By David S. Hilzenrath
Wednesday, March 16, 2011; 10:58 AM
Before Enron was publicly exposed as a financial house of cards, a whistleblower tipped the Internal Revenue Service that the company was using abusive tax shelters to generate fictitious income, a law firm representing the informant said Tuesday.
Now, more than a decade later, the IRS has paid that whistleblower a $1.1 million reward, the law firm said.
"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," lawyer Erika A. Kelton of the Washington firm Phillips & Cohen said in a news release.
The alleged tax fraud allowed Enron to evade taxes on more than $600 million in income and to report more than $300 million of bogus profit, the firm said.
Enron sought bankruptcy protection in 2001 in one of the nation's biggest financial scandals. Its implosion took a heavy toll on investors.
IRS spokesman Dean Patterson declined to comment, saying the agency was prohibited by privacy laws from commenting on whistleblower cases.
Phillips & Cohen did not name the whistleblower. However, the law firm identified the informant as a witness who testified anonymously before the Senate Finance Committee in 2004, and it provided a copy of his testimony.
At the time, the informant said he worked for a Wall Street investment bank, and he said he was "intimately aware of competitors' fraudulent tax shelters." He said he had spent thousands of hours over several years educating and prodding the IRS to take action on various abuses.
"Together, I estimate that the numerous fraudulent schemes on which I provided original information involved over $10 billion of taxable income," the witness said.
"In providing all this information, my experience with the IRS has been extremely frustrating and discouraging," he said. "What I have encountered is an agency that is resistant to and suspicious of confidential informants, that is, private citizens who are trying to do the right thing by coming forward and blowing the whistle on significant tax fraud."
Federal law allows whistleblowers to collect rewards for unpaid taxes that their information leads the IRS to recover. The Enron tipster received the maximum 15 percent reward under the law as it was written when he contacted the agency, Phillips & Cohen said.
The law was changed in 2006 to entitle whistleblowers to receive between 15 and 30 percent of IRS recoveries in cases involving more than $2 million.
The reward comes at a time when the Securities and Exchange Commission is writing rules for a new program that would it allow it, too, to reward tipsters for helping it police Wall Street fraud.
In the Enron case, the IRS was able to recover only a portion of taxes and penalties owed because the company filed for bankruptcy, Phillips & Cohen said.
One of the tax shelters the tipster singled out for the IRS was known as "Project Cochise," Phillips & Cohen said. In an interview, Kelton said she did not know whether that transaction contributed to her client's reward.
In a 2003 report on Enron tax issues, the staff of Congress's Joint Committee on Taxation said Enron engaged in transactions "that were designed to satisfy the literal requirements of the corporate tax laws, yet produce results that were not contemplated by Congress and not warranted from a tax policy perspective."
Enron agreed to pay $15 million to a Wall Street firm that promoted Project Cochise, the report said.
Based on the congressional report, if the IRS decided that Project Cochise was improper, that would apparently represent a more recent assessment or reassessment by the agency.
An IRS team undertook a limited, "expedited" review of Project Cochise and told congressional investigators "that they would not review Project Cochise any further and would propose no tax liability adjustments related to Project Cochise," the 2003 report said.