The Tax Fraud Blog – Qui Tam Attorneys

The IRS and the Justice Department work together to combat tax scams and to issue heavy fines and imprisonment for promoters. Meanwhile, taxpayers who become involved in these schemes must repay all taxes due plus interest and penalties.

The IRS has published its annual list of “dirty dozen” tax scams in 2011:

1. Hiding Income Offshore
2. Identity Theft and Phishing
3. Return Preparer Fraud
4. Filing False or Misleading Forms
5. Frivolous Arguments
6. Nontaxable Social Security Benefits with Exaggerated Withholding Credit
7. Abuse of Charitable Organizations and Deductions
8. Abusive Retirement Plans
9. Disguised Corporate Ownership
10. Zero Wages
11. Misuse of Trusts
12. Fuel Tax Credit Scams

A full discussion of the “dirty dozen” is available on the IRS’s website.

On February 28, 2011, Walter Allen Johnson, aka Beau Johnson, a former Tennessee Department of Correction inmate admitted that while incarcerated by the Tennessee Department of Correction between February 2006 and January 2007, he conspired with others to defraud the United States by submitting false tax returns that claimed refunds on behalf of other inmates. To execute the scheme, Johnson and others collected Social Security numbers from inmates and used those Social Security numbers to file false income tax forms with the IRS, claiming refunds to which the inmates were not entitled. Johnson and his co-conspirators collected approximately 87 U.S. Treasury checks totaling approximately $57,880.

On November 18, 2011, Chief U.S. District Judge Todd J. Campbell of the Middle District of Tennessee sentenced Johnson to 92 months in prison for his role in the IRS tax fraud scheme. Johnson was also ordered to pay $57,880.80 in restitution.

Just over four years ago, Congress passed the Extension of Tax Relief Act of 2006, which contained a whistleblower reform provision. These amendments authorized the IRS to create a Whistleblower Office to process tips received from individuals who spot tax problems in their workplace, while conducting day-to-day personal business, or anywhere else they may be encountered.

As a result, the IRS is now currently authorized to pay such sums as deemed necessary for detecting underpayments of tax, and detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving of the same.

As expected, the Tax Relief Act of 2006 significantly increased incentives for whistleblowers since Section 406 now provides for a recovery of at least 15%, but not more than 30%, of the collected proceeds. However, if the action is based upon the results from a judicial or administrative hearing, from a government report, hearing, audit, or investigation, or from the news media, the whistleblower’s recovery is limited to no more than 10% of the collected proceeds unless the whistleblower is an original source. Unlike the definition of original source in the FCA, Section 406 simply states that the reduction based upon public disclosure will not apply if the information was originally provided by the whistleblower.

A whistleblower’s share will also be reduced if the whistleblower planned and initiated the violations. Furthermore, if the whistleblower is convicted of criminal conduct arising from planning and initiating of the violations, he is not entitled to any share of the recovery. A whistleblower has 30 days from the determination to appeal an award determined by the Tax Court .

Critics of the tax whistleblower statute feel it infringes on the rights of taxpayers by allowing informants to allege wrongdoing with little or no evidence and they suggest that the statute raises serious privacy concerns. The most significant of these concerns is that private citizens will profit by disclosing taxpayer information and recklessly expose the information to persons not authorized by statute to receive such information. Under existing law, informants and qui tam plaintiffs must turn their information over to the government agencies that are authorized to receive tax-related information. Furthermore, any privacy concerns should probably be balanced against public policies that encourage private persons to expose tax-related fraud.

Below are examples of tax fraud schemes showing the type of activities whistleblowers can file a claim under the IRS whistleblower law: 

1. Backdating/postdating earnings or losses to move income into a different tax year.
2. Altering grant and/or exercise dates on stock options.
3. Questionable tax shelter schemes and false deductions.
4. Parent corporation manipulation of subsidiary relationships to conceal profits or create improper losses.
5. Under-reporting revenue or over-claiming losses
6. Foreign companies that fail to pay U.S. taxes for domestic operations.
7. U.S. companies and wealthy individual citizens who conceal earnings made from transactions on foreign stock and commodity exchanges, and from other foreign transactions
8. Non-filing of a federal tax return

If you are aware of tax fraud by a corporation or wealthy individual tax payer, you may be able to recover significant rewards through the IRS whistleblower laws.  The attorneys at Berg and Androphy are trial lawyers prosecuting IRS Tax fraud cases resulting in the recovery of hundreds of millions for the government and whistleblowers.

New York City’s Department of Finance has reached an agreement with the U.S. Treasury that will give local officials access to the Financial Crimes Enforcement Network (FinCEN). This federal database will give the city a new financial and analytical tool to use in the investigation of tax evasion. Because income from individuals and businesses is self-reported, it is estimated that the city is owed billions of dollars in unpaid and under-reported taxes.

The Financial Crimes Enforcement Network tracks suspicious financial activity including large cash transactions and money transfers into foreign bank accounts. According to Michael Flowers, the director of the city’s Financial Crime Task Force , access to this information gives enforcement agencies a significant advantage in tracking the financial activities of businesses or individuals who aren’t paying city taxes.

Gaining access FinCEN is just the latest move by the NYC Finance Department to combat tax evasion. Last year the department hired more than two dozen additional auditors. The department may hire additional auditors and is also considering developing a whistleblower program modeled on the IRS’ program. The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.

