Chance of being audited lowest in modern times - unless there is an IRS Whistleblower.
Gregory S. Lynam | Monday, March 27, 2017
Tom Herman had an interesting article in today’s Wall Street Journal about the low chance of getting audited by the IRS. It was nice to see Tom back to writing for the Journal, he used to be the WSJ Tax Report columnist and covered IRS whistleblowing. Tom starts the article off with a bang by saying:
Those who like to be, well, creative when filing out their federal income-tax returns may take cheer from the following.”
The article goes on to cover the seemingly ever decreasing rate of enforcement by the IRS. IRS Commissioner John Koskinen is quoted as stating that the IRS budget is down $900 million from 2010. Koskinen stated that “Exam rates are continuing their downward trend in all categories – individuals, small businesses and large corporations….” These are great facts if you are a tax cheat; not so great for everybody else.
Now, more than ever, the need for tax whistleblowers is vital to the efficient enforcement of tax. People with high-quality information about the underreporting of tax are an amazing resource to the IRS, especially in these tighter times. Issue identification, the part of an audit where the IRS determines what issues to fully examine can eat up an audit budget fast. The IRS is constantly working to reduce issue identification cost. The creation of Schedule UTP and the recent announcement of LB&I Compliance Campaigns are a couple examples. When an insider can point out the areas where an audit is most likely to bear fruit, the IRS is able to hone in and make the most of its enforcement budget.
The IRS whistleblower program works (perhaps we will do a future blog on the number of millionaires we have helped create). If you have information on tax underpayments we encourage you to seek assistance from a tax lawyer who can help you present it to the IRS in a way that shows the issues you have identified are a smart place to put the IRS’s enforcement dollars. Together, we can help reduce tax underpayments even in the face of fewer IRS boots on the ground.Comment on this article
Recent Tax Court case addressed a whistleblower's motion to proceed anonymously.
Erica L. Brady | Thursday, March 23, 2017
The ability to remain anonymous throughout the administrative and judicial whistleblower award determination an appeal processes has been a common theme in the concerns that we hear from clients and something that I spoke about on a panel at the ABA Section of Taxation Meeting in May of 2016. This includes how to protect the whistleblower’s identity, the taxpayer’s information, and when a protective order is appropriate. This is a very complex area, which should be discussed with your attorney as you weigh the decision to pursue litigation in the Tax Court.
The ability of a whistleblower to proceed anonymously in the Tax Court is a balance of the public’s interest in open courts and the interest of protecting the identity of confidential informants. This balance has generally resulted in whistleblowers being able to proceed anonymously.
The Tax Court yesterday released Whistleblower 12568-16W v Commissioner. This opinion addresses a whistleblower’s ability to proceed anonymously (and for the taxpayer’s information to be redacted) where the whistleblower claims that the taxpayer committed tax fraud resulting in a $3 billion tax liability. This opinion walked through the Tax Court’s jurisprudence on a whistleblower’s ability to proceed anonymously, focusing on the balance between protecting a confidential informant’s identity and the public’s interest in open court proceedings. Judge Halpern points out in this opinion that this balance can shift as the case progresses, citing the explanatory notes that were included at the time the Tax Court adopted Rule 345. The Court stated that:
since we do not know what turns this case may take, and given the extraordinary amounts of uncollected tax and penalty liabilities petitioner alleges, with the possibility that petitioner might receive a whistleblower award up to 30%of the proceeds the Commissioner collects (an award that might equal or exceed $1 billion), see sec. 7623(b)(1), we cannot say that, at some future time in this action, we may not revisit the balancing between alleged harm to petitioner and the societal interest in knowing petitioner’s identity and determine that anonymity is no longer justified.
