Articles Tagged with IRS

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Tax Fraud Whistleblower

Every year, people and companies in the United States cheat on their taxes.  The IRS has a special term for the amount of taxes that go unpaid each year.  It’s called the “Tax Gap,” which means the amount of true tax liability faced by taxpayers that is not paid on time.

The IRS estimates the annual Tax Gap to be $450 billion. Wow!  Forget about raising taxes, just think of the problems the Government could solve if it just collected the taxes that people actually owe right now.

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On August 30, 2016, the Treasury Inspector General for Tax Administration issued a report following an audit of the IRS Whistleblower Program. The audit was conducted to determine whether whistleblower claims are being appropriately and timely processed for investigation and examination.   The report confirms much of what lawyers who practice in this area already know.

First, the report confirmed that the program has the potential for great success.  From fiscal year 2011 through 2016, the IRS collected more than $2 billion of unpaid taxes based on information reported by whistleblowers.   While this sounds like a great success, lawyers who practice in this area, such as McCabe Rabin, P.A., believe this is just the tip of the iceberg.

The report also confirmed a number of problems with the IRS whistleblower program, most notably, the IRS’s failure to contact whistleblowers to clarify allegations and the IRS’s failure to have proper supervision and oversight to make sure that whistleblower claims are timely processed and referred for examination.  The report makes 10 specific recommendations for improving the manner in which the IRS receives, processes, and handles IRS whistleblower complaints.

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Business Litigation Attorney Explains: I.R.S. Whistleblower Awards Expanded by U.S Tax Court

The statute governing whistleblower claims, I.R.C. § 7623, grants awards to private citizens who provide information to the IRS that leads to the collection of at least $2 million in taxes, penalties, interest, and “additional amounts.”  The whistleblower can get an award of “at least 15 percent but not more than 30 percent of the collected proceeds.”

This week, the United States Tax Court issued an opinion that expands the definition of “collected proceeds” for purposes of an IRS whistleblower claim.  The IRS has generally taken the position that so-called “tax restitution,” or repayment of back taxes and interest, qualified as “collected proceeds,” but any criminal or civil fines or forfeitures did not.  For instance, the IRS’s Internal Revenue Manual explains that criminal fines cannot be used for a whistleblower award, because the entirety of the fine must be deposited into the Victims of Crime trust fund.  Likewise, a civil forfeiture must be placed in its entirety into a Treasury Department trust fund.

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Each year the IRS publishes a list of the “Dirty Dozen” tax scams.   The list is intended to warn taxpayers against common and trending tax scams.  The complete list for 2015 can be found by clicking here.

The 2015 list includes the improper use of captive insurance companies to shelter income from the IRS.

Captive insurance companies, when used lawfully, can be a means of legitimate self-insurance.  Basically, a parent company forms a wholly-owned subsidiary, which operates as a “captive insurance company.”  The captive insurance company can be incorporated domestically, but is more often incorporated in an offshore venue, such as the Cayman Islands, the Bahamas, or the British Virgin Islands.   The parent company pays insurance premiums to its captive subsidiary, which then provides insurance to the parent company, either through the reinsurance market or on its own.