Over the past few years, the IRS has seen a significant increase in refund fraud schemes in general and schemes involving identity theft in particular. Identity theft and the harm that it inflicts on innocent taxpayers is a problem that we take very seriously. The IRS has a comprehensive identity theft strategy comprised of a two-pronged effort, focusing both on fraud prevention and victim assistance.

The John Doe summons is a valuable tool for the IRS. For example, in 2008, the IRS maneuvered around the Swiss law prohibiting banks from revealing account holders’ identities by convincing a federal court to allow the IRS to issue a John Doe summons for UBS Swiss Bank accounts used by Americans. By way of another example, on April 7 2011, after considering the Department of Justice’s memorandum in support of the petition for a John Doe summons, the Northern District of California, San Francisco Division, authorized the IRS to serve a John Doe summons to request information from HSBC Bank USA, N.A. about Americans who allegedly used accounts at The Hong Kong and Shanghai Banking Corporation in India (HSBC India) to evade federal income taxes.

More recently, in December 2011, an Eastern District of California judge granted the IRS’s request for a John Doe summons on California’s Department of Equalization to ferret out taxpayers who allegedly evaded some or all gift taxes owed on property transfers to family members between 2005 and 2010. Given the IRS’s track record, additional requests for John Doe summons are likely.

1. Identity Theft
2. Phishing
3. Return Preparer Fraud
4. Hiding Income Offshore
5. “Free Money” from the IRS & Tax Scams Involving Social Security
6. False/Inflated Income and Expenses
7. False Form 1099 Refund Claims
8. Frivolous Arguments
9. Falsely Claiming Zero Wages
10. Abuse of Charitable Organizations and Deductions
11. Disguised Corporate Ownership
12. Misuse of Trusts

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

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 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.

The IRS cannot make an award determination until the underlying taxpayer matter is completed, including any administrative or judicial appeals the taxpayer may choose to pursue. Whistleblowers are advised that this process may take five to seven years, and longer when there are protracted appeals or collection actions.”

Waiting five to seven years is frustrating for whistleblowers who have turned over evidence to the IRS for use in prosecuting a tax fraud case. But the IRS, through its Report, has made clear that a whistleblower will not receive an award unless the IRS collects the monies it is owed.

As noted in an earlier post, the rewards for tax fraud whistleblowers range from 15% to 30% of the taxes, penalties, and interests collected by the IRS in the case if more than $2 million is at issue in the case and the IRS actually uses the information provided by the whistleblower.

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.

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.”

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.