Caroline Ciraolo, Principle Deputy Assistant Attorney General, Department of Justice Tax Division, made clear the importance of whistleblower counsel while speaking at the American Bar Association’s National Institute on Criminal Tax Fraud and Institute on Tax Controversy in Las Vegas.  Ms. Ciraolo discussed her announcement earlier this year that the Tax Division would be interested in receiving information from whistleblower’s counsel about mandatory award claims under section 7623(b) that have been submitted to the IRS Whistleblower Office if the claim involves a criminal tax matter.  Ms. Ciraolo cautioned that before bringing information to the Department of Justice that whistleblowers and their counsel should have serious discussions if the whistleblower participated in the reported conduct. 

It is important for whistleblowers to fully understand any consequences that they may have prior to providing information to the IRS, be it liability for additional taxes or potential criminal liability for certain actions.  As everyone’s situation is different this is something that should be discussed with an attorney prior to providing information to the government.

Ms. Ciraolo noted that the Tax Division will not be paying a separate award, nor will it be opening its own whistleblower office.  However, the channels that are used to submit information about civil tax underpayments to the IRS can still be used for criminal tax matters.

The Tax Court held that it has jurisdiction to review the IRS’s whistleblower claims award determinations where the informant has alleged that they provided significant information to the IRS before and after December 20, 2006, the effective date of section 7623(b).  Whistleblower 11332-13W v. Commissioner, 142 T.C. No. 21, is a continuation of one of the cases where the whistleblower that was allowed to proceed anonymously and have the record sealed in one of the three cases released on May 20, 2014. 

In this case, the whistleblower first provided generic information regarding the tax fraud scheme engaged in by the whistleblower’s employer and several related entities and subsidiary companies to IRS and the Department of Justice in June of 2006.  The whistleblower had several more meetings with the IRS and DOJ in 2006.  The whistleblower continued to provide additional information relating to the tax scheme and those involved to the IRS and Department of Justice until the fall of 2009.  The whistleblower alleges that the information provided after 2006 was not simply confirmatory details.  The Government entered into a Non-Prosecution Agreement with one of the targets that led to a recovery of more than $30 million in taxes, penalties, and interest.  The Whistleblower Office granted that whistleblower an award under section 7623(a) and denied the whistleblower’s request for an award under section 7623(b).

The Court held that the whistleblower had satisfied the “pleading burden by alleging facts that respondent proceeded with an action against the targets using information brought to respondent’s attention by the whistleblower both before and after December 20, 2006.”  The Court held that the allegations are sufficient to establish jurisdiction. 

The Tax Court also released a second opinion, Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-106.  The Tax Court held, on similar facts as Whistleblower 11332-13W, 142 T.C. No. 21, that the Tax Court also had jurisdiction to hear their appeal of the IRS Whistleblower Office’s denial of their award under section 7623(b).

It is good to see that the Tax Court continues to broadly interpret its jurisdiction when it comes to appeals of whistleblower award determinations.  These cases demonstrate the Tax Court’s continued fairness in providing whistleblower with a venue to appeal award determinations under section 7623.

Kathryn Keneally, Assistant Attorney General, Tax Division of the Department of Justice, acknowledged that the Department of Justice had used information provided by whistleblowers in tracking down unreported offshore bank accounts held by United States citizens while speaking to the Civil and Criminal Penalties Committee of Tax Section of the American Bar Association at its May Meeting on Saturday, May 10, 2014.  Ms. Keneally included whistleblower information along with several other sources of information, including bank disclosures, while discussing the Department of Justice’s Offshore Compliance Initiative.  Ms. Keneally emphasized her quote from a May 9, 2014 Press Release:

As today’s announcement shows, we receive information about U.S. taxpayers with undisclosed accounts from many sources, some of which are not public.  For many accountholders, the time to come forward voluntarily to avoid criminal prosecution has run out.  

Although contributions by whistleblowers frequently go unacknowledged, Ms. Keneally’s statement shows that the information provided by whistleblowers is vital to the continued success of the Department of Justice’s enforcement efforts.  This begs the question of how these whistleblowers will ultimately be rewarded for the information they provide.

