On March 9th, Tax Partner Scott Knott and I attended the Federal Bar Association Tax Law Conference in Washington, D.C.  Known colloquially as the “inside the beltway tax conference,” many high ranking federal government employees from DOJ, Treasury, and the IRS were in attendance and speaking on various new developments in the tax law.

The key note speaker, Don Fort, Chief IRS Criminal Investigation (“IRS-CI”), spoke about the work of his division in the areas of tax evasion, money laundering, the use of cryptocurrencies to conceal income, and terrorist financing. Mr. Fort highlighted that the mission of IRS-CI is to have a maximum deterrent effect and enhance voluntary compliance with the tax laws.  Mr. Fort said maximum deterrent effect comes from working with the DOJ to prosecute tax crimes that generate publicity or are highly visible to the public.  Enhancing voluntary compliance necessarily involves identifying tax crimes in the first place.  In that regard, Mr. Fort stated that whistleblowers are one of the most important sources of information for IRS-CI.

  • Mr. Fort closed by noting that even though his division has the same number of special agents as it had 50 years ago, IRS-CI continually investigates some of the most complicated cases in the agency’s history. According to IRS-CI’s Annual Report for 2017, international investigations have increased substantially from the 186 indictments in 2015, to 221 initiated in 2016, to 283 initiated at the end of 2017.  Indictments have increased correspondingly.

We have spoken to Mr. Fort in the past concerning criminal tax matters, some of which IRS-CI has taken action on, and Mr. Fort has encouraged us to forward relevant evidence of criminal tax evasion to his division. If you have information about criminal tax evasion, please contact The Ferraro Law Firm for a free consultation.

 

A recent study by the Institute on Taxation and Economic Policy details how Fortune 500 Companies are holding a record $2.6 trillion offshore, thereby avoiding $767 billion in U.S. taxes.  While we believe much of this amount is the result of lawful tax planning on the companies’ international operations and the use of tax haven entities, there remains a significant amount of aggressive tax planning here which is ripe for potential IRS whistleblower cases.  For example, a byproduct of holding trillions of dollars offshore is that it is difficult to bring the money back to the U.S. to use it without paying taxes on those deferred profits.  Therefore, many taxpayers have entered into abusive repatriation transactions to bring the cash back.  Or taxpayers have used hyper aggressive tax planning strategies involving financing structures or transfer pricing to get the profits in the tax haven jurisdiction in the first place.  While Congress may eliminate deferral or make other drastic changes to the Internal Revenue Code in the coming year, the fact remains that these tax underpayments already exist and thus are subject to IRS whistleblower claims.  We suspect the transition rules to whatever new international tax regime Congress comes up with will be similarly and abusively gamed by these companies to wring out the last drop of tax savings.

While many of the Fortune 500 companies have set aside reserves for uncertain tax positions that would cover some of this tax avoidance, many other taxpayers have not reserved at all for these positions by convincing their financial auditors that the risk is minimal or by hiding the risk from them altogether. We’ve been carefully tracking these reserves since 2010 and have concluded that the answer is usually a little bit of both.  Either way, whistleblowers with access to tax accrual workpapers would be able to see what those reserved weaknesses are, and whistleblowers who have unique insight to the unreserved positions have valuable information as well about what those skeletons in the closet are.  We’ve had great success reporting both to the IRS under their tax whistleblower program, so if you know of either type of issue you should give us a call to discuss what your opportunities and rights are.

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.

Today the IRS Whistleblower Office released a 3-page overview of the tax whistleblower process called Publication 5251 – The Whistleblower Claim Process.  The new publication purports to provide clarity on:

  • What qualifies for an award
  • How whistleblowers submit a claim for award
  • What happens to a claim after the IRS receives it
  • Communicating with the IRS after a claim is submitted
  • Whistleblower Process Timeline
  • Common reasons for Initial rejection/denial of claim

While there are no new procedural changes identified in the overview, this publication does provide a snapshot of the claims process for the uninitiated.  In particular, the Process Timeline” flow chart on page 3 is a relatively realistic display of the timelines involved with the claims process.  Of course, we could cite numerous, and I mean numerous with a capital N, exceptions to the timeline based on the cases we have seen and been involved with[1], this is still a good representation of how the claims process SHOULD work.  Getting a claim through the system without snags is another story, and is something we work on every day.  A copy of Publication 5251 can also be found on IRS.gov.

