The Internal Revenue Service has paid a $1.1 million reward to an anonymous whistleblower for information that exposed an alleged tax fraud scheme by Enron, Bankers Trust and others before the company collapsed.

It is one of the few whistleblower rewards the new IRS Whistleblower Office has made since Congress created the IRS Whistleblower Office and a new tax whistleblower program in 2006. The IRS made the award under the previous whistleblower program (known as the IRS 211 program), which allowed the IRS to award whistleblowers nothing or up to 15 percent of the tax funds the IRS recovered as a result of the whistleblower’s information.

The whistleblower, a Wall Street banker who has chosen to remain anonymous to protect his job and career, received the maximum reward of 15 percent. The announcement of the reward was made by the law firm that represented him, Phillips & Cohn LLP.

“Enron was able to inflate its book earnings due to abusive tax shelters allegedly set up with the help of Wall Street banks,” said Erika A. Kelton, a Washington, D.C., attorney with Phillips & Cohen. “My client’s knowledge of how Wall Street operates and his unflagging persistence in convincing the IRS to investigate Enron were instrumental in the government’s recovery.”

The whistleblower first provided the IRS with detailed information in 1999 about abusive tax shelters that Bankers Trust and other Wall Street firms allegedly helped Enron create that allowed Enron to operate tax free while lying about its reported profits for years before Enron declared bankruptcy in 2001. The shelters, including one nicknamed “Project Cochise” and another called “Project Steel,” involved artificial duplication of tax deductions so that Enron would generate fictitious pre-tax income on its financial statements.  

The tax fraud allowed Enron to evade taxes on more than $600 million of taxable income, resulting in more than $200 million of federal tax savings and the bogus reporting of over $300 million of financial accounting income. The IRS was able to recover only a percentage of taxes and penalties owed due to Enron’s bankruptcy.

“If the IRS had pursued this information in 1999 when my client first informed them of these abusive tax shelters, the government might have realized the depth of Enron’s problems and perhaps taken steps that might have helped avoid a total meltdown,” Kelton said.

The whistleblower testified anonymously in 2004 before the Senate Finance Committee about problems with the IRS whistleblower program at that time. He said the greatest problem was “the agency’s resistance to take seriously outside information from knowledgeable insiders.”

“There are still pockets of strong institutional resistance to whistleblowers at the IRS,” said Kelton. “The IRS Whistleblower Office works extremely hard to investigate and pursue whistleblower claims. But they are only one office in a vast bureaucracy.”

The Tax Relief and Health Act of 2006, enacted after Phillips & Cohen’s client notified the IRS about Enron’s abusive tax shelters, requires that whistleblowers receive 15 percent to 30 percent of the amount the IRS recovers if the tax fraud or tax underpayments exceed $2 million (including penalties and interest).

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