Tax Fraud

Overview

Recent studies conducted by the IRS confirm that over 93% of taxpayers believe it is every American’s civic duty to pay their taxes. And yet, each year individuals and corporations fail to pay over $450 billion in taxes by underreporting income, failing to pay taxes, and failing to file tax returns. The IRS has identified several leading reasons for the country’s massive tax gap, including unreported business income, hidden corporate profits, and unpaid employment taxes.

The IRS has also identified combating the use of offshore shell companies and foreign bank accounts to avoid taxes as a major priority and recently announced the end of its Offshore Voluntary Disclosure Program. In making that announcement, the Director of the IRS stated that the Service would rely on other tools, including whistleblower tips, to identify and punish U.S. corporations and individuals with high net worths who use offshore shell companies and bank accounts to hides assets and avoid paying taxes.

The IRS Whistleblower Office

The Tax Relief and Health Care Act of 2006 created an IRS Whistleblower Office dedicated to working exclusively with whistleblowers and to providing eligible whistleblowers with a share of government recoveries. The IRS puts great emphasis on whistleblower confidentiality and protecting whistleblowers from any reprisals for providing truthful information to the IRS. In the words of the Director of the IRS Whistleblower Office, “the IRS remains committed to protecting the identity and even the existence of whistleblowers.”

To be eligible for an award, whistleblowers must provide confidential information, including specific and credible evidence, that an individual or corporate taxpayer is avoiding or underpaying a tax obligation to the federal government, whether fraudulently or otherwise. Moreover, to be eligible for an award, that information must substantially contribute to an official action where either (1) the action involves a taxpayer whose gross income exceeds $200,000 or (2) the total unpaid taxes, interest, penalties, and related actions (including civil forfeitures and criminal fines) exceed $2 million.

Successful IRS Whistleblower Cases and Awards

In 2018, the IRS Whistleblower Office collected $1.4 billion in unpaid taxes, fines, penalties, and civil forfeitures as a result of whistleblower tips and made 217 awards to whistleblowers totaling more than $300 million. As impressive as those numbers are, the IRS has a long way to go — and needs the assistance of many more whistleblowers — to make a significant dent in the nation’s $450 billion tax gap.

Tax Fraud Liability Under State False Claims Acts

Individual states are also defrauded out of hundreds of millions of dollars by corporations and individuals who fail to pay state taxes. Several states, including New York, Illinois, and Rhode Island, allow whistleblowers to file a tax-related state False Claims Act qui tam complaint and, if the case is successful, to recover an award. This option is not available for unpaid federal taxes as the federal False Claims Act specifically excludes tax cases.

Successful State Tax Fraud Cases and Awards

Some examples of successful state False Claims Act suits for unpaid taxes include:

  • a $330 million settlement between the State of New York and Sprint Nextel Corp. for failing to collect and remit sales taxes on its cell phone monthly access charges.
  • a $40 million settlement between the State of New York and the Alabama-based investment firm Harbert Management Corp. for failing to pay New York income tax on income derived from its New York business activities.
  • a $6.27 million settlement between the State of Illinois and Gateway, Inc. for failing to collect and remit Illinois use tax on Internet sales to Illinois customers.

Whistleblowers have been rewarded under these laws, including a relator share of 19% (or $62.7 million) awarded by the state of New York in the Sprint Nextel case.

How to Report Tax Fraud

The above are just some examples of the many different types of tax fraud. If you think that you have information related to tax fraud, please contact us for a free, confidential consultation. As former federal prosecutors, we have investigated, charged, and convicted individuals and corporations for criminal violations of U.S. tax laws. We have worked extensively with the IRS, including its criminal investigation division, large business and international division, and tax-exempt entities division. We understand how the IRS as well as state tax authorities evaluate potential cases, and we know the type and the quality of evidence required to open an audit or an official investigation.

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