 


[1] For example, in theory the timeline shows the “Administrative Proceeding” starting at the time a payment is made but well before the IRS starts to wait simply for the period of limitations on refunds to expire before paying an award.  In practice this has not been happening.  This is particularly crucial because it is only the start of this Administrative Proceeding which would trigger the exception to the taxpayer rules of 6103(h)(4).

October 1st 2014 marks the beginning of fiscal year 2015 and a new sequestration reduction rate for whistleblower awards.  According to an OMB Report on the reductions for fiscal year 2015, every award payment made to a whistleblower under section 7623 on or after October 1, 2014, and on or before September 30, 2015, will be reduced by the sequestration rate of 7.3 percent.  That reduction rate is up slightly from fiscal year 2014’s reduction rate of 7.2 percent.

It has been and continues to be the position of The Ferraro Law Firm that whistleblower awards should not be reduced by sequestration.  As a technical matter, the reduction of award amounts paid to whistleblowers is in direct conflict with the statutory language of section 7623(b) which unambiguously states that a whistleblower “shall” receive as an award “at least 15 percent” of the collected proceeds.  The sequestration reduction is illegally defying the language and intent of the statute.  As a practical matter, reducing the amount paid to whistleblowers makes zero sense.  The entire purpose of sequestration is to ensure that tax dollars are saved and the nation’s debt is reduced.  Because whistleblower awards are paid directly from collected proceeds; proceeds that in all likelihood would not have been collected absent the whistleblower’s information; these award payments do not have a negative effect on the nation’s debt.  The whistleblower is actually assisting the government in raising money, not causing government to spend money.  As a matter of equity, whistleblowers came forward in reliance on the 2006 law and trusted that the statute would apply to them as written. The fact that the sequestration reduction can arbitrarily impact awards relating to claims made by whistleblowers many years ago, to us, is a prohibited retroactive change in the law.

Unfortunately, the IRS will continue to apply the sequestration reduction rate unless and until a law is enacted by congress that cancels or otherwise impacts the sequester.  A bi-partisan budget agreement has not yet been reached by congress.  The government will be funded through a Continuing Resolution that was passed by the House and Senate which generally maintains current spending at fiscal 2014 levels until December 11, 2014.    

In the third part of a four part series on qui tam suits, Jennifer Carr of Tax Analysts interviewed University of California, Davis School of Law tax professor Dennis J. Ventry, Jr. about his article, “Not Just Whistling Dixie: The Case for Tax Whistleblowers in the States.”  The article, which will be published in the Villanova Law Review, argues that states could benefit greatly from adopting tax whistleblower statutes or tax enforcement through state false claims acts (FCAs). 

In the article, Ventry argues that states are leaving billions of dollars “on the table” that a whistleblower program could help to shrink by closing the information gap.  Ventry claims that state tax agencies are “totally outgunned” and whistleblowers could assist by exposing and explaining a taxpayer’s noncompliance by providing detailed and unique information.  Moreover, Ventry argues that a “robust whistleblower program” in the states could have the effect of preventing tax noncompliance by adding significant risk to noncompliant taxpayers by increasing the probability that they will be detected by a whistleblower in the tax department, in an outside accounting firm, or outside counsel, or even a partner, associate, paralegal, or intern. 

Ventry also discussed the possibility that states would adopt what he called “mini-7623s” which would align them with the IRS whistleblower program.  Ventry pointed to successes in New York, the first state to specify tax claims under its FCA, such as Attorney General Eric Schneiderman using the program to sue Sprint Nextel for over $300 million, and the multimillion dollar settlement reached with a medical imaging company.  Towards the end of the interview, Ventry acknowledged the “parade of horribles” that some practitioner-critics have regarding FCA tax suits.  Although Ventry says that concerns need to be taken seriously when creating the state statute, abusive uses of the statutes have been the exception and not the norm.  To that end, Ventry said that he dedicated a lot of space in his upcoming article to describing how a properly drafted and implemented whistleblower program can minimize the potential harms that critics are concerned about.

