Canada: Policy Forum: Whistleblowers And The Evidentiary Challenges In Offshore Tax Evasion Cases

Last Updated: November 7 2017
Article by David W. Chodikoff

Introduction

Tax evasion is a serious problem in Canada, as it is elsewhere.1 The failure of a Canadian taxpayer to pay his or her (or its, in the case of a corporation) fair and statutorily required share of tax has a detrimental effect on the ability of our governments to pay for and maintain our entire societal infrastructure. Put simply, taxes pay for all sorts of public resources, including police, fire departments, schools, roads, sanitation, hospitals, and much more. A question that remains open to debate is just how much tax goes uncollected as a consequence of tax evasion.2 Some international organizations maintain that the tax gap is huge, running into the billions; others are convinced that the problem is not as pervasive as some analysts claim and that, in any event, the problem from a Canadian perspective is being well managed by the Canadian government, particularly given its recent political and financial efforts to combat both offshore and domestic tax evasion.3

While comparisons are not always fair, the us experience can teach Canadians a thing or two about the pursuit of tax evaders. The United States has reported great success in identifying non-compliance through the Internal Revenue Service's (IRS's) whistleblower program.4 Additionally, the United States has achieved numerous successful prosecutions and convictions of us tax evaders, including many cases with offshore components.5 Canada has made efforts to combat tax evasion by creating its own whistleblower program. However, on the prosecution front, it is arguable that Canada has, to date, failed to bring significant tax evaders to justice. There have been a handful of successful prosecutions with trace elements of offshore components,6 but there has yet to be a major reported case involving any of the more familiar financial institutions that have been named and brought to justice in other parts of the world.

This article provides an overview and a comparison of the us and the Canadian whistleblower programs, and it identifies a number of specific challenges facing Canadian prosecutors in tax evasion cases. The article also offers some ideas for addressing the obstacles to successful prosecutions involving Canadian taxpayers with offshore financial accounts.

The US Experience

The IRS operates a special unit called the Whistleblower Office, which oversees the us whistleblower program. The Whistleblower Office was created by legislation adopted by the us Congress over a decade ago. The Tax Relief and Health Care Act of 20067 added section 7623(b) to the Internal Revenue Code,8 which enacted major changes in the IRS award program for whistleblowers.9 It was this legislative change that created a new framework for the consideration of whistleblower submissions and actually led to the establishment of the Whistleblower Office. The Whistleblower Office operates under the control and supervision of the commissioner of the IRS, and it is well staffed, with a director, 19 senior analysts, and 18 supporting personnel.10 Recently, the IRS office of the chief counsel appointed a senior lawyer to serve as special counsel to the director of the Whistleblower Office.

The special counsel provides legal advice to the director and coordinates legal support to other chief counsel offices.11 The Whistleblower Office coordinates with numerous IRS units reviewing the information that is submitted to the IRS, and it makes the determinations regarding financial awards for informants.

The awards are made to informants who come forward to report cases of substantial tax evasion (as described below). Before an award is considered, an informant must meet several conditions to qualify:12

  1. The whistleblower must submit the information in writing and execute the document knowing that false information can lead to a penalty for perjury. This condition obviously discourages frivolous complaints.
  2. The information must relate to an action in which the tax penalties, interest, and any additional sums in dispute exceed a basic threshold of $2 million.
  3. The information must relate to a taxpayer whose total income exceeds $200,000 for at least one of the years in question.

Where the conditions are fully met, and the provision of the information results in the actual collection of tax, penalties, and interest, the IRS will pay a minimum of 15 percent and up to 30 percent of the collected amounts related to the enforcement action; it does not matter if the enforcement action is a result of an administrative or a judicial action. The ultimate percentage awarded depends on the IRS's determination of the amount of the information supplied that was available or disclosed in the public domain when the whistleblower reported the underpayment of tax. The whistleblower is not entitled to collect the award until the taxpayer that has been accused of tax evasion has exhausted all appeal rights. On the basis of experience to date, under the US program, typically a payment is received by the whistleblower about five to seven years after the claim has been filed.

