A report just released by TIGTA (the Treasury Inspector General for Tax Administration) shows that once again IRS audits of taxpayers are in decline.  Enforcement revenues are slightly up this year, but TIGTA says this is due to a small number of large corporate cases.

Some highlights of the TIGTA report:

  • “The number of staff assigned to Examination functions decreased 22 percent from FY 2013 to FY 2017, with a recent decline of 7 percent from FY 2016.”
  • “According to recent statistics, taxpayers filed nearly 196 million returns during Calendar Year 2016, of which less than 1 percent, or 1.1 million returns, were examined during FY 2017. This is a 32 percent decline from FY 2013 and a 9 percent decline from FY 2016, when there were approximately 1.6 million and 1.2 million examinations conducted, respectively.”
  • “The number of examinations performed by the LB&I Division decreased 8 percent from FY 2016 (34,676) to FY 2017 (31,880). This is also significantly less (41 percent) than the 54,211 performed in FY 2013.”
  • “The data show a significant downward trend in the IRS’s proposed audit adjustments over recent years. This may suggest that overall increases in enforcement revenues are not necessarily an effective indicator of how well the IRS’s traditional tax compliance enforcement tools (i.e.,
  • Examination and Collection) are performing under reduced funding.”

What does this mean to potential and current whistleblowers?  Based on my 20 years of experience in dealing with the IRS, it is more important than ever that your information stand out in a crowded field.  The likelihood that the IRS will act on unorganized or unpersuasive information is lower than ever – you have to clearly and concisely show and tell the IRS exactly how your information will lead to the collection of additional taxes (in period for which that statute of limitations is clearly open) if you wish to get anywhere with your award claim.  As always, the IRS must either collect additional tax or deny a refund based on your information for you to get an award.  However, first the IRS must decide to act on your information, and making your information stand out among others is the key to getting it selected to be used by the IRS.

We get absolutely deluged with hundreds of calls a day during tax return filing season about all kinds of fraud, particularly identity related scams and claiming child exemptions improperly.  In 2016, there was a 400% increase in tax related phishing and malware attacks, and 969,000 potentially fraudulent refunds claiming up to $6.5 billion. You may be unaware that you’re a victim until you try to file your taxes and IRS tells you something’s wrong.

Here are four common scams to watch out for this year:

  • Phishing—Fraudsters send fake emails to trick would-be victims into sharing personal data. The real IRS would never initiate contact with you this way.
  • Phone fraud—Identity thieves impersonate IRS agents. But, the real IRS states it will never call to demand immediate payment. You will first receive a mailed bill.
  • Tax preparer fraud—Use tax professionals? Watch out for emails that appear to be from them asking for private information. Delete and call your service directly.
  • Phony IRS agents visit your home—This scam often targets the elderly. Real IRS agents carry photo IDs, and will try to contact you before visiting.

The full list of the recently released “Dirty Dozen” tax scams can be found here.  As for claiming child exemptions improperly, the best defense is a good offence: file early.  Unfortunately, neither of these big problems make for good whistleblower claims under section 7623(b), the IRS whistleblower program we work with.  The Whistleblower Office does not handle the identity theft scams, that is handled by the Treasury Inspector General’s Office.  Claiming of exemptions for children is unfortunately not an issue the Whistleblower Office handles either, that has to be handled directly with the IRS in connection with the filing of your return.

What we do see a lot during tax season that the Whistleblower Office is interested in is non-filing of returns, positions being taken that are clearly non-compliant, abusive transactions, or anything that represents an underpayment of tax of more than $2 million of tax over the last three years.  If you have information about anything you believe may fit in those categories don’t hesitate to give us a call.

 

Tom Herman had an interesting article in today’s Wall Street Journal about the low chance of getting audited by the IRS. It was nice to see Tom back to writing for the Journal, he used to be the WSJ Tax Report columnist and covered IRS whistleblowing. Tom starts the article off with a bang by saying:

Those who like to be, well, creative when filing out their federal income-tax returns may take cheer from the following.”

