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IRS ‘Black Hole’ Swallows Whistleblower Against Koch, Walmart (1)

July 1, 2019, 4:57 PMUpdated: July 1, 2019, 9:40 PM

Charles Middleton has spent almost 10 years wondering whether becoming a whistleblower to the IRS was worth it.

A former senior tax executive at Walmart Inc. and billionaire Bill Koch’s Oxbow Carbon LLC, Middleton in 2009 filed the first of several confidential claims he’s made against his employers. He asserted, in hundreds of pages of documents obtained by Bloomberg Tax, that those companies engaged in questionable practices that he estimated resulted in more than $250 million in tax dodges by Walmart and $350 million by Koch’s business—allegations both companies vehemently deny.

As far as Middleton knows, the claims haven’t been resolved, according to the documents and one of his lawyers. He’s not sure how they’re progressing because the IRS has kept him mostly in the dark, he said in several of the documents.

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.

Lawyers say the limited communication can leave hundreds of millions of dollars in taxes uncollected and frustrate people like Middleton who put their careers on the line. “And you don’t want a lot of whistleblowers out there bad-mouthing the program,” because new whistleblowers won’t come forward, said Stephen M. Kohn, an attorney at Kohn, Kohn & Colapinto LLP, who represents such individuals.

The agency, in most cases, has a one-interview policy with whistleblowers, according to Kohn and the IRS’s own reports. After that it’s the “Black Hole of Calcutta,” Kohn said, referring to the dungeon in India where British prisoners were held in the mid-1700s.

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, Walmart

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.

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 for this story, 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.

The IRS said it wasn’t able to comment on cases because of privacy laws, and didn’t respond to several requests for statements on its general policies with whistleblower claims.

Middleton, who was vice president of international tax at what was then Wal-Mart Stores Inc. before his role at Oxbow, stands to benefit handsomely if the IRS collects more money from his former employers based on his claims. If the IRS uses information provided by a whistleblower, it can award up to 30% of the additional taxes, penalties and other amounts it collects.

Big Returns

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.

While the agency in reports says that it prefers to get its information from whistleblowers in their claims and in an initial interview, there are certain cases where it says ongoing interaction during an audit may be warranted. In its fiscal 2017 report, the IRS said it supported legislative changes that would give it more leeway for disclosures to whistleblowers if they were accompanied by tougher criminal penalties if whistleblowers shared that information with others.

The lack of communication with whistleblowers has been “detrimental” at times, sometimes resulting in the agency missing crucial information when investigating a company’s practices, Kohn said.

“The whistleblower’s your number one source. They can answer questions. They can cut through the maze. They can explain all the connections between the people,” he said. “You want complete flow of information.”

The documents relating to Middleton’s claim show a $99 million adjustment was proposed to Walmart’s 2009 tax return. Middleton filed his first claim against the company in December 2009, and said Walmart from 2001 up to that point had been understating its U.S. income inclusions and overstating its foreign tax credits.

On the $99 million adjustment alone, Middleton could reap as much as $29.7 million if the IRS determines an award is justified, but as of at least 2018 the documents suggest the agency hadn’t made a decision one way or the other. In a May 2018 letter, he questioned the reasoning for the 2009 adjustment and whether his claim had anything to do with it.

‘Japan Project’

The documents show that Middleton filed two new claims against Walmart in June 2010, each of which he said should result in more than $100 million in tax adjustments.

In the document he referred to a series of transactions he called the “Japan project,” which he said combined losses generated by Walmart’s Japanese subsidiary with profits generated by U.K. and Canadian subsidiaries to create a pool of artificially low earnings and artificially high foreign taxes. Another transaction, he said in the whistleblower filing, involved making false claims about the timing of the liquidation of a Singapore subsidiary.

Taken together, these moves, which Middleton said had no business purpose, gave the company access to more U.S. foreign tax credits that could be used to offset its overall U.S. tax bill, according to the claim.

A Walmart committee approved the Japan transaction in February 2009, Middleton said in the May 2018 letter. Because Walmart participates in a real-time audit program known as the Compliance Assurance Process, the IRS received information about that meeting, he said. But Middleton said there was a second meeting immediately afterward, one the IRS was not told about, in which a high-level tax executive touted the tax benefits of the project.

