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What Do Whistleblowers and Hedge Funds Have in Common

  • Whistleblowing becomes a for-profit business.  In David Kocieniewski’s article, Whistle-Blowers Become  Investment Option for Hedge Fundshe outlines how the hedge funds and private equity groups are getting into the Whistleblowing business by buying a percentage of future payouts.

    Informants who turn in tax cheats have to wait years to get their share of any rewards from the I.R.S.’s recently expanded whistle-blower program.  So hedge funds, private equity groups and other big investors are offering an alternative.  they are essentially agreeing to buy a percentage of those future payouts in exchange for a smaller amount upfront to the whistle-blowers.

    The surging size of the potential awards is driving all the interest.

    The Whistleblower/informant program has been on the books since 1867 and allows the Secretary of Treasury to pay rewards

    for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same time.

    Prior to 2006, the law had been largely unchanged and then in December, 2006 the Tax Relief and Health Care Act of 2006 was passed.  prior to 2006, the rewards were discretionary, the new law changed this and provided that the rewards would be 15% to 30% of the collected proceeds.  It also added Whistleblowers rights and set-up the Whistleblower Office reporting to the commissioner.  The first director of the Whistleblowers office, Stephen Whitlock, was appointed in February, 2007.

    Since then the program has taken off.  Prior to 2006 there were very few tips of reported infractions.  As the author highlights in his article:

    I.R.S. offices now receive a torrent of big money claims.  Accountants and company employees have taken to trooping in bearing computer records and boxes of documents to back up their claims of underpayments by big companies.

    The author goes on to report the first of these big payouts.

    In what is believed to be the first of these structured tax payouts, an I.R.S. informant who reported that an overseas multinational corporation had underpaid its taxes by billions of dollars received  $4 million last month from a private equity firm.  In exchange, the firm will receive a portion of the award the informant expects to collect eventually.

    To put it simply, one just has to follow the money.  If the money guys and investors see potential profits from this investment then isn’t it reasonable to think that the number of whisleblowers will increase.  If your business is not in compliance or you are doing things that appear to be shady, you could have an employee, bookkeeper, or contractor reporting you to the IRS for profit.

    Your best strategy is always compliance and when in doubt seek the assistance of a professional CPA for guidance.