The article goes on to cover the seemingly ever decreasing rate of enforcement by the IRS.  IRS Commissioner John Koskinen is quoted as stating that the IRS budget is down $900 million from 2010.  Koskinen stated that “Exam rates are continuing their downward trend in all categories – individuals, small businesses and large corporations….”  These are great facts if you are a tax cheat; not so great for everybody else.

Now, more than ever, the need for tax whistleblowers is vital to the efficient enforcement of tax.  People with high-quality information about the underreporting of tax are an amazing resource to the IRS, especially in these tighter times.  Issue identification, the part of an audit where the IRS determines what issues to fully examine can eat up an audit budget fast.  The IRS is constantly working to reduce issue identification cost.  The creation of Schedule UTP and the recent announcement of LB&I Compliance Campaigns are a couple examples.  When an insider can point out the areas where an audit is most likely to bear fruit, the IRS is able to hone in and make the most of its enforcement budget. 

The IRS whistleblower program works (perhaps we will do a future blog on the number of millionaires we have helped create).  If you have information on tax underpayments we encourage you to seek assistance from a tax lawyer who can help you present it to the IRS in a way that shows the issues you have identified are a smart place to put the IRS’s enforcement dollars.  Together, we can help reduce tax underpayments even in the face of fewer IRS boots on the ground.

The IRS today announced the conclusion of its annual list of the “Dirty Dozen” tax scams.  The list is published each year by the IRS as a way to both inform and warn taxpayers about the most common tax schemes they may encounter especially during filing season.  

This year’s list remains unchanged from last year’s list with familiar tactics such as “Offshore Tax Avoidance,” “Falsely Padding Dedudutions,” and  “Abusive Tax Shelters,” appearing yet again.

With respect to Offshore Tax Avoidance, the IRS noted that numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts, nominee entities, foreign trusts, employee leasing schemes, private annuities, or insurance plans.  The IRS’s release concerning Offshore Tax Avoidance said:

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as bankers and others suspected of helping clients hide their assets overseas.

Commissioner John Koskinen mentioned that the IRS has collected $10 billion in back taxes in recent years. He cited the offshore voluntary disclosure programs and third-party reporting as reasons why it is less likely that offshore financial accounts will go unnoticed by the IRS. 

The IRS’s release on Falsely Padding Deductions focused on warning taxpayers against “the temptation to falsely inflate deductions or expenses. . .”  Some taxpayers are not able to avoid that temptation and they file tax returns with substantially inflated business expenses, costs of goods sold, and in some cases they simply make-up expenses or deductions in an effort to pay less tax or increase their tax refund.  

Finally, the IRS warned of Abusive Tax Shelters for the third year in a row.  More specifically, “micro-captive insurance tax shelters.”  Promoters, accountants, or wealth planners persuade owners of closely held entities to participate in schemes that lack attributes of genuine insurance.  According to the IRS release, “coverages may insure implausible risks, fail to match genuine business needs or duplicate the taxpayer’s commercial coverages.  Premium amounts may be unsupported by underwritring and actuarial analyiss, may be geared toward a desired deduction amount or may be significantly higher than premiums for comparable commercial coverage.” In November of 2016, the IRS released Notice 2016-66 which advised that micro-captive insurance transactions have the potential for tax avoidance or even evasion.

The unscrupulous promoters of these abusive transactions always find new products to promote as the IRS and the Courts crack down on the abuse.  Accordingly, we expect the IRS to continue to pursue the promotors of the latest trends in tax evasion and we expect Abusive Tax Shelters to continue to appear on the Dirty Dozen List.  

If you have knowledge of offshore tax avoidance, substantially infalted tax deductions, or abusive tax structures, contact the tax attorneys at The Ferraro Law Firm to discuss filing a claim for an award for providing the information to the IRS and doing your part to hold tax evaders accountable. 

 

 

The 2015 IRS Enforcement and Service Report issued this week reveals that both individual and corporate audit rates are declining, with the respective audit rates at a record low .84% and .60% of returns filed.  This not only leaves tax dollars on the table for past years but also risks future taxpayer  non-compliance by not spending adequate resources to enforce the tax laws as they are currently written. 

