How to Report Tax Fraud

By Arthur Stock

The Internal Revenue Service (“IRS”) has had a reward program for whistleblowers since 2006.   26 U.S.C 7623.   Several individuals have received rewards in the seven and eight digit range.  The process is simpler than filing a False Claims Act (“FCA”) complaint, and typically, very little is required from the whistleblower after the initial filing and interview.  However, the likelihood of recovery is very low—less than 1% of claims have led to a reward to date.

Underpayment of federal taxes can be committed by a corporation or individual, and the total amount of potential recovery—including interest and penalties—must be at least $2 million. In measuring potential damages for a long-running practice, keep in mind the applicable of statute of limitations for initiating an audit or enforcement action, which in most instances is three years.

Reporting a Tax Underpayment to the IRS

All that is required is filing a Form 211 with the IRS.  On this form, the whistleblower explains the tax underpayment and names the perpetrator.  Although many whistleblowers report tax frauds, the Form 211 needs to describe an underpayment, not a fraud.  There is no filing fee.  A Form 211 is confidential, and the IRS will not disclose the identity of a whistleblower until an award is made.

Since the goal of the Form 211 is to entice the IRS to take action, it is best to submit underlying documents demonstrating that a tax was underpaid.  For example, if the claim is that real estate was undervalued for purposes of estate tax calculation, the whistleblower might include an appraisal and/or other evidence of the correct value, such as documentation of the price of a recent sale of the property.  Many whistleblowers will not have access to relevant documents.  A former employee aware of a corporate fraud might have detailed knowledge of what occurred, but no documents at all.  Submission of documents is not required.  The IRS will always have access to tax returns, and it can receive additional documents through an audit or an administrative subpoena.

Whistleblower Interviews with the IRS

The IRS frequently interviews the whistleblower, often several months after the filing, but it is not required to do that.  Depending on the nature of the reported alleged fraud, the whistleblower may be interviewed more than once.  The whistleblower may even be asked to participate in an investigation, for example to explain the significance of documents that the IRS has obtained, but this is rare.  The IRS has complete discretion as to whether to initiate an audit or investigation, and whether to take any action on the basis of the investigation.

Whistleblower Rewards

If the IRS chooses to move forward and ultimately recovers money through either judgment or settlement, the whistleblower is entitled to receive a reward of fifteen to thirty percent of the amount recovered, including collection of any interest and penalties as well as the amount of the original underpayment.  If the IRS determines that the whistleblower’s contribution to the investigation was “less substantial,” the award may be lowered to 10%.

Because tax investigations are confidential, the IRS will not keep the whistleblower informed of developments in the case, and will not even confirm whether there is an ongoing investigation. Commonly, several years of complete silence go by before the IRS informs the whistleblower that there is – or much more frequently, there is not– an award.

BE CAREFUL:  The people most familiar with a corporate tax underpayment may be found by the IRS to have been participated in the fraudulent scheme.  There is no immunity for statements included in Form 211 or statements. One of the first large awards, of over $9 million, was awarded to a whistleblower who was incarcerated at the time of the award, following a conviction for participation in the  tax fraud he reported.  Consult your lawyer on the risks as well as the rewards of filing a Form 211 with the IRS.

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By | 2018-03-26T04:53:16+00:00 May 3rd, 2017|Tax Fraud|