Whistleblowers Gone Wild? For Cash, Sure

Some oppose an IRS policy that could grant fraudsters rewards for their own wrongdoing. An early test case: between the CEO and ex-CFO of "Girls Gone Wild."

If you’re a corporate whistleblower who turns in a coworker for dirty accounting tricks, the best reward you can hope for under Sarbanes-Oxley is the right to keep your job. (Although the high burden of proof under Sarbox’s whistleblower protection provision makes that outcome very unlikely, as CFO.com has reported.)

Reporting a tax scofflaw, though, can bring in what some might consider a better reward for risking one’s job: money. Opening its door less than two years ago, the IRS’s Whistleblower Office can issue a bounty of up to $10 million to anyone who is the first to tell the taxmen that someone has ducked paying taxes. Even if the whistleblower himself or herself played a role in the tax evasion.

The IRS policy “basically gives all accountants a personal incentive, whether or not it’s something they would pursue,” says Steven Kobre, an attorney with Kobre & Kim LLP, which handles whistleblower cases.

The law is being questioned in a public dispute between CEO Joseph Francis, whose company makes the “Girls Gone Wild” videos, and Michael Barrett, his former top finance executive, whom Francis claims turned him in to the IRS.

Last month, Francis sued Barrett in a Los Angeles court, claiming Barrett hid mistakes in corporate tax returns. The suit comes in the middle of Francis’s fight against federal charges that he fraudulently deducted more than $20 million in business expenses on the 2002 and 2003 corporate income tax returns of his companies Mantra Films Inc. and Sands Media Inc. If convicted, he faces up to 10 years in prison and $500,000 in fines. He is scheduled to go to trial this fall.

For the civil suit, Francis’s attorneys claim that Barrett “failed his fundamental duties and tasks” while he was Francis’s controller and vice president of financial affairs, and knowingly filed mistake-ridden tax returns with the IRS. They are hoping to poke holes in the IRS’s bounty program, which they interpret as rewarding whistleblowers who had a hand in participating in fraud. Barrett did not return CFO.com’s request for comment.

The provision creates an incentive for an accountant or CFO “to make mistakes and profit from those mistakes,” says Robert Barnes, an attorney for The Bernhoft Law Firm, which is representing Francis.

Bernhoft’s complaint pits Francis — “a young businessman with no background in accounting or law with a business busting at the seams” — against Barrett, who one year after leaving Mantra Films reported the company’s tax problems to the IRS “in order to split the profit with the IRS from the taxes, penalties, and interest now due from the accounting mistakes.”

The IRS may reduce an award — which would have its value determined by the IRS after collecting taxes, penalties, interest, and other amounts from a tax evader — “if the whistleblower planned and initiated the actions that led to the underpayment of tax or the violation of the internal revenue laws,” according to the IRS’s policy. However, if the whistleblower is convicted for participating in the fraud, he or she will not receive the reward.

The Whistleblower Office — created under the Tax Relief and Health Care Act of 2006 — received 80 claims in its first year. Without its allowances for whistleblowers who may have done wrongdoing, the IRS could come up short on nabbing any bad guys. While acknowledging the agency’s policy isn’t perfect, Kobre says it has turned “private citizens into prosecutors or policemen. It’s a cheap way to do it.”

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