IRS authorizes paying whistleblowers by yaofenji


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                                                                        TaxaTion Law

IRS authorizes paying whistleblowers
                                                                                                                                of tax, penalties and interest, then the IRS
By KeViN DiAMOND                                                     Kevin DiamonD                                              will pay an award of at least 15 percent,
                                                                     is a licensed                                              but not more than 30 percent, of the col-
History                                                              attorney and CPa in                                        lected proceeds resulting from administra-
    The Tax Relief and Health Care Act of                            massachusetts with                                         tive or judicial actions, or from any settle-
2006 (the act) enacted significant changes                           a national tax fraud                                       ment in response to an administrative or
in the Internal Revenue Service award                                practice. He has                                           judicial action.
program for whistleblowers. The IRS                                  spent years working
shall pay awards for information that sub-                           on issues related to                                       limitations
                                                                     fraud as a forensic
stantially contributes to the collection of                                                                                         The maximum award can decrease
                                                                     CPa, state securities fraud investigator
taxes, penalties and interest.                                       and federal bank fraud investigator.                       to 10 percent for cases where it is deter-
    The IRS has long held the authority to                           Diamond accepts referrals from other                       mined that the information was disclosed
pay awards to whistleblowers. In fact, the                           counsel. For more information, see                         in certain public information sources. Or,
origins of the whistleblower legislation                                                         the reward may also be reduced if the IRS
relates back to the Civil War and the False                                                                                     determines that the whistleblower planned
Claims Act. The big difference was the                                                                                          and initiated the actions that led to the un-
old law, as now seen in 26 USC 7632(a),                           nificant tax non-compliance to provide                        derpayment of tax.
allowed the secretary of the Treasury to                          that information to the IRS. Many indi-
pay such amount as he deemed necessary                            viduals who apply for this reward often                       types of tax fraud
“for detecting and bringing to trial and                          claim to have insider knowledge of the                            The types of fraud can vary greatly
punishment person guilty of violating the                         transactions upon which they are report-                      from each of the three types of groups:
internal revenue law or conniving at the                          ing.                                                          the individual taxpayer; the corporate
same.” This meant whistleblowers were                                                                                           taxpayers; and abusive or fraudulent tax
paid at the discretion of the secretary of                        tecHnical requirements                                        professionals.
the Treasury.                                                         A whistleblower must meet several                             Below are some examples of each type
    The implementation of 26 USC                                  conditions to qualify for the award pro-                      of fraud:
7632(b) made a fundamental change to                              gram. Generally speaking, the informa-
the IRS informant awards program. The                             tion must:                                                    IndIvIdual taxpayers:
key change in the law was the addition of                                                                                         •	 Claims false deductions or expenses;
this section under which awards are no                              •	 Relate to a tax noncompliance mat-                         •	 Keeps two sets of books of accounting
longer discretionary! The new law says                                 ter in which the tax, penalties, inter-                       records;
that whistleblowers “shall receive 15 per-                             est, additions to tax and additional                       •	 Intentionally declares the false income
cent to 30 percent of the collected pro-                               amounts in dispute must exceed $2                             or knowingly changes the income;
ceeds.” In addition, the amendment gave                                million; and                                               •	 Makes overstatement of the deduction
the whistleblower certain rights of appeal.                         •	 Relate to a taxpayer whose gross in-                          amount;
That appeal is limited to the U.S. Tax                                 come exceeds $200,000 for at least                         •	 Conducts the business deals by using
Court. Finally, the legislation required the                           one of the tax years in question.                             false names;
IRS to establish a Whistleblower Office                                                                                           •	 Declares false amounts income
reporting to the commissioner of the IRS                              If the information meets the above                             and expenditure in the books of
to implement the law.                                             conditions and substantially contributes                           accounting records;
    The primary purpose of the act is to                          to a decision to take administrative or ju-                     •	 Transfers or conceals his/her assets
encourage people with knowledge of sig-                           dicial action that results in the collection                       or income;     2

