Tax: May 2008 Archives

About once every few months, I am asked about what is involved in "turning someone in to the IRS".  Here is the process. 

The IRS Whistleblower Office pays money to people who inform on other persons who do not pay their fair share of tax or any at all.  If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.

The IRS may pay awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer.

 The IRS must receive solid information, not an “educated guess” or unsupported speculation. Importantly, the IRS is looking for a significant Federal tax issue - this is not a program for resolving personal problems or disputes about a business relationship.

The law provides for two types of awards. If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the United States Tax Court. 

The IRS also has an award program for other whistleblowers - generally those who do not meet the dollar thresholds of $2 million in dispute or cases involving individual taxpayers with gross income of less that $200,000. The awards through this program are less, with a maximum award of 15 percent up to $10 million. In addition, the awards are discretionary and the informant cannot dispute the outcome of the claim in the United States Tax Court. 

If you decide to submit information and seek an award for doing so, use IRS Form 211. The same form is used for both award programs. Cal me before you do anything. 

John M. Hanamirian

The United States Attorney for the Southern District of New York announced today the indictment of James Treacy, former CEO of Monster Worldwide, Inc.("Monster") on charges of securities fraud and conspiracy in connection with an emploee stock option backdating scheme.  Also indicted was Anthony Bonica, Monster's former controller.

According to the indcitment, Treacy conspired with other former Monster senior executives to "systematically backdate stock option grants to Monster employees...in an effort to provide profitable options to employees without recording the required compensation expenses."

Here is how it works: The corporate officers in this case backdated stock options given to certain employees to reflect their issuance at a point prior to the actual issuance date. The backdated options reflected a price equal to the then fair market value of the stock. Because there was no difference between the stock option issuance price and fair marklet value, Monster didn't have to reflect any such difference as compensation to the employee to whom the option was granted. That fraud allows them to eliminate the expense of having given the option to the employee which makes their profit and loss statement look better; more income less expenses. Everyone's happy. The employee gets his stock, the company has no concomittent expense recording obligation. Oh, unless, of course, you abide the law and every governing accounting principle in existence.

John M. Hanamirian