This serves as a reminder that the balancing test is something that we need to continue to look at throughout the litigation process, because balancing a whistleblower’s anonymity and the public’s interest in the proceedings can shift from the Tax Court’s perspective as the case proceeds. As always, consult your attorney for specifics about your case.Comment on this article
IRS Releases 2017 Dirty Dozen Tax Scams
Stephen U. McCloskey, Jr. | Friday, February 17, 2017
The IRS today announced the conclusion of its annual list of the "Dirty Dozen" tax scams. The list is published each year by the IRS as a way to both inform and warn taxpayers about the most common tax schemes they may encounter especially during filing season.
This year's list remains unchanged from last year's list with familiar tactics such as "Offshore Tax Avoidance," "Falsely Padding Dedudutions," and "Abusive Tax Shelters," appearing yet again.
With respect to Offshore Tax Avoidance, the IRS noted that numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts, nominee entities, foreign trusts, employee leasing schemes, private annuities, or insurance plans. The IRS's release concerning Offshore Tax Avoidance said:
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as bankers and others suspected of helping clients hide their assets overseas.
Commissioner John Koskinen mentioned that the IRS has collected $10 billion in back taxes in recent years. He cited the offshore voluntary disclosure programs and third-party reporting as reasons why it is less likely that offshore financial accounts will go unnoticed by the IRS.
The IRS's release on Falsely Padding Deductions focused on warning taxpayers against "the temptation to falsely inflate deductions or expenses. . ." Some taxpayers are not able to avoid that temptation and they file tax returns with substantially inflated business expenses, costs of goods sold, and in some cases they simply make-up expenses or deductions in an effort to pay less tax or increase their tax refund.
Finally, the IRS warned of Abusive Tax Shelters for the third year in a row. More specifically, "micro-captive insurance tax shelters." Promoters, accountants, or wealth planners persuade owners of closely held entities to participate in schemes that lack attributes of genuine insurance. According to the IRS release, "coverages may insure implausible risks, fail to match genuine business needs or duplicate the taxpayer's commercial coverages. Premium amounts may be unsupported by underwritring and actuarial analyiss, may be geared toward a desired deduction amount or may be significantly higher than premiums for comparable commercial coverage." In November of 2016, the IRS released Notice 2016-66 which advised that micro-captive insurance transactions have the potential for tax avoidance or even evasion.
The unscrupulous promoters of these abusive transactions always find new products to promote as the IRS and the Courts crack down on the abuse. Accordingly, we expect the IRS to continue to pursue the promotors of the latest trends in tax evasion and we expect Abusive Tax Shelters to continue to appear on the Dirty Dozen List.
If you have knowledge of offshore tax avoidance, substantially infalted tax deductions, or abusive tax structures, contact the tax attorneys at The Ferraro Law Firm to discuss filing a claim for an award for providing the information to the IRS and doing your part to hold tax evaders accountable.
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New Treasury Secretary Confirmed; What that Means to Tax Whistleblowers
Scott A. Knott | Tuesday, February 14, 2017
In our experience the IRS is a peculiarly apolitical organization – despite the Lerner email scandal and the targeting of conservative groups for noncompliant tax exempt status claims, almost every position in the IRS is not motivated by or responsive to political considerations – but when we have a change of administration it means we have a new political people in the top tier at the Treasury Department, which runs the IRS. Yesterday the new administration’s appointee as Treasury Secretary Steven Mnuchin was confirmed by the Senate, so the question you may all be asking is: as current or prospective whistleblowers, what does that mean to us?
Senator Grassley had the opportunity to question the nominee about his thoughts on the Program, and here is what he just said about Mnuchin:
As the author of the provisions improving the incentives for whistleblowers to come forward about large dollar tax fraud, I was glad to receive a commitment from Mr. Mnuchin in support of a strong IRS whistleblower function. Whistleblowers have helped the IRS recover $3.4 billion that otherwise would have been lost to fraud. Cracking down on big dollar tax fraud is a matter of fairness to the vast majority of taxpayers who pay what they owe. The IRS has made progress in working with whistleblowers, but there’s more work to be done.
