Tax Whistleblowers Are Entitled to Award When There Are Civil Forfeitures and Criminal Fines, Rules Court

The U.S. Tax Court has ruled that tax whistleblowers are entitled to a reward when criminal fines and penalties are collected. The ruling in this particular case found that two whistleblowers had a right to receive a $17.7M reward in the wake of the $54M in civil forfeitures and criminal fines that resulted.

The Internal Revenue Service had argued that the fines and forfeitures were not under the realm of the IRS Whistleblower Program. The IRS and the U.S. Treasury Department had been seeking to approve a rule that would not award whistleblowers if the violation they reported ends up being criminally prosecuted. The rule would allow tax whistleblowers to be reward only for resulting administrative or civil penalties.

The IRS had previously decided that “collected proceeds” in a tax whistleblower case was only limited to taxes paid under Title 26. This decreased the incentive for whistleblowers to come forward and inform on criminal tax activities and illegal offshore accounts. Now, however, the Tax Court has said that “collected proceeds” in a tax whistleblower case includes not only Title 26 taxes but also civil forfeitures and criminal penalties.

In other whistleblower news, the U.S. Securities and Exchange Commission has imposed a $340K penalty against Health Net Inc. for using severance agreements that obligated outgoing employees to waive their right to receive monetary rewards under the regulator’s whistleblower program. The SEC said that the requirement is illegal and violates federal securities laws.

Health Net is not denying or admitting to the findings. However, it has consented to the cease-and-desist-order issued by the regulator. It also said that it would make “reasonable’ attempts to notify ex-employeesk, who had signed the severance agreements at issue from 8/12/11 to 10/22/15 , that the health insurance provider is no longer barring ex-employees from being able to obtain whistleblower rewards from the SEC. Under the SEC’s whistleblower program, individuals who provide quality, original information resulting in an enforcement action that renders more than $1M in sanctions are entitled to 10-30% of the money collected.

In another SEC case, BlueLinx Holdings Inc. also has been ordered to pay a penalty—$265K—for its severance agreement that required employees who were leaving the company to waive their rights to SEC whistleblower monetary recovery. The Commission said that BlueLinx put the monetary recovery provision in its severance agreements in 2013, almost two years after the regulator adopted Rule 21F-17. The rule bars any action that stops a person from notifying the SEC about potential violations of securities laws.

Under the language used by BlueLinx, outgoing employees risked not getting post-employment benefits, including severance payments, unless they agreed to waive their right to any SEC whistleblower awards in the future.

Without denying or agreeing to the SEC finding, BlueLinx agreed to the cease-and-desist order. It also agreed that it would amend its severance agreements so that employees would know that they were not prohibited from notifying federal agencies about possible violations of securities laws nor were the barred from receiving potential whistleblower awards in the future. The company also agreed to make reasonable attempts to let former employees know that the monetary recovery prohibition in their executed severance agreements was no longer in effect.

Contact our securities fraud law firm if you suspect that your losses may have been caused by the negligence or wrongdoing of others.

Big Win for Tax Whistleblowers as Pair Gets $17.8 Million, The Wall Street Journal, August 3, 2016

BlueLinx to pay SEC fine for violating whistleblower protection rule, BizJournals, August 11, 2016