Millions of people trust Vanguard to manage their money. The Pennsylvania-based firm touts its low fees and variety of mutual funds in every conceivable category. The company does not want its investors to know that it may have underpaid the IRS by more than $1 billion. The method by which Vanguard may have evaded its tax burden was brought to light by former employee David Danon, who once served as the company’s tax attorney.
In March 2018, Danon re-filed a wrongful termination complaint against Vanguard. He alleges the company fired him after he warned Vanguard that tax violations were occurring. A previous filing was dismissed in May 2016 by the U.S. District Court for the Eastern District of Pennsylvania. However, the U.S. Court of Appeals for the Third Circuit found Danon was not precluded from filing a whistleblower lawsuit.
The Contingency Fund
According to Danon, Vanguard created a contingency fund, but the monies in that fund were not used to pay taxes or shareholders. Instead, the financial behemoth used the fund to make it appear they made little taxable profit. If true, that may violate the U.S. Tax Code’s Section 482. Under the law, companies must pay market prices to their affiliates, so taxable income is clear. Vanguard’s famous low fees may result from charging artificially low prices.
When Danon discovered the company may have violated the tax law, he warned Vanguard principal, Shawn Travis, about the situation on multiple occasions. According to Danon’s lawsuit, Travis told Danon not to inform other Vanguard principals and to not put his concerns in writing. However, Danon did tell the assistant controller of Vanguard about the possible violations. He also told fellow lawyers in Vanguard’s tax department. His lawsuit states that Vanguard eventually received an outside opinion confirming Danon’s view of the contingency fund, but continued to file erroneous reports with the IRS, as well as the Securities and Exchange Commission (SEC). Danon then took his information to the SEC, which should have protected him under federal whistleblower laws. The SEC later filed a friend of the court brief in Danon’s case.
A Possible Windfall
Although Danon’s lawsuit is still proceeding through the judicial system, he has already received a windfall from his whistleblower role. Texas paid him $117,000 as a percentage of the back taxes the state received from Vanguard after Danon informed Texas tax officials about the tax underpayment. Currently, Vanguard is facing audits in New Jersey, New York, and Connecticut. The company is also involved in a Pennsylvania tax dispute on its corporate payments. If these states find Vanguard liable for back taxes, Danon may again receive a percentage. The IRS investigation is expected to take years, but if the federal agency determines that Vanguard owes back taxes, Danon may again qualify for a percentage.
New Jersey Whistleblower Lawyers at Sidney L. Gold & Associates, P.C. Advocate for the Rights of Whistleblowers
If you have lost your job or received unfair treatment because of whistleblowing, you need the services of the experienced New Jersey whistleblower lawyers at Sidney L. Gold & Associates, P.C. Fill out our online form or call us at 215-569-1999 today to schedule your initial consultation. We are centrally located in Philadelphia, Pennsylvania, and we proudly serve clients from the surrounding areas, including Atlantic County, Burlington County, Cape May County, Cumberland County, Gloucester County and Salem County, New Jersey.