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Top Ten Tax Recoveries for 2021

Posted  January 19, 2022

Our top tax recoveries for 2021 total over $7 billion, an impressive number that is due largely to just one of our top ten tax recoveries. Tax evaders were creative last year, utilizing offshore banking, good old tax fraud, and forum shopping for an accounting opinion that fits—all with the intention of cheating the IRS and, in return, the taxpaying public. IRS Criminal Investigation flexed its muscles and went after high-value tax evaders, showing the public that sophisticated fraud is seeing increased scrutiny, and that the well-funded are no match for tenacious tax enforcers.

IRS-Criminal Investigation resources were deployed to investigate at least five of our Top Ten tax recoveries for the year. Whistleblowers played a key role in tax enforcement as well, providing information that would likely have gone undetected had there not been a well-placed, informed insider.

  1. Renaissance Technologies, LLC. At the top spot in 2021 is the hedge fund founded by former math professor and wartime code breaker, James Simons. His initial investment successes derived from huge gains from quant trading—a practice Simons developed which based investments on non-random movements in the market. Later, Renaissance began trading heavily in basket options, which allowed Renaissance to buy an option on a basket of underlying stocks rather than on the actual stocks. Although Renaissance didn’t own any of the underlying stocks, they would give the banks instructions on how to trade those stocks. These bets paid off hugely, and Renaissance treated them as long-term gains, asserting that they converted their short-term profits into long-term investments.

While this technically was a correct assertion, what Renaissance failed to account for was the short-term financial boost this yielded. As a result of these positions, Renaissance borrowed large sums of money to invest in the market yet failed to pay taxes on this immediate benefit. While there has not been an official announcement of a settlement, it has been reported that a decade of wrangling with the IRS has resulted in Renaissance agreeing to convert many of those long-term gains into short-term ones, which are taxable at a higher rate. The agreed upon settlement amount: over $7 billion. This agreement affects only Renaissance’s “Medallion” investors—close friends and employees of Renaissance—yet the benefit will inure to every taxpaying American.

  1. Thomas E. Sandell. Second place has two winners: New York taxpayers, and a whistleblower who is now $22 million dollars richer. A whistleblower brought a claim under the New York False Claims Act, alleging that as owner of Sandell Asset Management Corporation, Thomas Sandell shifted the source of his earned investment services fees from New York to Florida via a handful of shady maneuvers. Sandell set up a sham Florida office with three back-office employees, moved to London for a few years and during the time in question, and managed SAMC’s funds via a shell company Sandell controlled. Despite his efforts, his longtime accountant informed him that he would be liable for a hefty tax bill since the income was derived from New York sources. His goal: avoid paying taxes on the $450 million in management and performance fees he recognized in 2017. Rather than pay the $105 million tax bill, Sandell fired his longtime accountant and instead hired one who agreed to take his erroneous position, without any further due diligence. Clearly, this backfired, and Sandell has since written a $105 million check to resolve the matter.
  1. Swiss Life Holding AG. The Swiss insurance company will pay $77 million and enter into a deferred prosecution agreement, admitting that they conspired with U.S. taxpayers to conceal more than $1.452 billion in assets and income in offshore insurance policies and related policy investment accounts that operated as abusive tax shelters. For a period of nine years, Swiss Life maintained approximately 1,608 Private Placement Life Insurance policies, using Swiss Life entities as the identified owners. These “insurance wrappers” were marketed to taxpayers withdrawing assets from UBS and other Swiss banks in response to increased tax enforcement efforts aimed at those banks. Indeed, the Swiss Life Entities saw U.S. authorities’ stepped-up offshore tax enforcement as an opportunity to pitch themselves to tax-evading U.S. customers as an alternative to Swiss banks. These accounts concealed the underlying assets from the IRS. IRS Criminal Investigation is currently investigating this matter.

Enforcement of offshore tax evasion emerged as a clear priority in 2021, with the Swiss Life Holding matter representing one of three major enforcement actions not only being investigated by IRS Criminal Investigation, but also having the distinct honor of making Constantine Cannon’s Top Ten list.

  1. LeVecke Corporation. Spirits, beer, and wine producer LeVecke Corporation agreed to pay almost $29 million in compromise of claims by the Department of Treasury Alcohol and Tobacco Tax and Trade Bureau alleging violations of the Internal Revenue Code, including failure to timely file tax returns and failure to timely file and/or pay excise tax. LeVecke’s transgressions included miscalculated flavor credits, unexplained inventory shortages, failed to timely file and/or timely pay their excise tax returns, and misused the Craft Beverage Modernization Act credit. Of note is the absolute whopper of a payment schedule, which should make any would-be boozy tax cheats take heed. After a roughly $3.6 million down payment, LeVecke has agreed to pay $350,000 per month for 6 years, along with two year-end payments of $1,000,000 in 2021 and 2022.
  1. Rahn+Bodmer. As with Sandell Asset Management Company, Swiss bank Rahn+Bodmer Co.will pay $22 million to resolve allegations that it conspired with U.S. customers to evade their U.S. tax obligations by concealing their ownership and control of up to $550 million in undeclared funds held in R+B accounts.  R+B aided its wealthy clients in evading more than $16 million in taxes by setting up “numbered” or “pseudonym” accounts, holding mail in Switzerland rather than sending it to the accountholder’s U.S. address, and allowed check withdrawals under $10,000 (which, not coincidentally, is the threshold for AML flagging in the U.S.).

They’re now helping the attorney general recover the funds, which means there are likely several people with offshore accounts who are, quite reasonably, very nervous. Here, again, the IRS leveraged its Criminal Investigation team to shed light on R+B’s bad behavior, proving that it’s not a matter of if, but when, a taxpayer’s fraud is rooted out.

