The criminal investigations arm of a California tax agency has been reviewing allegations that the Vanguard Group may have underpaid its income taxes in the most populous state.
The California Franchise Tax Board in September received the allegations of David Danon, a former Vanguard tax lawyer turned whistle-blower, and sent them to its criminal investigators, state correspondence shows. The bureau disclosed the investigation in an email to Danon's lawyer, Stephen Sorensen.
Most tax disputes are handled as civil cases. The Criminal Investigations Bureau gets involved only in a "relatively small" number of cases, such as when a tax board auditor finds "something suspicious" indicating possible fraud, said Troy M. Van Dongen, partner in the San Francisco office of Winston & Strawn L.L.P. and an editor of the California Tax Lawyer journal.
Danon alleges that the Malvern-based company has violated federal and state tax law by undercharging its mutual funds for professional services. Vanguard has said this "at-cost" pricing lets it charge customers low fees.
Danon, backed by tax experts he hired as consultants, says federal law requires affiliated companies to charge one another "market" prices, generating profits and tax obligations, which he says Vanguard wrongly avoided. He also accuses Vanguard of moving money to a reserve that is not taxed or shared with customers.
Vanguard has said it complies with the law.
The tax board does not confirm or comment on probes, said spokesman John Barrett.
The Criminal Investigations Bureau's email "shows California is taking this very seriously," said Sorensen, Danon's lawyer.
"We are not aware of an inquiry by California or any other state," Vanguard spokesman John Woerth said.
California is not the only state to look at Vanguard. The company paid Texas "penalty and interest" for taxes the state said Vanguard owed for the year 2013.
Texas' top tax official, Glenn Hager, and Vanguard corporate tax director Albert Pisanelli signed a statement that they were cutting a deal to end their tax dispute "solely due to the vagaries of litigation and to buy peace." Vanguard did not admit wrongdoing.
The amount of taxes, penalty, and interest Vanguard paid were blacked out and treated as confidential in a copy of the agreement obtained by Danon's lawyer through a freedom-of-information request.
Danon was awarded a $117,000 "informant" fee by Texas in October. Texas imposed a 1 percent tax on a broad measure of corporate income, and the state pays whistle-blowers up to 5 percent of taxes recovered using information they provide. The amount of Danon's award suggests the state, using his information, collected a minimum of $2.34 million on Texas income totaling $234 million
California imposes a corporate income tax of 8.84 percent, so liabilities could be larger there. So could Danon's whistle-blower cut, if he collects one.
Last month, a New York judge ruled that Danon could not sue to collect whistle-blower fees there because, as a New York lawyer, he would have violated confidentiality restrictions in reporting alleged wrongdoing to the state in early 2013 before Vanguard fired him. Danon plans to appeal.
Danon has also alleged that Vanguard underpaid its federal taxes. The IRS has reviewed his information but does not comment on tax cases.
NOTE: This story has been updated to clarify Vanguard's apparent Texas taxable income for 2013.