Tax shelters are an on-going battle for the IRS and the Department of Justice with large amounts of money at stake for the government, the taxpayer, and possibly for a knowledgeable whistleblower.  Tax shelter cases involve schemes that attempt to manipulate internal revenue laws in order to reduce participants tax liability and are typically marketed to a large number of taxpayers.  Tax shelters tend to involve unnecessarily complicated transactions so that the transaction appears to fit the technical requirements of a beneficial rule, but clearly lack the economic substance.  In these cases, a knowledgeable whistleblower could provide the IRS with information about the scheme allowing the IRS to engage in a promoter audit that would allow the IRS to audit and assess tax, interest, and penalties against the taxpayers that used the tax shelter and the promoter that sold or promoted the tax shelter.  The assistance of a whistleblower in a tax shelter transaction could reduce the time that it takes the IRS to discover and ultimately assess tax on the improperly sheltered income.

For example, Paul M. Daugerdas, a former partner at Jenkens & Gilcrest, was convicted for his role in a tax shelter scheme in which he and his co-conspirators designed, marketed, and implemented fraudulent tax shelters used by wealthy individuals to avoid paying taxes to the IRS from 1994 to 2004.  Over the course of a decade, the scheme generated over $7 billion of fraudulent tax losses and netted Daugerdas approximately $95 million in fees. 

Internal Revenue Service, Criminal Investigation Chief Richard Weber described the conviction saying: “Mr. Daugerdas’s use of convoluted mechanisms to conceal income from the IRS is criminal activity.  He designed and marketed tax shelters making him $95 million in illegal profits from the ten-year scheme.  Taxpayers deserve our vigilance in making sure everyone pays their fair share of tax.”  However, the jury acquitted Denis Field, the former CEO of BDO Seidman, on seven counts against him including conspiracy and tax evasion.

According to the Department of Justice, Daugerdas participated in a scheme to defraud the IRS by designing, marketing, implementing, and defending fraudulent tax shelters between 1994 and 2004.  As part of this scheme, Daugerdas and others undertook to prevent the IRS from: (i) detecting their clients’ use of these shelters; (ii) understanding how the transactions operated to produce the tax results reported by the clients; (iii) learning that the shelters were marketed as cookie-cutter products designed to eliminate or reduce large tax liabilities; (iv) learning that the clients were not seeking profit-making investment opportunities, but were instead seeking huge tax benefits; and (v) learning that, from the outset, all the clients intended to complete a pre-planned series of steps that had been designed to lead to the specific tax benefits sought by the clients. Daugerdas and others created, and assisted in creating, transactional documents and other materials that falsely and fraudulently described their clients’ motivations for entering into the tax shelters and for taking various steps in order to yield the tax benefits.  As a result of the scheme, the defendant and his co-conspirators made millions of dollars in fees and bonuses.  Specifically, Daugerdas made $95 million in profits but used tax shelters to reduce the taxes he paid to less than $8,000; without the shelters, he would have owed over $32 million in taxes.

In addition to Daugerdas and Field, five others were indicted for their roles in this scheme, including David Parse and Donna Guerin.  David Parse, a former broker at Deutsche Bank was convicted of various tax fraud charges in May, 2011 after an 11-week jury trial, and was sentenced in March, 2013 to 46 months in prison.  Donna Guerin, a former lawyer at J&G’s Chicago tax practice pled guilty for her role in the scheme to various tax fraud charges in September, 2012.  She was sentenced in March, 2013 to eight years in prison and ordered to pay $190 million in restitution.  

Tax practitioners and government officials recently came together at the American Bar Association International Tax Enforcement Conference in New York to discuss international tax enforcement rules and procedures.  Among the topics of discussion was the federal government’s increased arsenal of tools available in combating offshore tax evasion, making its efforts stealthier and less predictable to practitioners and taxpayers, according to a panel of tax controversy practitioners.  These new tools include data mined from voluntary disclosures; cooperation by taxpayers and bankers; and notably, information obtained from whistleblowers.  

Thomas E. Bishop, Assistant Special Agent In Charge, IRS Criminal Investigation division in New York, referred to the 2006 IRS whistleblower law as a “game changer” for the IRS’s efforts to combat offshore evasion.  Bishop stated that the Criminal Investigation division is investigating individuals based on information provided by whistleblowers.  The use of whistleblower information was also discussed by Sandra Brown, Assistant U.S. Attorney/Tax Division Chief (Central District of California), who said that the Justice Department has ongoing investigations because of information provided by whistleblowers.  Brown continued by saying that people tend to picture the jilted ex-spouse as the whistleblower who provides information on individual taxpayers, but that view is antiquated.  Business partners and associates are providing information as well, she said, adding, “Those who lie with dogs know where the fleas are.”

