caterpillar’s Massive Tax Headache Could Make $600 Million.” Bloomberg BusinessWeek 1 June 2017.

Kocieniewski, David. “Whistle-Blower Awarded $104 Million by IRS.” The New York Times. 11 September 2012.

Wolff-Mann, Ethan. “The IRS Pays Whistleblowers to Turn In Tax Evaders.” Yahoo Finance 24 February 2017.