Lessons From IRS For A New HMRC Whistleblowing Model – Andrew Park

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When it comes to payments to tax whistle-blowers, is HMRC missing a trick, or does the IRS serve a cautionary tale? Andrew Park, Tax Investigations Partner, examines in Law360.

Andrew’s article was published in Law360, 21 December 2021, and can be found here. 

INTRODUCTION

Paid rewards for whistleblowing to law enforcement bodies in the UK are a modest affair – as the latest information from HM Revenue & Customs (“HMRC”) shows.  HMRC protocols are still derived from the National Police Chiefs Council policy which informs the UK’s law enforcement agencies as a whole – notwithstanding the huge cash harvests that whistleblowing to HMRC can directly reap for HM Treasury.  It begs the question whether the public interest would be better served in allowing the UK’s tax enforcers to offer larger and more certain cash incentives to people blowing the whistle on tax misdemeanours.

The equivalent information from the US’s Internal Revenue Service (“IRS”) offers a stark contrast with UK system.  However, for all its impressive scale the US experience also offers some useful lessons were HMRC – and UK enforcement bodies generally – to go down the same track.

THE STATE OF PLAY IN THE UK

A solitary paragraph in the latest HMRC Annual Report and Accounts for the year ended 5 April 2021 discloses the extent to which HMRC relied on so-called “whistleblowers” during the year to boost enforcement against tax fraud.  The paragraph simply says:

“We encourage the public to report all kinds of tax fraud, including fraud related to the Covid-19 relief schemes, via our Fraud Hotline channels and we received almost 120,000 reports in the financial year 2020 to 2021.  There are times when it is appropriate for us to make payments to individuals for providing us with information that helps us tackle avoidance and evasion.  This year we paid out £397,950 in rewards to individuals who provided us with information.”

Clearly, although HMRC is inundated with people providing information, paid rewards for those informers are few and far between.  Indeed, the level of payments to informers actually fell during the year from £473,000 the previous year.  The fall in payments came notwithstanding developments during Covid and the rampant £5.2bn level of Coronavirus Support Scheme fraud and errors  estimated in the same 2020/21 annual report.

In the UK, people report known or suspected tax fraud to HMRC in a wide variety of situations and for varying motivations – but seldom, at present, for personal financial gain.

Common whistleblowing situations include:

• disgruntled former employees;
• spouses looking to get even in divorce proceedings and perhaps suspicious that assets and income might get similarly hidden from them as well as the taxman;
• neighbours jealous of new cars and expensive holidays and perhaps party to neighbourhood gossip that not everything is going through the books;
• customers irritated and suspicious of demands that they pay tradesmen they are unhappy with in cash.

THE US SYSTEM

The level of payments by HMRC to informers is small beer not only in comparison with the total number of informers in the UK but also with the vastly higher level of payments by the US Internal Review Service (“IRS”).  The equivalent IRS report to the latest HMRC report – produced for the calendar year 2020 – shows that the IRS paid c. $87m to informers to 169 major whistleblowers who assisted the IRS in recovering c. $470m – of which, c. $110m related to criminal matters.  Population adjusted, a c. 30 times higher level of payments than the UK in relative terms.

Formerly, the US was much like the UK in having no system in place to offer qualifying whistleblowers a guaranteed share of recoveries.  That changed with the creation of the IRS Whistleblower Office in the Tax Relief and Health Care Act of 2006.

Tax-geared rewards were brought in of between 15% and 30% of the tax evaded to act as a massive incentive to whistleblowing about major tax frauds that might otherwise go undetected.

Under the IRS Whistleblower Program, in order to automatically qualify for such a share of tax the information enables to be recovered:

• the total debt to the IRS must exceed $2m, including interest and penalties;
• any defaults reported for individuals must exceed $200,000 in at least one of the years in question.

Because of the way it is structured, the scheme has been highly successful in encouraging the reporting of fraud by high-net-worth individuals and large corporates and of large scale tax avoidance schemes.

Perhaps the most high-profile US success, was Bradley Birkenfeld a private banker who blew the whistle in spectacular fashion on Swiss banking giant UBS.  Birkenfeld’s information directly yielded the IRS hundreds of millions in back taxes as well as a $780m payment from UBS in 2009 to avoid criminal prosecution.  It hugely contributed to the US breaking down Swiss banking secrecy generally and more than 14,000 wealthy Americans paying more than $5bn in further back taxes through a special amnesty.

US DRAWBACKS

There are potential drawbacks.  The US experience demonstrates that offering large incentives to whistleblowers comes with its own issues.

Tax investigations are normally slow, laborious and time intensive.  The greater the number of leads the tax authorities get the more human resource they need to process them – both to conduct the investigations and adjudicate on whistleblower claims.  The US now finds itself with a c. 24,000 case backlog processing whistleblower cases.  Each case currently takes an average of c. 11 years to process.

Although the IRS Whistleblower Office has overseen the collection of over $6bn and the distribution of over $1bn in payments since 2007 it is still staffed with barely more than 40 people.  As with the IRS in general, they are heavily understaffed – notwithstanding their role in collecting huge amounts of money.

Even the Birkenfeld success was not without controversy in that – notwithstanding his huge cash reward – Birkenfeld served two and a half years in a US prison for his efforts after being successfully prosecuted for fraud by federal authorities for withholding full information from his disclosures – including details about a key client.  Inevitably, questions were raised about how someone could seemingly simultaneously gain vast wealth and go to prison.

SHOULD THE UK FOLLOW SUIT?

If one accepts the legitimacy of whistleblowing as a fundamental principle, surely the obvious conclusion is that HMRC should follow the IRS example but should learn from it too.  If HMRC is going to encourage whistleblowing and is prepared to pay cash incentives, it should surely do so as effectively as possible.

As matters stand in the UK, HMRC is highly effective – indeed more effective than ever – at encouraging “low level” whistleblowing of more minor matters.  HMRC’s press and social media output is highly persuasive in encouraging people to inform upon of suspected transgressions and promoting whistleblowing as socially responsible.  However, by their very nature more substantial matters tend to require whistleblowers with more intimate knowledge of often more sophisticated arrangements – they tend not to be things reportable by jealous neighbours or disgruntled lower-level employees.  In practice, those sorts of people will generally need more to motivate them to break bonds of trust and potentially jeopardise careers than petty jealousy or irritation or high-minded notions of the public interest.

There should, of course, continue to be suitable safeguards – particularly, with regard to the thorny issue of legal professional privilege.

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