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Saturday, Sep 11th

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Tax Fraud

What is Tax Fraud?

Tracy Feldman
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EA lawyers have successfully represented tax fraud whistleblowers for years, even before whistleblower rewards became mandatory. The Tax Relief and Health Care Act of 2006, signed into law on December 20, 2006, amended the Internal Revenue Code to provide for substantially increased rewards for tax fraud whistleblowers.

The new law applies to claims for rewards in cases in which the potential amount owed to the IRS for taxes, penalties, and interests exceeds $2 million and, in cases of individuals, the taxpayer's gross annual income must exceed $200,000.

The new law provides a minimum reward of 15% and a maximum reward of 30%. This is a substantial increase over the previous regulations that provided a minimum discretionary recovery of 1% and a maximum recovery of 15% for whistleblowers.

The new law also provides that IRS must make a reward payment in those cases in which pursues a remedy against a taxpayer based upon information provided by the whistleblower. This mandatory requirement that the IRS pay a reward is a drastic change from the previous regulation that, in effect, gave the IRS the discretion to decide whether a reward was appropriate in any given circumstance.

The new law also provides whistleblowers the right to appeal the denial or amount of a reward to the Tax Court. Again this is a significant change to existing law strengthening the rights of whistleblowers, who under previous regulations could not appeal a decision by the IRS as to the amount of a reward or whether a reward was appropriate. The new law does place a cap of 10% on rewards if the IRS determines that the whistleblower's information was not the original source of information but still contributes to the additional collection. However, whistleblowers who planned or initiated the tax scheme may be barred from recovering a reward.

In February 2007, the IRS named Stephen Whitlock the first director of its new Whistleblower Office. The new law will apply to any claims submitted after the date of enactment of the new law on December 20, 2006.

Types of Tax Fraud Cases

Tracy Feldman
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Underpayment Fraud

The IRS Whistleblower Rewards Program applies to any tax underpayment, whether the result of fraud, reckless disregard, innocent mistake, or some other level of intent. Thus a tax underpayment can arise from any issue that results in the payment of less tax than would otherwise be due if the taxpayer had computed its tax properly. Therefore a whistleblower does not have to be aware of a fraud in order to seek a reward.

Sophisticated taxpayers often take overly aggressive positions on their tax returns. They do so in the hope that their tax position will not be challenged by the IRS. Even though these overaggressive positions may not be fraudulent, they often relate to very large tax issues, which, when identified by the IRS, can lead to substantial recoveries by the IRS. Such whistleblower claims are entirely appropriate IRS Tax Whistleblower Law usage.

The IRS has identified many issues that commonly result in underpayments. Some of these issues are the result of fraud that the IRS may prosecute criminally. But more often the IRS pursue tax underpayment cases civilly. This is often due to the highly complicated, technical nature of the tax schemes used to avoid the payment of taxes, making it hard for the IRS to establish that the taxpayer "intentionally" underreported its taxes. Nonetheless, criminal tax schemes are also pervasive.

The IRS has identified numerous common schemes for those among the public that are interested in reporting tax underpayments. Below is a partial listing of those schemes identified by the IRS. If you are aware of any of these schemes, you should consider reporting them through the Tax Whistleblower Program:

Foreign Earnings Repatriation

Other offshore tax haven abuses exist, such as:

  • Undisclosed Third Party Transactions
  • Shifting or Siphoning Pre-Tax Income Offshore
  • Lending Money to a Parent Company by Offshore Subsidiaries
  • Relocating Intellectual Property Offshore & Then Charging a U.S. Division Royalty Payments
  • The Use of Special Purpose Entities (i.e. Structuring of Financial Instruments that Enable Profits to Either Be Moved Overseas or Onto Another Accounting Category Where They Will Not Be Taxed)

Abusive Tax Shelters

Abusive tax shelters are transactions designed for the purpose of lowering tax liabilities but otherwise having no economic value. The IRS publishes a list of abusive tax shelters to place taxpayers on notice that the IRS will oppose the tax benefits that have been claimed as a result of these transactions. Thus, if you have information about a tax shelter transaction of a type that has previously been identified by the IRS as abusive, you should consider submitting a tax whistleblower claim. You should also consult with an experienced tax whistleblower attorney if you believe that you have evidence of an abusive tax shelter that has not been previously identified by the IRS.

A partial listing of those transactions identified by the IRS as abusive tax shelters is as follows: