Tax Fraud: A Guide for Potential Whistleblowers
Ask someone if they enjoy paying their taxes and you will probably get a response that ranges from laughter to disbelief. That’s not exactly news. It’s also not news that some tax strategies that allow some people to avoid paying taxes may anger us or cause resentment.
It’s important to distinguish between tax avoidance and tax evasion. Avoidance is legal, because it means using legitimate methods that enable you to pay a minimal amount in taxes. Generally, a taxpayer accomplishes avoidance through various deductions, credits, and certain tax law regulations that might require a CPA in order to understand them. But almost everyone practices tax avoidance. If you have a mortgage and use the IRS’s Schedule A, you are engaging in tax avoidance. Our tax system and its laws—and some Supreme Court decisions—give us the right to pay as little in taxes as possible by legal means.
But tax evasion is the intentional avoidance of paying taxes by employing illegal practices. If you are found guilty of evading taxes, you will certainly face big fines, and may even do jail time.
Tax Evasion Hurts All of Us
The problem of tax evasion is significant in the U.S. The historical noncompliance rate for paying all taxes owed is 17 percent, meaning that about 1 in 6 is guilty of tax evasion. (This figure includes both individuals and corporations.) The Treasury Inspector General for Tax Administration (TIGTA) reported that, in 2006 alone, this rate of tax payment noncompliance meant that roughly $450 billion was underpaid.
Admittedly, it is difficult to obtain certain figures from the IRS when it comes to underpayment of taxes and tax fraud. But one group that has consistently underreported taxable income are folks who have a side business, sometimes on the Internet, in which payments are often in cash. TIGTA believes that, in just one year, such businesses result in $63 billion in lost revenue.
But it’s not just weekend sellers who are cheating. According to TIGTA, some rich individuals and some corporations using illegal strategies like offshore tax shelters are also underpaying. The lost tax revenue, some experts believe, is as much as $40 to $70 billion a year.
If a person or business entity is not paying their taxes, the rest of us end up shouldering the burden. Do you really think it is right that a substantial number of business owners and individuals should get away with tax fraud? After all, such behavior is definitely not fair to the rest of us who pay what we owe. These tax-fraudsters are sponging off those of us who obey the law.
Facts for Whistleblowers
Federal tax fraud cases are not handled under the False Claims Act (FCA). However, the compensation for a whistleblower that brings a successful case is modeled on the FCA: 15 to 30 percent of the total amount collected will be awarded to the whistleblower. Congress changed the Internal Revenue Code in 2006 to provide these incentives for reporting tax fraud. Interestingly enough, if a whistleblower does not like their award, they can challenge the amount they received. Before 2006, whistleblowers did not usually receive substantial awards, and the awards were not appealable.
Note that the 2006 legislation applies only to companies or persons who have underpaid taxes by more than $2 million. Also, investigations of individual persons are limited to those with annual incomes of $200,000 or greater.
Consider that, if you were involved in planning or initiating the tax fraud, the IRS might reduce or deny an award to you, as is their right under the law. But it’s only a “maybe,” and it certainly does not mean you should lie. Always tell the truth to the best of your ability. In one huge case, the U.S. government was able to recover $780 million from UBS AG, a financial firm, for helping the wealthy hide taxable funds offshore. The whistleblower who took part in the scheme tried to hide his role in it, and was prosecuted for doing so. However, he did receive a $104 million payout after getting out of prison.
Finally, know that the IRS is required by law to protect your identity as a whistleblower.
Kinds of Tax Fraud Reporting the IRS is Seeking
When it comes to taking on tax evasion cases that are reported by whistleblowers, the IRS needs documentation of one (or more) of the situations listed below:
- Failure to pay taxes
- Unreported income
- Fake or false deductions
- Fake or false exemptions
- Fake or misrepresented documentation
- Failure to properly withhold
- Any evidence of organized crime.
According to a report in the Wall Street Journal, the IRS is especially interested in the following:
- Any tax shelter that might be difficult for the IRS to detect on their own because it is a one-time occurrence (a “one-off” or “bespoke” shelter).
- Secret offshore accounts, with special emphasis on the locations Panama, Singapore, and Hong Kong.
- Frauds that extend over several years, which maximize the IRS’s chances of successful prosecution.
The IRS requires hard evidence of fraud, including dates, names, and supporting paperwork. The investigative and court processes can take several years, and nothing is paid to the whistleblower until the suit is brought to a positive conclusion. But, like the UBS AG suit mentioned above, cases do get resolved. In a successful 2016 case of tax noncompliance, an anonymous whistleblower received an $11.6 million award from the IRS.
Working with whistleblowers tirelessly to shed light on fraudulent practices.
If you think you have the facts needed to bring a whistleblower case, the experienced whistleblower attorneys at the Louthian Law Firm can review your case and help you file the appropriate disclosure statement. Under some circumstances, the government will intervene, or join in your lawsuit.
Your chances of succeeding are greater if your whistleblower claim is substantive, clear, and to the point. Because of this, meeting with a qualified whistleblower attorney can increase your chances of winning. The Louthian Law Firm can help you form your claim so that the government will be more inclined to intervene in your case; government intervention can sometimes increase the chances of recovering reward money. Even if the government decides not to intervene, it could still be a good idea to pursue your case without government involvement. Our strong support system can assist you through every step of the process.
For a free, confidential evaluation of your case, call the Louthian Law Firm today at 1-803-454-1200 or, if you prefer, you can fill out our online contact form.