According to the Whistleblower Office's annual report to Congress, in 2016 awards to whistleblowers increased by 322 percent over the number in the previous year (418 in 2016 compared to 99 in 2015).13 Not only has there been a jump in awards but there have also been more claims. Chuck Grassley, a Republican senator from Iowa who is known to be highly supportive of the whistleblower program, recently stated that [us] whistleblowers have helped the IRS recover $3.4 billion that otherwise would have been lost to fraud. Cracking down on big-dollar tax fraud is a matter of fairness to the vast majority of taxpayers who pay what they owe.14

The speed at which the Whistleblower Office processes the information that it receives has been criticized. Not only is there a long waiting period before awards are made, but many of the claims that are filed are ultimately rejected. The belief is that the failure of such claims is attributable to workload management, to the quality of the information, or to the IRS agents' lack of persistence in following through with an investigation. Meanwhile, when an investigation is launched, the whistleblower is not kept informed about its progress. It has been reported that some unhappy whistleblowers have gone to court to force the release of information from the IRS on the status of an investigation, but it appears that such efforts typically fail.

The United States has a record of success in its prosecution of offshore tax evaders. 15 Dozens of us citizens have been sent to prison, with periods of incarceration ranging from a few months to several years. Fines and penalties are common. In 2016, as part of the effort to combat offshore tax evasion, the Tax Division of the us Department of Justice concluded its 80th non-prosecution agreement under its Swiss bank program.16 This program provides a way for Swiss banks to resolve potential criminal prosecution in the United States before the commencement of litigation. In order to be eligible for the program, a Swiss bank must not be under criminal investigation for its banking activities, and it must have one or more us clients with undeclared accounts. The agreement requires the bank to make its own presumption that it committed a tax-based criminal offence. The Swiss bank program has been viewed as a great success. The us government has received more than $1.36 billion in penalties and the promise by the 80 Swiss banks to cooperate in future criminal enforcement actions.17

In March 2016, the us Department of Justice announced its first conviction of a non-Swiss financial company for tax evasion.18 Two Cayman Island companies pleaded guilty to criminal charges related to allegations that they had helped us clients to hide more than $130 million in offshore accounts. Cayman National Securities Ltd. and Cayman National Trust Co. Ltd. further aided these accountholders in evading the payment of us taxes on the income earned in their accounts. The two companies provided investment brokerage and trust management services to various entities and individuals, including us persons. As part of the plea agreement, the Cayman companies agreed to cooperate fully with the us Department of Justice, and specifically with the department's investigation of their criminal conduct.

The us Department of Justice is already following a number of leads created by the Swiss bank program that will likely result in further convictions of non-Swiss financial institutions for tax evasion. us investigators are currently looking at various financial operations in Israel, Luxembourg, Liechtenstein, the Cook Islands, Panama, and the Marshall Islands, and several other countries.19 Information obtained as a result of compliance with the Foreign Account Tax Compliance Act20 (fatca ) has provided another avenue for investigators to search for and find American offshore tax evaders. In May 2016, the us Department of Justice announced that a dual citizen of Canada and the United States, Gregg R. Mulholland, had pleaded guilty to money-laundering conspiracy, involving the fraudulent manipulation of stocks of more than 40 US publicly traded companies and the laundering of more than $250 million in profits through at least five offshore law firms.21 Mulholland was the "secret" owner of Legacy Global Markets s.a., an offshore broker-dealer and investment management company that had offices in Panama and Belize. As the IRS special agent-in-charge stated at the time of the announcement,

[t]his investigation highlights the government's ability and resolve to combat global money laundering, in this case, the laundering of illicit proceeds from a stock manipulation scheme. . . . Prospective money launderers should take note of Mr. Mulholland's conviction and think twice about the consequences of such actions. The same holds true for individuals who attempt to criminally circumvent IRS reporting requirements regarding foreign accounts, as their actions will attract the attention of IRS-Criminal Investigation.22

