WWW.MASSBAR.ORG VOluMe 18 | NuMBeR 8 | ApRil 2011 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 www.KevinDiamond.com. 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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