Previously Grassley said this about the nominee after his Finance Committee nomination hearing: “Mr. Mnuchin gave his assurance that he’ll work with me if confirmed to support tax fraud whistleblowers.” It is a positive sign to whistleblowers that we have such a show of commitment by the incoming administration. This statute isn’t going to be eliminated, and if anything whistleblowers can expect to see the statute strengthened in the coming years with cooperation by Treasury leadership.
“Support” from the new administration has to be tangible and results oriented to have any meaning. Words are not enough. For starters, the leaders at Treasury needs to work with and instruct their attorneys in the office of Chief Counsel to not take legal positions which damage the legitimacy of the Program. For example, not resisting whistleblowers discovery requests for information from the taxpayer’s administrative file which would show how their information was used beyond what happened to the in the Whistleblower Office’s file; not limiting collected proceeds to be only those monies collected under Title 26 despite rulings by the Tax Court opinions to the contrary; and reconsidering sequestration on awards. Most importantly the new Treasury leadership should through proper channels instruct IRS operational personnel take a long hard look at allegations of tax underpayments and fraud reported by whistleblowers and treat these losses to the government as the serious threat that they are. Such claims of large scale malfeasance should not to be taken lightly and dismissed without proper due diligence. Just because there is a serious limitation on resources at the IRS it does not mean that it is smart or proper to do less with whistleblower claims, to the contrary the data showing the higher return on agent time used in whistleblower cases suggests that the IRS should spend more time prosecuting whistleblower claims because they are one of the most efficient ways to use those precious resources. Finally, “support” by the new administration is best shown by one thing: putting their money where their mouth is by timely paying awards to whistleblowers.Comment on this article
The Ferraro Law Firm Represented 22% of All 7623(b) Tax Whistleblower Awards Paid by the IRS in 2016.
Gregory S. Lynam | Friday, January 13, 2017
The IRS released the IRS Whistleblower Program Fiscal 2016 Annual Report to Congress recently. There were some interesting statistical revelations, some surprising and some not. Among the more important, if not surprising, takeaways was the fact that nearly 60% of all cases are rejected for not being specific, credible, or for being too speculative. Getting over this hurdle should be the number one goal of all IRS whistleblowers. The best way to get over that hurdle is to have experienced tax lawyers working for you. We have over a hundred billion dollars in active submissions to the IRS. I have only seen one case where one of our submissions was initially rejected for being perceived as too speculative and we got the IRS to reconsider that position.
A surprise from the 2016 report was that we represented nearly a quarter of all 7623(b) awards made by the IRS last year. We are proud to be seeing success for our clients and happy to see the IRS recognizing the important contribution made by whistleblowers.Comment on this article
DOJ Tax Division is interested in whistleblower information, but risks of disclosure should be discussed with counsel prior to disclosure.
Erica L. Brady | Friday, December 09, 2016
Caroline Ciraolo, Principle Deputy Assistant Attorney General, Department of Justice Tax Division, made clear the importance of whistleblower counsel while speaking at the American Bar Association’s National Institute on Criminal Tax Fraud and Institute on Tax Controversy in Las Vegas. Ms. Ciraolo discussed her announcement earlier this year that the Tax Division would be interested in receiving information from whistleblower’s counsel about mandatory award claims under section 7623(b) that have been submitted to the IRS Whistleblower Office if the claim involves a criminal tax matter. Ms. Ciraolo cautioned that before bringing information to the Department of Justice that whistleblowers and their counsel should have serious discussions if the whistleblower participated in the reported conduct.
It is important for whistleblowers to fully understand any consequences that they may have prior to providing information to the IRS, be it liability for additional taxes or potential criminal liability for certain actions. As everyone’s situation is different this is something that should be discussed with an attorney prior to providing information to the government.