As demonstrated by the prosecution of Mulholland and other recent tax evasion cases, the successful crackdown on us tax evaders can be attributed in part to the coordinated efforts of various us government departments and agencies, including, for example, the Federal Bureau of Investigation, the IRS, the Department of Justice, the Financial Industry Regulatory Authority, Inc., Criminal Prosecution Assistance Group, the Department of State's Diplomatic Security Service, and the us Immigration and Customs Enforcement, Homeland Security Service. For us customers of foreign-based financial institutions, time is clearly running out before the potential of us criminal tax liability becomes a reality. An avenue that still remains open to taxpayers is the IRS's offshore voluntary disclosure program.23 But those at risk had better hurry because, as in the old days when bloodhounds were put on the trail of escapees from prison, in present-day circumstances the coordination within the United States between the various agencies and departments, as well as their individual efforts, means that there is little time or cover for those us citizens who are not in compliance with the law.

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Footnotes

1 See Will Fitzgibbon and Emilia Diaz-Struck, "By the Numbers: Eight Months of Panama Papers Global," ICIF International Consortium of Investigative Journalists, December 1, 2016 (https://panamapapers.icij.org/blog/20161201-impact-graphic.html). This particular article from the website provides the number of people and companies investigated (6,520); the number of inquiries, audits, or investigations prompted by the publication of the Panama papers (150 in at least 79 countries and territories); and the amount of money ($110 million) recovered by governments, in the eight months following, and in part attributable to, the initial Panama papers revelations.

2 The difference between tax owed and tax collected is referred to as "the tax gap." For a recent article and commentary on the subject, see Marco Chown Oved, "Canada Misses Out on Nearly $50 Billion in Tax Each Year," The Star, February 13, 2017 (www.thestar.com/news/ world/2017/02/13/canada-misses-out-on-nearly-50-billion-in-tax-each-year.html ); and Caroline D. Ciraolo, "US International Tax Enforcement and Compliance," remarks delivered at the Thirty-Fifth Cambridge International Symposium on Economic Crime, September 5, 2016.

3 See supra notes 1 and 2. On recent Canadian initiatives in particular, see "Offshore and Aggressive Tax Planning," in Canada Revenue Agency, Departmental Performance Report 2015-16 (Ottawa: CRA, 2016), at 54-55.

4 Dean Zerbe, "IRS Whistleblower Program: Update" (2016) 18:4 Journal of Tax Practice & Procedure 33; United States, Treasury Inspector General for Tax Administration, The Whistleblower Program Helps Identify Tax Noncompliance; However, Improvements Are Needed To Ensure That Claims Are Processed Appropriately and Expeditiously, reference no. 2016-30-059 (Washington, DC: Treasury Inspector General for Tax Administration, August 30, 2016); and Internal Revenue Service, IRS Whistleblower Program: Fiscal Year 2016 Annual Report to the

5 Congress (Washington, DC: IRS, 2016).5 Robert W. Wood, "IRS and Justice Department Push Tax Prosecutions," Forbes, February 12, 2016 (); and United States, Department of Justice, US Attorney's Office, Middle District of Pennsylvania, "U.S. Attorney and IRS Announce Message to Potential Tax Cheats That Tax Crimes Result in Criminal Prosecution and Lengthy Prison Sentences and Fines and Issue a Fraud Notice to Taxpayers," News Release, April 14, 2016. See also Joshua D. Blank and Daniel Z. Levin, "When Is Tax Enforcement Publicized?" (2010) 30:1 Virginia Tax Review 1-37.

6 Patrick Cain, "Tax Evasion Prosecutions in Canada Fall Dramatically," Global News, April 26, 2016 (globalnews.ca/news/2660332/tax-evasion-prosecutions-in-canada-fall-dramatically/).

