The IRS yesterday announced that it has paid a $1.1 million reward to a whistleblower for information that exposed an alleged tax fraud scheme by Enron. The reward represents the maximum 15% permitted under the statute. From the whistleblower lawyer's press release:
"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 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," attorney Kelton said.