Case 3-5
IRS Whistleblower and Informing on Tax Cheats
On October 4, 2012, the Internal Revenue Service paid a $2 million reward to a whistleblower that exposed
an alleged tax avoidance scheme by Illinois Tool Works Inc. (ITW) that cost the U.S. Treasury hundreds of
millions of dollars. The scheme involved ITW enlisting a Swiss bank to fabricate unauthorized tax
deductions by duplicating its own tax deductions in order for ITW, as a client and unrelated taxpayer, to
claim the same deductions as an offset to ITW’s otherwise taxable income. As a result of tax audits, ITW
wrote-down its deferred tax asset by $383 million.
Whether motivated by a sense of justice or the pursuit of a seven figure reward, the Wall Street insider
known only as Mr. ABC has demonstrated the huge return on investment available to IRS whistle-blowers
that provide information under a program that pays out between 15 percent to 30 percent of any recovery,
without any monetary cap on the amount of the reward,
It was the third time Mr. ABC had received an IRS whistleblowing award including $1.1 million in 2004
when he provided information about abusive tax shelters that helped Enron avoid taxes on more than $600
million of taxable income. He also received $1.24 million in another case.
In testimony before the 2004 U.S. Senate Finance Committee, Mr. ABC proceeded to explain his
motivation to blow the whistle by criticizing the government’s ability to identify and investigate
sophisticated tax shelters. “When I looked through all the financial engineering and big words, I believed it
was just a fake deduction scheme, he testified.”
The IRS refused to comment noting confidentiality issues.
Questions
1. Should we regard Mr. ABC has a new “caped crusader” or an opportunist? Explain the
reasons for your response.
Mr. ABC may be considered both a “caped crusader” and an opportunist. Maybe the question that needs to
be asked is how to train, encourage, or attract more such people. Mr. ABC has collected $4.34 in rewards
which implies that the taxes recovered could range from $28.93 million at a 15 percent reward to $145
million at a 30 percent reward. The size of the recovery and the reward amounts are hard to ignore and
2. Is it ethical for a Wall Street insider to purposefully analyze financial data of an unrelated
company in order to identify corporate wrongdoing, report it to the appropriate authorities,
and then receive a whistleblowing reward?
Mr. ABC has helped the IRS collect taxes owed under tax law. In whistleblowing he may be argued that he
is trying to see fair application of the tax law to all U.S. companies, and thus, all U.S. taxpayers. His ethical
motivation could only be tested if he would still whistleblow the ITW to the IRS, even if no reward was
3. Consider Mr. ABC’s motivation for blowing the whistle in the ITW case and the fact that it
was the third time he had engaged in whistleblowing to the IRS. Using Kohlberg’s model of
moral development, at what stage of ethical reasoning would you say Mr. ABC was at? Why?
Since this is the third time for Mr. ABC to engage in whistleblowing to the IRS, it is hard to judge his
motivation from afar. The reward may play a large part in the motivation. If you ignore the reward
temporarily, a whistleblower to the IRS is reasoning at least at stage 4, law and order, but may also be