By R. Scott Oswald and Jason Zuckerman
March 2, 2009 (SmartPros) — If disclosed properly, original information about violations of tax can result in an award up to 30 percent of the proceeds recovered by the IRS.
While preparing financial statements for your employer, you learn that the company has been shifting profits overseas to reduce its tax liability. Specifically, you discover that your employer has fictitiously transferred ownership of its drug patents to a company formed in the Caribbean and has claimed large deductions for purported royalties paid to the Caribbean company despite the fact that the Caribbean company does not truly own the patent. You know that this type of activity is unlawful but you are uncertain as to how you should proceed with this knowledge. Before you report this tax fraud, consider whether you are eligible to receive an award from the Internal Revenue Service (“IRS”).
IRS Whistleblower Rewards Program
Under the IRS whistleblower provisions codified at 26 U.S.C. § 7623, an individual who discloses tax fraud is eligible to receive an award ranging from 15 percent to 30 percent of the proceeds recovered by the IRS. Even individuals who participated in the violation can recover an award, as long as the individual did not plan and initiate the violation and is not criminally charged. To qualify for an award, the tax, penalties, interest, and additional amounts in dispute must exceed $2 million, and, if the allegedly noncompliant person is an individual, the individual's gross income must exceed $200,000.
Origin of the IRS Whistleblower Rewards Program
Prior to December 2006, the IRS offered little incentive for individuals to report tax fraud against the IRS. Indeed, under the old IRS whistleblower rewards program the IRS had the discretion not to provide any award to a whistleblower, the rewards were fairly modest, ranging from one to fifteen percent, and whistleblowers waited an average of seven years before receiving information on the disposition of their disclosures. Recognizing the critical role that whistleblowers can play in combating an estimated $400 billion in unpaid taxes each year, Congress adopted a robust IRS whistleblower rewards program to help the IRS detect underreporting and nonpayment of tax.
What types of activities are considered tax fraud?
Examples of tax fraud or evasion include:
Deliberately underreporting or omitting income
Claiming false deductions
Hiding or transferring assets or income
Overstating the amount of deductions
Making false entries in records
Failing to report income earned in a stock exchange
Maintaining two sets of books
Abusing charitable deductions
Shifting profits overseas
Transferring ownership of intangible property rights to offshore companies
Discounting receivables to an unrelated foreign business entity
What protection is available to the tax fraud whistleblower?
The IRS will maintain the confidentiality of the whistleblower's identity throughout the initial investigation process. If however, the whistleblower's testimony is needed in a judicial proceeding to further the IRS’ investigation, the whistleblower’s identity may be revealed.
Procedures for disclosing tax fraud
A disclosure is more likely to result in
an award if it includes documentation of
fraudulent transactions, a solid paper
trail, and detailed evidence
demonstrating tax fraud. Disclosures
that are speculative or lack concrete
evidence of tax underpayment may not
result in a whistleblower award. Where
two whistleblowers disclose the same
fraud, the whistleblower who made the
original disclosure will receive the
The statute of limitations for making a disclosure under the IRS Whistleblower Rewards Program is three years from the time the tax return was filed. If the disclosure concerns an omission in excess of 25 percent of the gross income stated in a tax return filed with the IRS, the statute of limitations extends to six years.
IRS investigations can take years to complete, but a detailed disclosure can shorten the process. Accordingly, it is critical to work with an attorney to investigate the fraud and present it to the IRS in a manner that will increase the likelihood of receiving an award. In addition, an attorney can advise the whistleblower as to remedies for retaliation resulting from disclosures to the IRS. After the IRS completes an investigation, the Whistleblower Office will issue a final determination regarding the whistleblower’s award amount. If the whistleblower believes that the award does not adequately reflect his or her contributions, the whistleblower may appeal the IRS’ decision to the Tax Court within 30 days.
Award payments are not made until there is a final determination of the tax liability owed to the IRS and the owed funds are collected by the IRS.
Monetary award for disclosure
Under the IRS Whistleblower Rewards
Program, a whistleblower can receive up
to thirty percent of any back taxes that
the IRS recovers. Additionally, a
whistleblower can receive up to thirty
percent of the collected penalties and
interest due on the back taxes recovered
by the IRS. The statutory minimum for
original source information is fifteen
Likely increase in tax fraud prosecutions
As the deficit swells, the government
will likely intensify its efforts to
investigate and prosecute tax fraud. The
IRS’ Whistleblower Rewards Program
provides a critical tool to the IRS to
identify tax fraud and obtain original
source information about the intricacies
of fraudulent tax schemes.
R. Scott Oswald and Jason Zuckerman are Principals at Employment Law Group® law firm in Washington, D.C., where they litigate whistleblower and other employment-related claims on behalf of employees.
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