Ms. Ciraolo noted that the Tax Division will not be paying a separate award, nor will it be opening its own whistleblower office. However, the channels that are used to submit information about civil tax underpayments to the IRS can still be used for criminal tax matters.Comment on this article
Another Treasury Report released about the IRS Whistleblower Program
Scott A. Knott | Monday, October 24, 2016
Today the Treasury Inspector General released a Report titled "The Whistleblower Program Helps Identify Tax Noncomplicane; However, Improvements Are Needed to Ensure That Claims Are Processed Appropriately and Expeditiously" about the IRS Whistleblower Program. It contained some interesting statistical analysis of various processes relating to the inner workings of the Program but a quote from page 7 of the Report stuck out:
[A] majority of claim closures in FYs 2015 and 2016 (83 and 85 percent, respectively) are rejected or denied before going to an operating division field group for an investigation or examination, with only a small portion (2 percent each year) resulting in an award. Most claims were rejected because the allegations were not specific enough for the IRS to take action or denied because the allegation was below the threshold to justify resources for compliance action.
We understand that about 85% of the submissions that the IRS Whistleblower Office receives are pro se filings, and the problem is that often those claims are speculative or are not developed enough for the IRS to use them as a basis for taking action. Of the remaining 15% on which the IRS does take action and passes the whistleblower’s information to the field agents for examination, approximately 2 out of every 15 are getting an award. We believe a whistleblower’s odds of getting an award can be significantly higher [than 13.333%] for a thoroughly vetted submission with good facts and good law that are clearly laid out. The hurdle of getting the IRS to take action in the first place is certainly a high one but then you have to deliver your information in a way that helps them win their case.
The TIGTA Report spent a lot of time looking at the procedures for the debriefing intake and the claim rejection processes, but in our view that is not the most material weakness of the IRS Whistleblower Program. The biggest weakness is that under the current claim processing system it is still far too easy for the IRS field examination divisions to simply walk away from a good case even when the facts and the law are on their side. Often people have a difficult time convincing the IRS to take even a slam dunk case, no matter how much it costs taxpayers if they give it up. Our mission is to set forth a whistleblower’s information in such a way that it not only convinces the IRS to take action, but it forms the solid foundation of a winning case once they do decide to take action.Comment on this article
IRS Releases an Overview of the Whistleblower Claims Process.
Scott A. Knott | Monday, September 12, 2016
Today the IRS Whistleblower Office released a 3-page overview of the tax whistleblower process called Publication 5251 - The Whistleblower Claim Process. The new publication purports to provide clarity on:
- What qualifies for an award
- How whistleblowers submit a claim for award
- What happens to a claim after the IRS receives it
- Communicating with the IRS after a claim is submitted
- Whistleblower Process Timeline
- Common reasons for Initial rejection/denial of claim
While there are no new procedural changes identified in the overview, this publication does provide a snapshot of the claims process for the uninitiated. In particular, the Process Timeline” flow chart on page 3 is a relatively realistic display of the timelines involved with the claims process. Of course, we could cite numerous, and I mean numerous with a capital N, exceptions to the timeline based on the cases we have seen and been involved with, this is still a good representation of how the claims process SHOULD work. Getting a claim through the system without snags is another story, and is something we work on every day. A copy of Publication 5251 can also be found on IRS.gov.
 For example, in theory the timeline shows the “Administrative Proceeding” starting at the time a payment is made but well before the IRS starts to wait simply for the period of limitations on refunds to expire before paying an award. In practice this has not been happening. This is particularly crucial because it is only the start of this Administrative Proceeding which would trigger the exception to the taxpayer rules of 6103(h)(4).Comment on this article
Tax Court: "The term 'collected proceeds' means all proceeds collected by the Government from the taxpayer."