  1. James Tarpey, an attorney and principal in Project Philanthropy Inc. dba Donate for Cause (DFC), was ordered to pay $8.5 million in penalties for promoting a tax shelter with claims that timeshare owners could donate their unwanted timeshare interests to DFC and receive tax benefits in return. To further the fraud, Tarpey and his agents prepared appraisals on donated timeshares, despite lacking sufficient independence and knowing that his false appraisals resulted in tax avoidance. This huge penalty goes to show that no one is immune to scrutiny—not even attorneys holding themselves out to be philanthropists. In addition to paying the hefty penalties, Tarpey is now on DOJ’s injunctions list, which is accessible to the public and which also encourages people to report list members to the DOJ if the in accordance with the injunction. Consider this fair warning: Not only does DOJ have tax fraudsters in their sights, but anyone with internet access can search for your name on the injunctions list.
  1. Joel Jerome Tucker. The principal in payday loan business eData Solutions, LLC and related entities, Joel Jerome Tucker was ordered to pay $8.1 million in restitution to the IRS and sentenced to 5 years in prison. Further proving that the payday loan industry is rife with fraud and should be eradicated, Tucker sold nonexistent payday loan portfolios and then didn’t bother filing or paying taxes on his ill-gotten gains. Instead of paying taxes on his gains, he splashed out on a luxury home, chartered private jets, leased a Ferrari and a Porsche, and spent loads more on travel and entertainment. The IRS again used their Criminal Investigation arm to detect Tucker’s illicit activity. This sends a clear message to all tax cheats that the IRS eventually will find you, and they will not believe you when you tell them you’re so broke you’ve had to borrow money from your mom. (He really did that.)
  1. Rounding out the trifecta of offshore fraudsters, Bermudan Bank of N.T. Butterfield & Son Limited will pay $5.6 million and enter into a deferred prosecution agreement to resolve charges that between 2001 and 2013 it assisted U.S.-taxpayer clients in opening and maintaining undeclared foreign bank accounts. The bank has provided the government with approximately 386 unredacted client files. From those files, it can be reasonably assumed that there will be additional funds recouped in this matter. Butterfield is on the hook to continue cooperating with the US for at least 3 years from the date of the agreement. And with that comes a warning from Acting Deputy Assistant Attorney General Stuart M. Goldberg: “Taxpayers contemplating hiding money offshore and those who would facilitate their fraud should take note – nothing remains hidden forever.”

This is the 4th of our Top Ten matters in which the IRS-CI division was used to root out fraud. The IRS is sending a clear message that they are undeterred by sophisticated, wealthy fraudsters. The IRS-CI team is at the ready to find them.

  1. William McCabe and Service Station Vending Equipment, Inc. With New York state’s second entry on this list, the power of whistleblowers who are able to report tax fraud under state False Claims Acts is obvious. McCabe owns New York’s SSVE, which provides self-service, coin-operated air machines used to inflate automobile tires. New York acted on a whistleblower’s tip that McCabe was knowingly evading sales tax, as well as engaging in other tax avoidance schemes by paying employees off the books and underreporting their sales.

This is an issue dear to McCabe, as he has been on a mission for nearly 25 years to have air inflation services exempt from sales tax. McCabe’s lobbying efforts started in 1997 with a request for an advisory opinion from the NY Department of Taxation and Finance on whether coin-operated air machines should be exempt from sales tax. The DTF stated unequivocally that these were not exempt from sales tax. Nearly 20 years later, McCabe renewed his efforts when he hired a new accounting firm and lobbied two state legislatures (2016 and 2017) for an exemption to sales tax for air machine services. Neither proposal moved forward.

Undeterred, McCabe persisted. But thanks to a whistleblower, his fraud was detected and his tax bill has come due. The lesson for all would-be tax evaders is that fraud will eventually catch up with you, be it by audit, a questionable filing, or by a well-placed insider whistleblower.

    1. Chandra Yarlagadda. Yarlagadda owned and operated biodiesel supplier Alpha Bioenergy LLC. Yarlagadda, who reported income and expenses associated with Alpha Bioenergy on Schedules C attached to his personal income tax returns, admitted that over the course of three years he reported that the company incurred expenses totaling more than $14.2 million for the purchase and retirement of Renewable Identification Numbers (RINs) used by the EPA, when, in fact, he had incurred only $80,000 in RIN expenses during those years.  Without the inflated deduction claims, Yarlagadda would have owed an additional $2.3 million in federal income taxes. Yarlagadda was sentenced to two and a half years in prison and ordered to pay restitution of $3.3 million following his guilty plea to income tax evasion charges.

There are several key takeaways from 2021. IRS Criminal Investigation is not afraid to go after sophisticated, wealthy tax evaders. Offshore tax evasion is a high priority for enforcement. And regardless of the venue, whistleblowers are a high-value resource for the IRS and states in uncovering fraud, as they typically have access to non-public-facing information including meetings, internal conversations, reporting practices, and the like. With these resources, tax evaders and fraudsters should consider themselves forewarned. And whistleblowers should feel emboldened to step up and report wrongdoing.

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Annual Whistleblower Insider Top Ten Lists

Every January, Whistleblower Insider looks back at the significant government enforcement actions of the past year. Our Top Ten lists highlight the biggest recoveries and significant enforcement efforts by different government actors in cases of interest to whistleblowers.
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Tagged in: Abusive Tax Shelters, FCA State, IRS Whistleblower Reward Program, Tax Credit and Deduction Fraud, Tax Fraud, Top 10,