7 Tax Relief and Health Care Act of 2006, Pub. L. no. 109-432.

8 Internal Revenue Code of 1986, as amended.

9 IRS Whistleblower Program, supra note 4, at 5.

10 Ibid., at 7.

11 Ibid., at 6.

12 Ibid., at 5.

13 Ibid. See also Matthew D. Lee, "United States' Crackdown on Offshore Tax Evasion: What Does the Future Hold?" Financier Worldwide Magazine, Special Report: White Collar Crime, July 2016.

14 Quoted in Robert W. Wood, "Tax Cheats Beware: IRS Whistleblower Awards Soar 322%," Forbes, January 17, 2017 (www.forbes.com/sites/robertwood/2017/01/17/tax-cheats-beware-irs-whistleblower-awards-soar-322/#3d7a78287b8e). 

15 See United States, Department of Justice, Office of Public Affairs, "Justice Department Highlights Tax Division's Enforcement Results—Investigating Offshore Evasion" (www.justice .gov/opa/pr/justice-department-highlights-tax-divisions-enforcement-results); and United States, Department of Justice, "Offshore Compliance Initiative—Offshore Compliance Initiative News—Indictments, Pleas, Sentences, and Other Developments," covering the period from February 18, 2009 to December 29, 2016 (www.justice.gov/tax/offshore -compliance-initiative). .

16 United States, Department of Justice, Office of Public Affairs, "Justice Department Reaches Final Resolutions Under Swiss Bank Program," News Release, December 29, 2016.

17 Ibid. See also Marvin J. Michaels, George M. Clarke, Martin P. Furrer, and James J. Dries, "The DOJ's Swiss Bank Program—Lessons Learned and the Road Ahead," The Journal/ Litigation Practical Law, August/September 2016, 50-57.

18 U nited States, Department of Justice, "Two Cayman Island Financial Institutions Plead Guilty in Manhattan Federal Court to Conspiring To Hide More Than $130 Million in Cayman Bank Accounts," News Release, March 9, 2016; and "Cayman Islands Companies Fined for US Tax Evasion Conspiracy in Historic Conviction," Caribbean 360, March 11, 2016 (www.caribbean360 .com/news/cayman-islands-companies-plead-guilty-us-tax-evasion-conspiracy.

19 Interestingly, on January 20, 2017, tax agencies from 30 countries met in France to discuss the information obtained from the Panama papers. The meeting of the Joint International Taskforce on Shared Intelligence and Collaboration was held at the offices of the Organisation for Economic Co-operation and Development. According to reports, this was a historic meeting because it was the largest simultaneous exchange of information that had ever occurred between the tax authorities from these countries seeking to collaborate on tax investigations. For further information, see Will Fitzgibbon, "Tax Agencies Draw Up Target List of Offshore Enablers," ICIF International Consortium of Investigative Journalists, January 20, 2017 (www.icij.org/blog/2017/01/tax-agencies-draw-target-list-offshore-enablers).

20 Foreign Account Tax Compliance Act (FATCA), enacted on March 18, 2010 as subtitle A of Title V of the Hiring Incentives To Restore Employment Act of 2010, Pub. L. no. 111-147.

21 U nited States, Department of Justice, United States Attorney's Office, Eastern District of New York, "Orchestrator of More Than 40 Pump and Dump Schemes and Secret Owner of Offshore Brokerage Firm Pleads Guilty to $250 Million Money Laundering Scheme," News Release, May 9, 2016.

22 Ibid., quoting Shantelle P. Kitchen, special agent-in-charge, IRS, Criminal Investigation, New York.

23 United States, Internal Revenue Service, "Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014" (www.irs.gov/individuals/international-taxpayers/offshore-voluntary-disclosure-program-frequently-asked-questions-and-answers-2012-revised). See also David Kerzner and David W. Chodikoff, International Tax Evasion in the Global Information Age (Toronto: Irwin Law, 2016), at chapter 10, "International Collections Enforcement and Voluntary Disclosures."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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