“The IRS whistleblower statute provides an important tool in law enforcement,” says Joel Androphy, attorney and partner at the prestigious Nationwide law firm of Berg & Androphy.” Any efforts that provide more opportunity for citizens to discover tax fraud benefit the country’s financial health.”

A recently passed law in the state of New York will allow IRS whistleblowers to file qui tam lawsuits against the wealthy who cheat on their taxes under the False Claims Act.

Under the qui tam law, whistleblowers who file suits against those who defraud the government can receive a portion of the potential penalty imposed by the state on the defendant. Previously, the law had focused on those who committed Medicare Fraud or Defense Contractor Fraud, but now the scope has been expanded in New York to include those who cheat on their taxes, according to the New York Times.

Qui tam law experts said that the New York law is the first of its kind in the US. “Another positive step by NY to stop cheaters,” says attorney and partner Joel Androphy. “California and other tax states should follow.”

The new law targets only wealthy individuals because qui tam lawsuits can only be filed against those defendants who make more $1 million in net income a year. In addition, suits can only be filed when the damage against the government is more than $350,000.

Lydia Hernandez of Lydia Hernandez Tax Services in Salinas, California pleaded guilty to tax fraud charges on July 27, 2009 in Federal Court. As a result she was sentenced this week to 15 months in prison for tax evasion including aiding and assisting in preparing false tax returns. She was also ordered to pay $35,433 in restitution, the U.S. Attorney’s Office said, and three years of supervised release.

Authorities said Hernandez prepared 39 income tax returns on behalf of 13 clients for the 2002 through 2005 tax years.

In the plea agreement, they said, Hernandez admitted that she prepared false returns in order to reduce the taxable income for the clients and obtain a bigger refund for them than they were entitled to receive.

Hernandez also admitted that for the 2004 tax year, she underreported her business income by $51,129 on her individual tax returns.

She will begin her sentence September 27, 2010.

Last week, Swiss Parliament approved an agreement between Switzerland and American to disclose information on approximately 4,450 Swiss bank accounts that are held by American clients who are under investigation for tax fraud.

Swiss banking has always been known for secrecy, but recent court orders to disclose client information in criminal investigations could not be ignored. In fact, directors of UBS, the bank in question, could have faced indictment and legal action from American courts for failure to comply with court orders.

Just two years ago, the Switzerland-based investment bank, UBS, came under the scrutiny of the U.S. DOJ for assisting Americans with tax evasion schemes and was fined $790 million for facilitating fraud.

UBS is currently in the process of transferring the court-ordered information on clients. In the wake of recent financial crisis, many governments, including the U.S. Government, have increased efforts to penalize tax evaders.

Bradley Birkenfeld, the former banker who blew the whistle and helped uncover the largest tax fraud scheme to date came forward last month with additional information. Birkenfeld is now claiming that U.S. politicians took advantage of the same Swiss bank account scheme as many of the country’s executives.

Birkenfeld is currently serving a 40-month term in federal prison for his part in the UBS tax evasion scheme. Although he blew the whistle on the scam, federal prosecutors claim that he withheld important information about his own dealings.

From prison, he alleged over the phone that only the bank’s top executives knew about what they called the PEP Office (Politically Exposed Persons) for politicians who were seeking to store undisclosed money away in Swiss bank accounts. Birkenfeld alleges that the New York based “referral desk” that steered many rich Americans to the Swiss branch of UBS also served political clients whose names have not been revealed.

Birkenfeld’s lawyers are currently seeking clemency from President Obama on the ground of Birkenfeld’s importance in uncovering the largest tax evasion scheme in American history.

Michael Craig Cooper, a 55 year old man from Topeka, Kansas, was sentenced to 20 years in prison for Tax Fraud. Cooper is the founder Renaissance (The Tax People) and was sentenced on more than 70 tax fraud counts.

In addition to serving those 20 years, Cooper will also be required to pay $10 million in restitution to the United States Government to cover the extent of his fraudulent activities, as well as a forfeiture of about $75 million.

The case was decided in 2008 when a federal jury found Cooper guilty on 73 counts of tax fraud including mail fraud, wire fraud, money laundering and conspiracy.

As America files taxes, stories of tax fraud, evasion and scams begin to hit the press. Many Americans choose to have their taxes filed by a CPA, and are employed by companies that issue tax paperwork to each employee. Usually, these basic tax-season transactions go as planned. But, if you’re one of the individuals who has seen tax fraud first hand, you should report it today.

If you are having your taxes prepared by a professional who is behaving suspiciously or has tried to sell you on a scam to make more money by filing for losses you don’t have, make sure to report them. If your company has with-held information or asked you to lie to the government on your earnings, you could have a potential case. Our team of experienced attorneys can help you decide what the next steps should be.

As a whistle blower, you will receive a portion of whatever money the U.S. Government gains back in court proceedings. Do your country, fellow citizens and yourself a favor by reporting tax fraud if you suspect it. Berg & Androphy has handled many types of Qui Tam cases, including tax fraud. We’re more than happy to help you assess your potential case and decide what the next steps should be.

If you blow the whistle on fraudulent behavior, you can reap substantial financial rewards.

If you suspect tax fraud, contact Berg & Androphy using our online Qui Tam Form today!