Walmart confirmed the existence of the Japan project but rejected Middleton’s claims that it violated any tax laws and said it didn’t withhold information. “We provided all documents and information requested by the IRS associated with our Japan transaction,” the company said, noting its continual communication with the IRS through the real-time auditing program. “The IRS reviewed the information and the matter was closed.”

Middleton said in documents that he worked as Walmart’s VP of international tax from September 2007 to October 2009. He told the IRS he remained on the company’s payroll until February 2011, but had been relieved of his duties and access to all company information after October 2009.

Plea for Communication

In the May 2018 letter, Middleton said the IRS was making a mistake by not communicating with him because the “Japan project” was complex and “it is almost impossible to expect IRS personnel to understand a transaction as intimately as an internal tax person.”

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. Petcoke is a byproduct of the oil refining process that can be used as fuel.

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.

Contract Option

Lee Martin, director of the IRS Whistleblower Office, wrote a memo in 2017 that said the IRS had the ability under tax code Section 6103(n) to enter into agreements with whistleblowers to permit more communication, and laid out the procedures for doing so.

Even so, Martin told Bloomberg Tax June 21 at a conference in New York, the agency has never entered such an agreement.

Dean Zerbe, national managing director at alliantgroup LP, said the IRS’s hesitance to enter into 6103(n) agreements—at least on the civil side of its operations, where whistleblower claims are initially assigned—seems to stem in part from the fact that it has always limited interaction with whistleblowers. The extra work and headache created by the agreements has been another deterrent, said Zerbe, a well-known whistleblower attorney.

These same roadblocks to communication don’t exist in the IRS’s Criminal Investigation Division, Zerbe and Kohn said. 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 can’t verify whether they’re authentic.

New Alternative

The new IRS reform law allows the agency to exchange information with whistleblowers without a 6103(n) agreement to the extent disclosure is necessary in obtaining information that isn’t otherwise reasonably available to help the IRS determine how much a taxpayer owes.

It also requires the Treasury secretary to notify whistleblowers about the status of their cases within 60 days of cases being referred for audit or taxpayers making payments to settle liabilities related to information whistleblowers provided.

Kohn said the legislative changes provide more cover to the IRS than Section 6103(n) because they explicitly tie the ability to disclose information to whistleblower law.

The bill allows the agency to talk to whistleblowers without the formalities a contract under 6103(n) might entail, Zerbe said.

Zerbe questioned whether the IRS will take advantage of that new authority. “Culturally, they have not embraced this idea of back-and-forth communication with the whistleblowers,” he said.

‘Eye-Blinkingly Crazy’

The legislative changes don’t address the government’s position in the U.S. Tax Court case Whistleblower 11099-13W v. Commissioner that the whistleblower shouldn’t get an award for amounts a taxpayer voluntarily pays as a result of a claim and related IRS audit.

The government says the award should be limited to adjustments the IRS makes.

The law wasn’t intended to work that way, said Zerbe, who thinks Congress should step in if the courts don’t side with the whistleblower in these cases.

“This is eye-blinkingly crazy that the service is taking this position,” said Zerbe, who isn’t involved in that case but said he’s dealing with the same issue in another matter under review with the IRS involving a Fortune 500 company.

Zerbe was formerly senior counsel and tax counsel on the Senate Finance Committee for Sen. Charles E. Grassley (R-Iowa), who now chairs the committee, and was one of the key architects of the legislation that created the IRS Whistleblower Office.

A spokesman for Grassley said in an email that the chairman “is always looking at whistleblower issues and would consider any necessary improvement.”

‘Great Personal Cost’

As for Middleton, he’s now 55 and says he is unemployable in the tax field because of his whistle-blowing history.

As of at least May 2018 he said he hadn’t seen a cent or had any resolution on his Walmart claims, according to the documents. The same goes for his Oxbow claim, which his attorney says is ongoing as far as he knows but the IRS won’t offer any updates either way.

In a 2014 memo about the Walmart claims, one of Middleton’s lawyers said IRS officials had by that point discussed the possibility of partial payouts. It wasn’t clear to him, though, whether any had been or would be approved.

“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.”

(Updates with signing of H.R. 3151.)

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; Bernie Kohn at