Businesses and individuals are legally bound by voluntary compliance to file a tax return in order to pay the correct amount of taxes on income, employment and excise taxes. Tax fraud, also called tax evasion or IRS fraud, occurs when a person or business deliberately falsifies information or data on a tax return. Usually the fraud is committed for the purpose of limiting their tax liability. This can be accomplished by overstating deductions or declaring less profits, income or gains than were actually earned in a fiscal year. It can also involve failing to file a return at all. When businesses commit tax fraud, they pose a threat to both the tax administration and our nation’s economy.
IRS whistleblowers play an important role in exposing corporate tax fraud. The is due in large measure to the Tax Relief and Health Care Act of 2006 which, for the first time, offered IRS whistleblowers significant rewards for reporting tax fraud. The False Claims Act [link this to new False Claims Act page] specifically excludes “claims, records, or statements made under the Internal Revenue Code.”
Under the 2006 Act, tax fraud whistleblowers are entitled to receive at least 15% but not more than 30% of the amount recovered by the IRS. The tax, penalties, interest, and additional amounts in dispute must exceed $2 million.
In a 2013 report to Congress on its whistleblower program, the IRS presented data showing that in 2012 and 2013 the agency engaged in 18 collection actions of over $2 million. Nearly $960 million was recovered and over $178 million was paid to 250 tax whistleblowers, an average of $712,000 per whistleblower.
Types of Tax Fraud
Hiding Income Offshore – Occurs when individuals or businesses attempt to hide income in offshore banks, brokerage firms or by using nominee entities in an attempt to limit their tax liability. Those who attempt this scheme typically do so through the use of offshore credit or debit cards, foreign trusts, employee-leasing schemes, private annuities or wire transfers. In 2009, UBS, a large Swiss banking group, agreed to resolve criminal charges that it conspired to defraud the United States by promoting tax evasion through secret offshore accounts. The bank also turned over the names of over 4,000 account holders. The IRS whistleblower who exposed the tax evasion was awarded $104 million.
Filing False or Misleading Returns – Occurs when individuals or businesses fraudulently file returns in order to reduce their tax bill or claim refunds or tax credits they are not entitled to receive. False tax returns may also be filed in order to cover up other illegal activities. In 2005, KMPG, a firm that provides audit, tax, and advisory services, agreed to pay $456 million in fines, restitution and penalties to settle charges that it designed, marketed and implemented fraudulent tax shelters. The defendants allegedly filed false tax returns in support of the scheme.
Transfer Pricing – There have been several high profile cases involving a practice known as transfer pricing. In transfer pricing a multinational corporation doing business in several countries attempts to avoid taxes by making it appear that its operations in a high-taxed country produced relatively little profit, while its operations in a low-taxed country did well. The practice is widespread and the IRS has an entire team devoted to pursuing transfer pricing fraud. In 2006, drug maker GlaxoSmithKline paid $3.4 billion to settle IRS charges that it engaged in transfer pricing by assigning too little of its worldwide drug sales to its U.S. subsidiary. In 2011, Western Union paid $1.2 billion to settle transfer pricing charges.
Abuse of Charitable Organizations and/or Deductions – Occurs when individuals or businesses highly overvalue or overstate donations to a charitable organization in order to fraudulently reduce their taxable income.
Disguising Business Ownership or Financial Activity – Occurs when corporations or businesses operate using a third party to disguise the true owners. These third parties can be used to underreport assets, create fictitious deductions, and launder money or a variety of other financial crimes.
Misstating Wages – Occurs when businesses file false statements about wages or income in order to limit the amount of taxes owed at the end of a fiscal year.
Abuse of “Independent Contractor” Rules for Actual Employees – Occurs when employees are designated as contractors and given 1099s at the end of the year, therefore avoiding the employer’s share of taxes. A 2013 report from the Inspector General for Tax Administration estimated that employers misclassified millions of workers as independent contractors to avoid the payment of employment taxes. In 1989 and 1990, the IRS examined tech giant Microsoft and found that workers who had been classified as independent contractors were actually employees. Microsoft was required to pay their share of overdue Federal Insurance Contribution Act (FICA) taxes (used to fund Social Security and Medicare) for the workers.
Identity Theft – According to an audit conducted by the Treasury Inspector General for Tax Administration (TIGTA), the IRS processed 1.5 million potentially fraudulent tax returns in 2011, and may have paid over $5.2 billion to identity thieves. TIGTA estimated that the “IRS could issue approximately $21 billion in fraudulent tax refunds resulting from identity theft over the next five years.”
Whistleblower Attorneys for Tax Fraud Claims
It is in your best interest to hire attorneys that have experience in preparing and filing IRS Tax Fraud Claims cases. The stakes are high and thousands of tax whistleblower claims are filed each year, with some rejected by the government because they are not properly prepared and submitted. Our attorneys work with you to evaluate and prepare the evidence necessary to be included in your claim. We then represent you with government agencies like the IRS. As your advocate, our attorneys work with the IRS to explain the claim and provide whatever additional assistance and evidence the government requests. The attorneys at Baum, Hedlund, Aristei & Goldman have experience working on tax fraud matters, which enables us to present a powerful case on behalf of our clients.
Contact a whistleblower attorney to find out how Baum, Hedlund, Aristei & Goldman can assist you with your IRS whistleblower case.