An anonymous Wall Street banker has received a reward of $1.1 million for reporting a massive tax fraud by Enron, Bankers Trust and others. Attorney Erika A. Kelton of Phillips and Cohen announced the reward to her client yesterday. It is one of the first rewards issued by a five-year old Whistleblower Office at the Internal Revenue Service (IRS). However, the IRS paid this reward under an older law that made the rewards discretionary.  Still, the IRS decided to issue the maximum reward allowed under the old law — 15% of the IRS’ recovery. Kelton points out, however, that the IRS’ recovery would have been much bigger if the IRS had acted more quickly on her client’s 1999 disclosure. "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," Kelton said in her announcement.

The tax fraud scheme consisted of creating phony tax shelters that Enron used to operate tax free while lying about its reported profits for years before Enron declared bankruptcy in 2001. The schemers nicknamed their shelters "Project Cochise" and "Project Steel." They involved artificial duplication of tax deductions so that Enron would generate fictitious pre-tax income on its financial statements. The whistleblower testified anonymously to the Senate Finance Committee in 2004.

Under the 2006 amendment, the IRS whistleblower reward became mandatory for information that leads to IRS recoveries over $2 million.  Now the minimum reward is 15% and the IRS can issue rewards of up to 30% of the recovery. It is a good sign that the IRS Whistleblower Office used its discretion to award Kelton’s client the maximum allowed under the old law. This award should encourage others to come forward to report large tax frauds in the future. Congratulations to Erika Kelton, Phillips and Cohen, and their anonymous client.