Scott A. Knott | Wednesday, August 03, 2016
The Tax Court’s opinion in Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4 (2016), was a clear and decisive win for whistleblowers. The IRS has long been improperly trying to limit what should be included in “collected proceeds” and today’s opinion restores Congress’s intention that all proceeds that are collected be included in the amount on which the whistleblower’s award is computed. By specifically including criminal fines and forfeitures in the collected proceeds amount, this court decision means that a whistleblowers’ award will reflect the full amount that the government collected based on their information. In this opinion, the Tax Court examined the definition of “collected proceeds” as used in section 7623(b)(1). The court found that the language of that
Section 7623(b)(1) is straightforward and written in expansive terms, namely, where, using information provided by the whistleblower, the Secretary proceeds with an administrative or judicial action regarding underpayments of tax or any action regarding the violation or, or conniving to violate, the internal revenue laws, the whistleblower is entitled to an award based on a percentage of the collected proceeds resulting from the Secretary’s action (as well as any related actions) or from any settlement in response to such action.
The court refused to follow Respondent’s request to narrow the definition of collected proceeds. The court stated:
We are leery of arbitrarily limiting the meaning of an expansive and general term such as “collected proceeds”. In drafting section 7623(b)(1), Congress could have provided that the whistleblower’s award is to based on taxes and other amounts assessed and collected by the IRS under title 26. But it did not.
The court explained that this case is not in conflict with Whistleblower 22716-13W v. Commissioner, which had ruled that FBAR penalties were not to be included in the $2 million threshold amount used to determine if section 7623(b) applied. The court here stated that:
In reaching our holding today, we determined that the wording in the threshold requirement of section 7623(b)(5)(B) … is different from that of section 7623(b)(1), which provides for an award of a percentage of the collected proceeds …
The Tax Court held that the phrase “collected proceeds” is sweeping in scope and is not limited to amounts assessed and collected under Title 26 of the United States Code. The Tax Court goes on to hold that criminal fines under Title 18 as well as civil forfeitures under Title 31 are both collected proceeds under section 7623(b)(1).Comment on this article
Tax Reserves continue to remain stable over time despite cuts to IRS budget and Schedule UTP.
Erica L. Brady | Wednesday, March 30, 2016
We began reordering the Fortune 500 based on uncertain tax positions reported in the most recent 10-K filed before June 15th of that year in 2010, the same year that the IRS announced that it was planning to require that certain business taxpayers to report uncertain tax positions on their tax returns. The IRS implemented a five-year phase in of Schedule UTP, requiring corporations that have total assets of $100 million or more to file Schedule UTP beginning with the 2010 tax year. The total asset threshold for the filing requirement dropped to $50 million for the 2012 tax year and to $10 million for the 2014 tax year. At the same time that corporations were expected to begin disclosing their uncertain tax positions the IRS’s budget started to be cut, year after year. According to the Center on Budget and Policy Priorities, the IRS’s budget has been cut by 18 percent since 2010, after adjusting for inflation. The IRS’s budget constraints have cut into enforcement efforts, but this should not be reflected in the uncertain tax positions reported because the likelihood of an audit on the issue is not a factor when setting the reserve. The total amount collected by the IRS through enforcement actions has remained in the $50 billion range for Federal fiscal years 2010 through 2014.*
We had assumed that tax reserves would decrease because corporations would not want to report their uncertain tax positions to the government. This assumption seemed reasonable given the amount of concern and interest in the topic by practitioners. However, the total cumulative uncertain tax positions of the Fortune 500 has been reasonably stable, even increasing on the 2013 Ferraro 500. Using the 2010 Ferraro 500 as the base line measurement for pre-Schedule UTP reserves, as this data reflects uncertain tax positions that were reported in 10-Ks published prior June 15, 2010. As a whole the Fortune 500 has only reduced its tax reserves by 10.8 percent over the last five years.
The 2015 Ferraro 500 can be found here.
* The numbers is the chart are for the Federal government’s fiscal year, October 1 through September 30. Enforcement revenue collected in a fiscal year includes tax, interest, and penalties from multiple years.Comment on this article