Not only has whistleblower information brought specific information forward, whistleblower information, along with other tools used by the government, has created a situation where practitioners can no longer predict the next wave of enforcement, said Charles P. Rettig of Hochman, Salkin, Rettig, Toscher & Perez PC.  Practitioners used to be able to mine their own data to predict those enforcement efforts, but that’s changed, he said.  Scott D. Michel of Caplin & Drysdale agreed, citing subpoenas recently issued by the U.S. attorney’s office for the Southern District of New York to account holders of Bank Frey & Co., a Swiss bank.  Those subpoenas essentially “came out of the blue,” with no inkling by practitioners that the bank was even on the government’s radar, he said.

We note that this is anecdotal until the IRS publishes statistics on the mater, but it is encouraging to hear from Criminal Investigation and the United States Attorney’s office that they think the whistleblower program is providing them with good cases.  But this is not all together surprising as we have referred a number of cases to the IRS Criminal Investigation Division with good results.  A well-informed whistleblower can be a key asset in any tax case, not just in offshore evasion.  I will be speaking with Stephen Whitlock, Director of the IRS Whistleblower Office, at the ABA Tax Section meeting in January.  One of the talking points of our panel will be the IRS’s great successes in utilizing informant information and its impact on all levels of enforcement both civil and criminal. 

As the calendar year winds to a close we wish you and your loved ones a Merry Christmas and Happy New Year.  We look forward to another year’s hyper-aggressive tax transactions being locked in place waiting for a fresh crop of IRS Whistleblowers to bring the transgressions to justice.

We get questions all the time about situations that appear to involve tax fraud, but often it is unclear to the person asking the question exactly what activities rise to the level of tax fraud or tax evasion.  So here’s a short primer on what tax fraud and tax evasion really mean. 


What is Tax Fraud?


Tax fraud is a general term which can trigger many different laws found in Title 26 (the Internal Revenue Code) and Title 18 of the United States Code (or “USC”).  The core distinguishing feature of tax fraud is a taxpayer’s intent to defraud the government by not paying taxes that he knows are lawfully due.  Tax fraud can be punishable by both civil (i.e. money) and criminal (i.e. jail time and money) penalties, with the civil violations primarily in Title 26 and the criminal violations principally in Title 18, respectively, of the USC.  For example, a taxpayer can commit tax fraud and be punished with civil penalties under 26 USC § 6663, without being charged with criminal tax evasion.  


Tax fraud as a general matter is very difficult for the government to prove because they have the burden to show the court that the taxpayer has intentionally defrauded the government out of tax revenue.  Proving that a taxpayer knowingly violated the highly complicated Internal Revenue Code is a very difficult task, so the government often chooses to pursue the taxpayer civilly for simply underpaying tax, which does not require proving that the taxpayer intentionally underpaid their taxes.  As a practical matter, if the taxpayer has any reasonable legal argument for why they did not pay the tax due they will usually beat an allegation of fraud.


What is the difference between Tax Fraud and Tax Evasion? 


Tax evasion is a subset of tax fraud.  “Tax evasion” is typically used in the criminal context, as in someone who is charged with the crime of tax evasion in violation of 26 USC § 7201.  Tax evasion usually entails a deliberate act of misrepresentation of taxable income to the IRS.  Common examples of acts which could result in a charge of tax evasion are: not declaring all your income, deliberately overstating expenses or deductions, or failing to file tax returns when you have taxable income in an attempt to avoid detection.

In order for the government to prove that a taxpayer committed the crime of tax evasion, they must prove each of the following three elements of the law beyond a reasonable doubt:

1)  the tax deficiency (i.e. that there is an unpaid tax liability);

2)  the affirmative act constituting evasion or an attempt to evade either: the assessment of a tax, or the payment of a tax (and not merely an omission or failure to act); and

3)  the mental element of willfulness (i.e. that the taxpayer had the specific intent to violate a known legal duty to pay tax).

What are some of the penalties for Tax Fraud and Tax Evasion?


Title and Section



Title 26 USC § 7201

Attempt to evade or defeat tax

Any person who willfully attempts to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof:

  • Shall be imprisoned not more than 5 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both, together with the costs of prosecution

Title 26 USC § 7202

Willful failure to collect or pay over tax

Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to penalties provide by the law, be guilty of a felony

  • Shall be imprisoned not more than 5 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both , together with the costs of prosecution

Title 26 USC § 7203

Willful failure to file return, supply information, or pay tax

Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof:

  • Shall be imprisoned not more than 1 years
  • Or fined not more than $100,000 for individuals ($200,000 for corporations)
  • Or both, together with cost of prosecution

Title 26 USC § 7206(1)

Fraud and false statements

Any Person who… (1) Declaration under penalties of perjury – Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; shall be guilty of a felony and, upon conviction thereof;

