New York’s False Claims Act, under which the employee is suing, entitles him to a generous share of any tax proceeds as well as attorneys’ fees if successful.
The Philadelphia Inquirer and Wall Street Journal have more; the complaint is here courtesy of TaxProf. The company denies wrongdoing, and the general question of transfer pricing on which the claim hinges is very well aired in the tax and accounting literature, which makes it seem unlikely that auditors would have neglected the issue.
If it sounds like you’re hearing about more cases where discontented employees are turning in their bosses on tax charges for a share of the bounty, you’re right. Bradley Birkenfeld got a $104 million check for informing on his employer, Union Bank of Switzerland, on charges of helping Americans conceal overseas accounts; the prize was presented when he got out of jail, since he had been part of the scheme. Will the spread of a culture of informants sow distrust and disloyalty in the workplace, while encouraging dissident executives and their lawyers to shake settlements out of risk‐ and publicity‐averse targets by seizing on doubtful, gray‐area legal theories? That’s part of the game too. Lately hedge funds and litigation finance firms have moved in to bankroll the filing of likely “whistleblower” cases.
It’s worth noting that the action against Vanguard, like most of the new wave of litigation, does not rest on the IRS’s own tipster program. Instead, clever lawyers are turning to pro‐plaintiff state versions of the federal False Claims Act, charter for bounty‐hunting litigators. As the Vanguard complainant’s attorney explained to the Philadelphia paper, he filed in New York because it’s “the only jurisdiction that allows False Claims Act complaints to be filed for unpaid federal taxes”; it also allows the litigant to collect a share of the unpaid taxes. (Both Vanguard and the complaining employee are based in Philadelphia.) The Attorney General of New York, incidentally, had a choice whether to prosecute Vanguard himself but decided not to.