The U.S. International Revenue Service is still weighing whistleblower complaints filed in 2009 that alleged that William (Bill) Koch’s Oxbow Carbon LLC, West Palm Beach, Fla., and Walmart Inc., Bentonville, Ark., dodged taxes to the tune of $350 million and $250 million, respectively, according to Bloomberg Tax, which recently obtained hundreds of pages of documents in the case. Charles Middleton, the whistleblower, was a former tax executive with both companies. They both vehemently deny the allegations.
Up until recently, Oxbow Carbon was involved in the sulfur, sulfuric acid (see page 1), and fertilizer businesses (GM Nov. 3, 2017).
As far as Middleton knows, the claims have not been resolved, and he has been kept mainly in the dark regarding their progress, according to the documents. If the IRS uses information provided by a whistleblower, it can award the whistleblower up to 30 percent of the additional taxes, penalties, and other amounts it collects.
Middleton’s cases reflect a level of secrecy particular to the IRS’s whistleblower program. Tax code Section 6103 prohibits IRS employees from disclosing tax information about an individual or company – which the IRS, according to reports from its whistleblower office, interprets as a need to limit interaction after claims are filed. However, a recently-enacted IRS reform bill (H.R. 3151), which alters some agency operations and lays groundwork for more restructuring, allows for more open communication with whistleblowers. The legislation, which President Donald Trump signed into law July 1, also protects whistleblowers from retaliation by their employers.
Oxbow called Middleton’s allegations in the whistleblower claim “false and defamatory,” saying its tax structure was lawful while tax efficient. It said IRS audits cleared the company’s returns for 2011 and 2012, two of the years Middleton covered in his claim. “Oxbow cooperated in the process, and the audit concluded that no material changes to the returns were necessary,” the company said in an email.
In the case of Oxbow, where Middleton was senior vice president of tax from 2010 to 2016, his claim is that the company transferred its profitable petroleum coke contracts from the U.S. to the Bahamas in 2010. He said Oxbow failed to recognize the profits from those contracts and pay the appropriate taxes, while continuing to manage the Bahamas-based company from the U.S.
Middleton contended in the documents that he was ultimately fired after discovering Oxbow had kept documents from IRS auditors and suggesting corrective action. Oxbow, in its statement, said Middleton left “for reasons unrelated to these matters.” Documents indicate Middleton received monthly severance payments at the rate of $200,000 a year for some period of time.
Walmart also denies Middleton’s claims. The retail giant, in an email, said it has signed letters from the IRS confirming the agency concluded audits for 2009 and 2010, two years covered in Middleton’s claims.
Middleton declined to be interviewed, citing nondisclosure agreements with his former employers. In a May 2018 letter to the IRS, obtained by Bloomberg Tax, he expressed frustration over lack of communication with the agency since filing his claims – suggesting that by not engaging more with him, the IRS had lost out on hundreds of millions of dollars.
Tips from whistleblowers are an important tool for helping the IRS focus resources on examinations that are most likely to result in big returns. In fiscal year 2018 the office collected about $1.4 billion, according to its latest annual report.
In criminal cases, the IRS and the Justice Department can use a whistleblower as a confidential informant, which allows for freer exchange of information. William Cohan, a tax attorney representing Middleton in the Oxbow claim, said he had email correspondence with an IRS special agent from criminal investigations in early 2017 about the case. Still, he said, there has been “dead silence” since he last spoke to the IRS that spring.
Oxbow, in an email, said that no one from the Justice Department, Treasury Department, or IRS Criminal Investigation Division has contacted the company or any of its representatives in connection to an audit, which it said was closed in 2015. The company said it has never seen Cohan’s emails and therefore cannot verify whether they are authentic.
As for Middleton, he is now 55 and said he is unemployable in the tax field because of his whistle-blowing history. “I provided the IRS information at great personal cost,” Middleton pleaded in an April 28, 2018, letter to the Whistleblower Office. “I respectfully request to be treated fairly.
“The reality is: whistleblowing can severely damage a person’s ability to provide for his or her family,” he added in another letter to the office a month later. “The whistleblower reward program is designed to compensate for that reality. If the whistleblower program doesn’t listen to whistleblowers, and it doesn’t process awards without litigation, the program is failing the whistleblowers.”