Tax Whistleblower Blog

When a Whistleblower Stands Too Close To The Fire To Be Rewarded

I have blogged on several occassions about former executives of companies who become Whistleblowers against their former employers.  In fact, I have heard more than one IRS employee comment regarding the Tax Whistleblower Reward Program, “The moral of the story is–Don’t fire your CFO.”  This story, which I’m about to tell, is about a former CFO who likely stands too close to the fire to receive a reward from the Whistleblower Office–

Gene Haas, the former CEO and owner of Haas Automation, Inc., created a phony Nevada company and enlisted the help of his then CFO to commit tax fraud.  After enlisting the help of John Phillips, CFO, Haas created a phony company in Nevada called “Supermill,” and then paid the phony company from phony invoices.  Then Haas and Phillips got in a business dispute, Haas sued Phillips for $27 million (apparently related to the phony transactions), and Phillips went to the FBI and told them of the scheme. Phillips was not indicted.  (It’s not a good idea when you commit tax fraud to get a co-conspirator angry enough to go to the FBI.)  The DOJ, in a press release announcing Haas’ indictment, claimed that the tax fraud was upwards of $20 million.  Now, with a $5 million fine added in, penalties, and interest, the total judgment is somewhere around $70 million.  And Haas has been sentenced to a two-year prison term in a Federal Prison Camp.

However, if Phillips is anxiously awaiting a check from the Tax Whistleblower Reward Program, he may a bit disappointed.  IRC section 7623 specifically prohibits anyone from receiving a reward if they were instrumental in initial underpayment of tax.  Phillips would likely be considered instrumental, where he received several million dollars from the scheme.  Clearly, Phillips was more than an innocent bystander in this affair.  His reward for coming forward is that he wasn’t prosecuted.  However, it is unlikely that Phillips could receive a reward based upon his material involvement in the tax-avoidance scheme.