  • Shall be imprisoned not more than 3 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both, together with cost of prosecution

Title 26 USC § 7206(2)

Fraud and false statements

Any person who…(2) Aid or assistance – Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the Internal Revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; shall be guilty of a felony and, upon conviction thereof:

  • Shall be imprisoned not more than 3 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both, together with cost of prosecution

Title 26 USC § 7212(A)

Attempts to interfere with administration of Internal Revenue laws

Whoever corruptly or by force endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, upon conviction:

  • Shall be imprisoned not more than 3 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both

Title 18 USC § 371

Conspiracy to commit offense or to defraud the United States

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each:

  • Shall be imprisoned not more than 5 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both

This is not an all inclusive list of the tax fraud and tax evasion sections of the USC, and often the government will go after a taxpayer for multiple violations at the same time.

You don’t need to have evidence of Tax Fraud


The IRS Whistleblower Program applies to more than just cases involving tax evasion and tax fraud.  Pursuant to 18 USC § 7623, the IRS can pay an award for information about ANY underpayment of tax.  It does not matter if the underpayment is due to evasion, fraud, an aggressive or negligent application of the law, or even an innocent mathematical error or mistake.  Your tax lawyer can maximize your award determination by helping the IRS determine the where/when/why of a tax underpayment and how they can prove it.  Do not limit yourself to thinking that you can claim a reward only if it relates to “Tax Evasion and Tax Fraud.”  Consult with an IRS Whistleblower Attorney to help determine specifically what violations of law your information relates to.

The latest round of the U.S. crackdown of tax evasion through the utilization of undeclared offshore bank accounts has the US significantly upping the stakes of the game.  The U.S. Department of Justice has indicted Wegelin & Co, founded in 1741 – which makes it the oldest Swiss bank, for helping former U.S. clients of banking giant UBS move their undeclared accounts to avoid detection by the IRS.  In anticipation of this indictment, Wegelin sold all of its other non-U.S. assets to a new bank, leaving the old bank only with a billion or so of toxic U.S. accounts.  Three of the Wegelin bankers have also been indicted, and this basically means that a U.S. law enforcement agency has effectively shut down a Swiss bank.  Amazing. 

Stories are also circulating that nearly a dozen other Swiss banks are trying to negotiate a settlement with the U.S. to avoid being indicted themselves.  Although Switzerland is probably the best known haven for U.S. taxpayers trying to stay off the IRS’s radar, it certainly is not the only player in that game.  It appears as if, however, that its game with the U.S. is coming to an end. 

It has been known for some time that Credit Suisse was the latest target in the crosshairs of the IRS and Department of Justice for hiding money on behalf of U.S. taxpayers.  Today’s Wall Street Journal article, Credit Suisse to Hand Over Account Data, provided the latest twist to the story – that the Swiss bank has apparently started to turn over names of U.S. taxpayers with hidden accounts, and also that the bank itself may be facing hundreds of millions of dollars in fines for their role in helping these taxpayers evade U.S. taxes.  While the UBS offshore banking scandal last year appears to all have been prompted by a whistleblower, there is no indication that Credit Suisse had an insider helping the IRS, although it certainly is possible.  Insiders at other offshore banks who have U.S. taxpayers as customers with accounts that are intentionally or inadvertently not disclosed to the U.S. authorities should take notice: the window of opportunity to get an award for being a whistleblower under U.S. law is getting smaller as the IRS targets more and more financial institutions.

The potential civil and criminal liability of whistleblowers was discussed at the Offshore Alert Conference in Miami, Florida earlier this week.  Attention was again directed towards the pitfalls of how Bradley Birkenfeld’s disclosure to the government about United States taxpayers with secret Swiss bank accounts at UBS was handled.  Mr. Birkenfeld’s story has been a cautionary tale for those considering reporting violations of internal revenue laws where the would-be whistleblower may have civil or criminal liability.  Often whistleblowers have intimate knowledge of tax underpayments due to their relationship with the taxpayer or their participation in the transaction, which can lead to civil and or criminal liability for the informant. 

“Whistleblowers must engage knowledgeable professionals familiar with the inner workings of the Justice Department before they unwittingly volunteer potentially incriminating evidence to the government,” said Jeffrey H. Sloman, attorney with The Ferraro Law Firm.  Mr. Sloman was the United States Attorney for the Southern District of Florida in 2009, when UBS settled the criminal charges against it in his district.  It is rare that the whistleblower will become the target of an investigation because of their disclosure; but if they have any doubt as to their potential liability, they should consult with an attorney prior to making the disclosure.