Lots of well written articles have been released about the Report that are worth checking out:

 CNBC: IRS Audit Rates of Large Corporations Hit 10-Year Low.

 The Wall Street Journal: IRS Focuses Its Audits More on 1 Million Incomes.

 CBS: Afraid of an IRS Audit? Here’s One Reason to Chill. 

As it relates to whistleblower claims, we and the Treasury Inspector General for Tax Administration’s Office (“TIGTA”) continue to shout the message that pursuing information from whistleblower claims is among the most efficient uses of scarce enforcement resources.  TIGTA’s own studies show that every dollar spent by the IRS on enforcement for whistleblower claims yields $6.88, whereas the normal enforcement return is four to one according to a November 2015 speech by Commissioner Koskinen.  However, the reality is that there are less agents now than there were 10 years ago to audit more returns than ever, and the IRS is being very picky about what cases they select for audit and what issues they move forward with in those audits.  This means that it is more important than ever that your whistleblower submission to the IRS be tight, concise, thorough, and persuasive to convince the IRS to take action in your case.  

I bet that every person reading this blog – people with an interest in the IRS Whistleblower Program – has seen that the IRS has been under fire this summer due to the exempt organization application processing scandal, and is wondering how this situation impacts their tax whistleblower claim or the IRS Whistleblower Program.

Caveat: I’m not a political person.  Despite having practiced tax law in Washington DC for the first dozen years of my legal career, my interest in politics is largely limited to what changes Congress is going to make to the Internal Revenue Code.  I.e., amending section 7623 in December of 2006 caught my attention!  With that said, my first reaction to the current IRS scandal wasn’t: “how could that noxious but revenue-irrelevant situation have been allowed to develop without someone asking themselves how it would look politically once it came to light.”  No, my reaction was: “uh oh, this is going to cause serious problems the next time the IRS needs something from Congress.”  How right I was.

All tax whistleblower cases, and the success of the IRS Whistleblower Program along with them, are wholly dependent on the IRS enforcing the violations of the Internal Revenue Code that we bring to their attention.  We have said from day one that the biggest risk in any whistleblower case is that the IRS will not act on your information, or they will not act with sufficient tenacity and resources to carry the case through to a successful conclusion.  In short, we’ve said the old analogy applies: “You can lead the horse to water but you can’t make him drink,” and the Cooper and Cohen cases have confirmed that analogy applies here.  If the IRS doesn’t act on your information, you get no award.

Fast forward to this summer… the IRS blunders in the total-waste-of-enforcement-resources exempt organizations area, and now it needs next fiscal year’s budget approved by Congress.  Surprise surprise, now some outraged members of Congress want to cut the IRS budget by 30%.  Never mind the fiscal stupidity of cutting the IRS budget in the first place – because it is the principal collector of the money our civilization runs on –  this cut would decimate the IRS’s ability to enforce the Code.  Whistleblower cases could simply have to be abandoned for lack of enforcement resources, e.g. because there are no agents or lawyers available to prosecute the case. 

Now, most political experts will say that this massive IRS budget cut proposal will not be accepted, and the Senate has proposed a budget that restores the funding the House of Representatives wants to slash, but it still highlights the biggest risk that we all have, that the IRS will do nothing with a whistleblower’s information.  The IRS has unfortunately shown that it is willing to ignore whistleblower cases even while the nation is running huge deficits.  The excuses why don’t really matter, although we continue to believe that some IRS officials will ultimately be held accountable for intentionally ignoring specific instances of large-scale non-compliance, what matters is that to have any chance of success in this landscape a whistleblower has to do everything they can to make their case attractive to the decision makers at the IRS.  Those officials in the IRS who decide how their scarce enforcement resources will be allocated hold your case in their hands, along with many other cases competing for those resources.  Budgets that make those enforcement resources even more scarce are a huge threat to a whistleblower case.  Helping them pick your case in spite of that scarcity is what we continue to strive to do.