If all this comes to fruition, it opens up the possibility of simultaneous state and federal tax whistleblower filings, which would be great for those whistleblowers whose claims arise under both sets of laws. 

The IRS has spent much time ensuring that they would not be whipsawed by paying an award on proceeds that is ultimately refunded to the taxpayer, but apparently, little consideration has been given to what happens when the IRS whipsaws a whistleblower using their information after it denied the whistleblower’s claim.  On November 2, 2012, Anonymous 1 and Anonymous 2 had their appeal of the IRS’s denial of their claim dismissed by the Tax Court despite the IRS’s notification that a division of the IRS was conducting an investigation of the taxpayer identified in Anonymous 1 and Anonymous 2’s claim.  The order dismissing Anonymous 1 and Anonymous 2’s claim states:

Petitioners provided respondent with information relating to Company X and approximately 90 of Company X’s clients.  Respondent evaluated petitioners’ information for almost two years, yet assets that he did not institute an administrative or judicial action and collect proceeds relating to Company X or its clients.  Furthermore, after the Whistleblower Office denied petitioners’ claims, a separate division of the IRS opened what respondent asserts is an independent investigation into Company X.  While we question whether the information provided by petitioners was used in the subsequent investigation, section 7623 does not provide a mechanism for petitioners to challenge respondent’s assertion.  See Cohen v. Commissioner, 139 T.C. at __ (slip op. at 9) (holding that “Congress *** has charged the Commissioner with resolving these claims and has not provided remedies until after an administrative or judicial action and the collection of proceeds.”).  Respondent established that petitioners have not met the prerequisites of section 7623(b) and petitioners have not set forth specific facts showing that there is a genuine issue for trial.

Now Anonymous 1 and Anonymous 2 are asking the Tax Court to vacate its prior decision in light of the fact that not only has the IRS begun an audit of the taxpayers identified in their whistleblower claim, but Anonymous 1 and Anonymous 2 have received letters from the IRS that the IRS has re-opened their whistleblower claims and the IRS has asked for assistance from Anonymous 1 and Anonymous 2.  We will be watching to see how the Tax Court rules on this motion to vacate its prior decision because the implications may be felt widely.  By reopening the whistleblower claims, the IRS has functionally rendered the prior denial of the claims an interim determination.  If the denial is treated as an interim decision, then it is likely that the case is not ripe under Cooper I.  However, if the decision is allowed to stand the concern is that the IRS will use Anonymous 1 and Anonymous 2’s information in an investigation and collect proceeds based on that information, and when it comes time to pay an award the whistleblowers will no longer have the right of review because the Tax Court has already ruled on that claim.  If the IRS is able to side step their duty to pay awards to whistleblowers by simply denying the claims and then opening an investigation and using the information, then the requirement to pay awards and the right of review are meaningless.  I cannot believe that this is the case.  The best end result for these whistleblowers is that the IRS successfully uses their information and then the Whistleblower Office determines that they are entitled to an award on all the proceeds collected, but in the meanwhile the Tax Court will hopefully see the position that all whistleblowers can be put in if the IRS denies their claim and then uses their information afterwards.  Therefore, we think the Tax Court should treat the previous determination of the IRS as an interim – not final – award determination and vacate its prior decision due to the subsequent re-opening of the case by the IRS.

We are excited to share some good news … the IRS has awarded $38,037,899 to one of our clients for providing information about a tax avoidance scheme perpetrated by one of the nation’s largest corporations.  We respect our client’s wishes to remain anonymous and are therefore we are not authorized to comment on the specifics of the tax issues that led to this $38 million award.  We can say that the issues involved were more akin to aggressive corporate tax planning than outright fraud, and the tax adjustments the IRS made were commensurate with the factual and legal allegations we made in our submission to the IRS. 