Reprinted with permission of the Massachusetts Bar Association.                      This document may constitute advertising under the rules of the Supreme Judicial Court of Massachusetts.
pAGe 2                                                                                                           MASSAchuSettS lAWyeRS JOuRNAl | ApRil 2011

whistleblowers                                                         port wages; or                                              fraudulent actions that would lead
Continued from page 1                                               •	 Misreporting officer compensa-                              to the collection of taxes, penalties
                                                                       tion — misreporting officer com-                            and interest;
  •	 Hides income in offshore accounts;                                pensation as S corporation cor-                          •	 Assist in the determination of
  •	 Records personal expenditure as                                   porate distributions or other such                          whether the case has the possibility
     business expenditures; or                                         fraudulent reporting.                                       to qualify under the rules requiring
  •	 Intentionally does not file the tax re-                                                                                       a $2 million-minimum for recovery
     turns.                                                       abusIve tax professIonals                                        and the taxpayer having earned at
                                                                  are those who:                                                   least $200,000 in one of the years
    Corporate taxpayers:                                            •	 Claim they can obtain larger re-                            at issue;
  •	 Keeps two sets of books to track in-                              funds than other preparers;                              •	 Assist in the filing of the required
     come and expenses for the purpose                              •	 Base their fee on a percentage of                           forms and documentary evidence
     of hiding income;                                                 the amount of the refund;                                   to substantiate the whistleblower’s
  •	 Fails to keep required business re-                            •	 Advocate the use of abusive “off-                           claim with the IRS;
     cords;                                                            shore accounts” as a means for not                       •	 Frame the tax issues in a manner
  •	 Destroys evidence, such as records                                having to report income; or                                 that the IRS will understand the
     and receipts;                                                  •	 Advocate the use of abusive “tax                            legal and tax issues related to the
  •	 Lies during an IRS audit;                                         shelters” to avoid taxes and create                         noncompliant taxpayer;
  •	 Uses fake Social Security number                                  what will be represented as “legiti-                     •	 Communicate and cooperate with
     and/or tax identification numbers;                                mate losses to offset against taxable                       the IRS in pursuit of the collection
  •	 Hides income in offshore accounts;                                income.”                                                    action and work with the IRS until
  •	 Pyramiding — collects taxes from                                                                                              a determination is made; and
     employees and fails to pay them                              WHat to do if i Have tax                                      •	 Represent the whistleblower in
     to the IRS;                                                  fraud to report                                                  U.S. Tax Court in the event an ap-
  •	 Unreliable third party payers — us-                               If you know of or suspect signifi-                          peal of determination is required.
     ing a shady payroll service, which                           cant tax fraud, your best option is to
     may fail to pay collected taxes to the                       find the services of a competent attor-
     IRS;                                                         ney. The tax attorney will be of great                     tax treatments of
  •	 Offshore employee leasing — at-                              assistance in helping you understand the                   informant aWards
     tempts to redirect employee status                           issues and procedure for filing a claim                        IRS awards can lead the whistle-
     and wages to avoid employment                                for a Whistleblower’s Informant Award.                     blower to very significant returns. At
     tax;                                                         The claim must be filed with the IRS                       the minimum requirement of $2 mil-
  •	 Misclassifying worker status — giv-                          and there are many technical require-                      lion, recovery at 15 percent to 30 per-
     ing employees the title of indepen-                          ments that need to be met in order to                      cent could result in an informant award
     dent contractor in order to avoid                            qualify as a whistleblower who is en-                      from $300,000 to $600,000. The range
     paying the related taxes;                                    titled to the informant’s award. And ul-                   of an award under IRC Section 7623(b)
  •	 Paying employees in cash — at-                               timately, if there is a dispute over the                   for a recovery of $10 million would be
     tempting to evade taxes by paying                            award amount, it will be heard in the                      from $1.5 million to $3 million.
     employees in cash without reporting                          U.S. Tax Court!                                                All awards issued by the IRS will be
     the wages to the IRS;                                             The attorney will:                                    subject to current federal tax reporting
  •	 Filing false returns or failing to file                         •	 Assist you in understanding the tax                  and withholding requirements and the
     required returns — intentionally                                   issues in your case;                                 whistleblower will receive a Form 1099
     misreporting income or failing to re-                           •	 Determine if the issues are, in fact,                or other form as prescribed by law. n

Reprinted with permission of the Massachusetts Bar Association.                   This document may constitute advertising under the rules of the Supreme Judicial Court of Massachusetts.

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