The Law Firm of Piacentile, Stefanowski & Malherbe LLP

Tax Evasion and Fraud in the Art Market – The Role of Whistleblowers

Whistleblowing is a valuable tool for law enforcement and the IRS and State Tax authorities to investigate tax fraud. Often it is difficult for Tax authorities to discover all instances of tax fraud or evasion just based on audits and standard investigations. That is where Whistleblowers often provide invaluable assistance to authorities who otherwise may not have discovered such schemes or crimes. While the motivation for exposing the fraud may vary, the whistleblower may also in some cases be financially rewarded for alerting authorities and helping to stop the harm to the public interest. For example, in tax cases, if a whistleblower exposes tax fraud and there is a prosecution and recovery, the whistleblower could be entitled to 15-30 percent of the reward.

The Art Market and ownership, sale, donation, and transfers of Art, is a field that is ripe for the possibility of tax fraud; therefore, it is also a field that is ripe for whistleblowers to assist in detecting and catching such tax frauds.

Some examples of fraud in the art world include donating art to receive charitable deductions based on the fraudulent or inflated valuation of the art itself. Tax evasion in reporting of the sale of art is another type of fraud. For example, the art auction house Christies had to pay a $16.7 million settlement to the state of New York for failing to pay NY Sales taxes on some $187 million in private sales of art sold through their foreign offices but to New York buyers. Christies failed to report the sales and pay NY Sales tax, as required by NY law.

Another example of fraud in the New York art world was in 2020 when the art auction house Sothebys in New York fraudulently assisted an art purchase to claim tax benefits that should not apply. Sothebys provided resale certificates to a collector so that they could claim a special tax benefit given to dealers who sell art. However, this particular collector was planning and in fact, kept the art for themselves. Sotheby’s provided the resale certificates despite knowing that the buyer was not planning to resell the work and thus allowed the buyer to avoid $27 million in New York sales tax.

Many cases of tax fraud and evasion in the art world are only detected and prosecuted because a whistleblower with inside information assisted the authorities in bringing the fraud to light. This is the case in the above-mentioned Sothebys tax evasion case in New York. It is well known that in the high-end art market, purchasing and selling expensive art can provide a tax haven and art transactions often come very close to, or step over, the line of legal tax strategy. The purchase and sale of art often take place behind the scenes and out of the field of awareness of tax, or law enforcement authorities, making it potentially ripe for fraud. Whistleblowers are often the only way that certain tax fraud and evasion schemes come to light.

As demonstrated by some of the examples above, New York is one of the global centers of the art market and thus its tax laws are particularly important as applied to art transactions. New York has special sales and use and income taxes that apply to art transactions. Since New York has an extensive regime of taxes that apply to art sales, it is unsurprising that there are many cases of tax fraud and evasion in the New York art market. As with any fraud or illicit activity, whistleblowers are a valuable asset for law enforcement and government authorities investigating art tax non-compliance. In New York investigators have both federal and state laws and whistleblower provisions in their toolbox.

Two of the most important federal whistleblower laws and programs are the False Claims Act, which contains a whistleblower provision, and the IRS Whistleblower program. The False Claims Act allows the government to prosecute those who submit false claims to fraudulently receive government money. Its whistleblower provision allows a whistleblower to receive an award of between 15-30 % of the money recovered in successful government enforcement.

The IRS Whistleblower Office pays monetary awards to whistleblowers who provide information leading to enforcement and recovery in cases of tax non-compliance. The award percentage is generally between 15 and 30 percent of the proceeds collected.

New York also has its own False Claims Act which also has a whistleblower provision. The New York False Claims Act (NYFCA) provides penalties for tax violators and can provide substantial rewards to art tax whistleblowers. Awards are similar to the Federal False Claims Act and can range in general from 15-30 % of the money recovered, given that the information is what leads to the recovery. The New York False Claims Act Whistleblower provision also provides protections to employees in the case that they blow the whistle on tax violations.

Given the lucrative nature of the art market, and that it is a market that is especially difficult to regulate and investigate, whistleblowing is one of the more effective means of uncovering tax fraud and evasion. Providing incentives to the whistleblower, in the form of financial reward and protection, as such is provided in the whistleblower programs of the IRS and as provided in the False Claims Act, is an effective countermeasure and deterrence in the fight against Art Tax fraud.

Art transactions and tax fraud, as well as the procedures for whistleblowers to follow when providing inside information to authorities, are not simple to navigate and understand. As a potential whistleblower, it is vital that you speak with an attorney knowledgeable in the field of whistleblower law as well as the procedures that whistleblowers must follow for the applicable whistleblower programs.

If you have any information about suspected art tax violations and are considering reporting it to the authorities, please do not hesitate to contact Whistleblowers International for a free and confidential consultation about your rights, protections, and possible financial reward