Both the name of the company and the name of the whistleblower have remained completely confidential throughout this whole process, and remain so even after payment of this award.  The company was in the top half of the annual Ferraro 500 list, which reorders the Fortune 500 companies based on the size of those companies’ Uncertain Tax Positions.

Before agreeing to the proposed award, we went through the administrative award determination procedure.  During the administrative award determination procedure, we were able to thoroughly review the IRS’s proposed award computation.  This is a crucial step for any whistleblower claim involving a complex corporate return.  We were able to aid the process by submitting our own proposed award computation to the IRS prior to the IRS coming up with their proposed award computation.  Also, as we have written about before on this blog, the IRS is withholding on the award payments that it is making.  In order to ensure that the IRS did not over withhold millions of dollars, we negotiated a withholding agreement with the IRS on behalf of our client. 

It has been great to see years of work come to fruition.  This particular claim was filed shortly after The Ferraro Law Firm began representing whistleblowers in front of the IRS.  This is within the 5 to 7 years that the IRS estimates on average it takes to work a whistleblower claim from start to finish.  It has been a long journey with a great ending.  

The Tax Court dismissed a whistleblower’s complaint that challenged the IRS’s decision not to act on the whistleblower’s information.  In Raymond Cohen v. Commissioner of Internal Revenue, 139 T.C. No. 12 (October 9, 2012), the Tax Court holds that section 7623(b) does not authorize the Tax Court to order the IRS to reopen Petitioner’s award claim.

The Petitioner, Raymond Cohen, is a CPA who provided information to the IRS Whistleblower Office regarding a corporation that he believes had unreported income from uncashed dividend checks that had not been turned over to the state.  The Whistleblower Office informed Mr. Cohen that he was not entitled to an award because no proceeds were collected based on the information he provided.  Mr. Cohen requested the Whistleblower Office to reconsider the claim.  The Whistleblower Office reiterated the denial, noting that the claim was based on publicly available information.  Mr. Cohen filed a petition with the Tax Court requesting that the Tax Court order the IRS to reopen his claim, arguing that the IRS abused its discretion by not acting on his information.  The IRS moved to dismiss for failure to state a claim upon which relief can be granted.

The opinion’s reasoning starts with a review of the Tax Court’s ability to review whistleblower award determinations.  Tax Court may exercise jurisdiction only to the extent authorized by Congress.  In a whistleblower action, that jurisdiction is limited to the Commissioner’s award determination.  The opinion states that the “jurisdiction under section 7623(b) does not contemplate that we review the Commissioner’s determinations of alleged tax liability to which the claim pertains.  See Cooper v. Commissioner, 136 T.C. 597, 600 (2011) (Cooper II).  Nor does section 7623 confer authority to direct the Commissioner to commence an administrative or judicial action.  Id.”  Mr. Cohen admits that his information did not lead to the Commissioner commencing an action against, or collecting any proceeds from the corporation.  Nevertheless Mr. Cohen argues that he should be granted relief.  Mr. Cohen first argues that he is entitled to relief because the IRS did not comply with the Administrative Procedure Act (“APA”).  The opinion states that “[t]he APA, however, does not create a right of action or expand our jurisdiction.  See Anonymous v. Commissioner, 134 T.C. 13, 19 (2010).”  As the APA does not expand the Tax Court’s jurisdiction the Tax Court can provide relief under section 7623(b) only after the Commissioner has initiated an administrative or judicial action and collected proceeds.  Mr. Cohen’s second argument is that he is entitled to a legal and factual explanation of respondent’s denial of the claim.  While the opinion in Cooper II noted that the Commissioner had produced through the course of litigation a memorandum explaining why the whistleblower claim had been denied, the court “did not hold that the Commissioner was obligated under section 7623 to detail his legal and factual reasons for not pursuing a claim.”  Mr. Cohen’s third argument is that he is entitled to equitable relief; however, the Tax Court is not a court of equity and section 7623 does not provide for equitable relief. 

For these reasons, submissions made to the IRS Whistleblower Office should be carefully prepared and should act as a roadmap that the IRS can simply follow to detect underpayments, making the decision to act on the information an easy one for the IRS.

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

Definition

 

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.