Blowing the Whistle on State Sales and Use Tax Violations.
Gregory S. Lynam | Monday, September 11, 2017
There seems to be as many ways to cheat on your taxes as there are taxes. State sales and use taxes are no different. Some may not realize it but sales and use taxes are two different taxes. Sales tax is usually collected by the seller at the time you buy an item and most of us have seen this on everything from car purchases to restaurant bills (even residents of the five states without a sales tax have likely left their little tax havens and paid sales tax somewhere else). Use tax is the backstop when sales tax was not charged. Bought a new mixer online and had it shipped to your house without a sales tax being collected; congratulations, you probably owe your state use tax. Has anyone ever actually filed a use tax return declaring their legally owed taxes? You are probably not surprised to learn the answer is very very few.
We focus primarily on Federal taxes with submissions to the IRS Whistleblower Office, but there are some possibilities of a whistleblower getting paid for rooting out state tax issues. Currently, Florida and New York have programs that we work with to report state tax issues. Florida’s program is similar to the IRS program in that you report the information and they take it from there. Florida pays a 10% award. New York amended its False Claims Act in 2010 to add taxes to the list. There you actually sue the taxpayer on behalf of New York. It is a lot of work, and a wild ride but the end “Relator Share” that you receive could be up to 30%.
We have dealt with several state tax issues (and even received awards!) but the circumstances must be right to make them worth pursuing. First and foremost, you need a lot of avoided tax. While the top Federal income tax rate is 39.6%, Florida has a sales and use tax rate of 6% and New York 4% (8.875% for sales and use in New York City). It takes some pretty big ticket items to add up to a worthwhile award in a use tax case. For example, to get a million dollar award from Florida, they would need to find an underreporting of around $170 million dollars’ worth of stuff (170,000,000 x .06 x .1 = 1,020,000 for those playing along at home). That’s a lot of blenders.
From where does that level of use tax violation come? Usually it comes from things that don’t need license plates or captains, like art and jewelry (cars, planes, and boats are almost always registered making avoiding sales and use tax slightly more complicated). I was reminded of this in today’s Wall Street Journal. Daniel Grant wrote an interesting piece entitled, “Art Collectors, Pay Your Taxes.” The article discusses states, particularly California and New York, cracking down on sales or use taxes. Often, purveyors of art are more than happy to accommodate requests of buyers that help them avoid sales tax, tacitly knowing the use tax will never be paid. Insiders with quality information about large-scale art or jewelry purchases may do well to consult with a tax whistleblower lawyer to see if their information is actionable.Comment on this article
Tax Court retains jurisdiction while Whistleblower Office issues revised determination, denies IRS Motion for Remand.
Erica L. Brady | Friday, August 04, 2017
On July 28, 2017, the Tax Court denied the April 14, 2016 Joint Motion to Remand the case to the IRS Whistleblower Office. In the joint motion, the parties represented that the IRS Whistleblower Office had reconsidered its determination. The Tax Court previously issued an order for the parties to file a status report by October 19, 2016, to report the efforts to resolve the case and held the joint motion in abeyance. A similar order was issued on October 25, 2016, for the parties to file a status report on or before April 25, 2017. On April 11, 2017, respondent filed a status report indicating that the IRS Whistleblower Office is prepared to make a revised determination regarding petitioner’s claim and asked the Court to grant the Motion to Remand. On April 20, 2017, petitioner advised the Court that he believes that remand is unnecessary and would needlessly delay the case.
The Court walks through an interesting discussion about when remand would be appropriate. Ultimately, the Court follows what it has previously done in cases where the IRS reopens a claim or reexamines its determination, stating:
We see no reason why remand is required to enable to Office to issue a new final determination letter. Alternatively, if the parties have resolved all issues in this case to their mutual satisfaction, they may employ this Court’s standard procedures for bringing this case to an end. This order does not foreclose the possibility of remand, should we determine that we may properly order one, in a future whistleblower case where a remand would serve a useful purpose.
This resolution follows Whistleblower 21276-13W v. Commissioner of Internal Revenue, wherein the Court retained jurisdiction of the claim and required the parties to file status reports while the parties to resolve the case and allow the IRS Whistleblower Office to review, investigate, and evaluate the merits of those whistleblowers’ claim.
We believe that allowing the parties to work to resolve the case this way is similar to allowing taxpayers, who have not already gone to Appeals, to go to Appeals after filing a petition with the Tax Court. Ultimately, this allows the parties to find a resolution while preventing whistleblower cases from being unnecessarily delayed.Comment on this article
U.S. Tax Court: The section 7623(b)(5)(B) phrase "amounts in dispute" is not specifically limited to only those amounts directly or indirectly attributable to the whistleblower information.
Erica L. Brady | Tuesday, June 13, 2017
The United States Tax Court held in Smith v. Commissioner of Internal Revenue that the threshold limitation found in section 7623(b)(5) have “clear meaning” and were intended to limit the nondiscretionary award regime to larger cases. The Court explained:
Subsection (b)(5) is intended to make the nondiscretionary award program of subsection (b)(1) and (2) applicable to larger cases. Those where the “amounts in dispute” between the taxpayer and the Commissioner exceed $2 million. Once that threshold is met, then subsection (b)(1) and (2) would apply and award percentages are to be made on the standards of those subsections.
In Smith, the petitioner’s whistleblower claim regarding barter and gift transactions caused the IRS to examine those and related issues for the taxpayer, resulting in almost $20 million in collected tax revenue. However, the IRS only found that $1.8 million were directly attributable to the whistleblower’s information and an additional $2 million had no direct relationship to the whistleblower’s information. The IRS made a determination under 7623(a) and applied an award percentage of 10 percent to the $1.8 million that was directly connected to the whistleblower’s information and 1 percent to the $2 million that was not directly connected to the whistleblower’s information. The whistleblower sought review in by the Tax Court and the parties filed cross-motions for summary judgement. The Court granted in part the petitioner’s motion for summary judgement. The Court noted the other issues raised by petitioner in their motion for summary judgement; however, the Court stated that these issues are moot until there is an award determination under section 7623(b).
Also of note were two other cases Lippolis v. Commissioner of Internal Revenue (Lippolis 2) and Gonzalez v. Commissioner of Internal Revenue. Both of these cases involved the IRS’s motion for summary judgement based on an affirmative defense that the amount in dispute was less than $2 million in each of these cases. In both of these cases, the Tax Court denied the IRS’s motion because they had failed to establish the facts necessary to prove the affirmative defense. In Lippolis 2, the Tax Court stated:
Facts alleged in respondent’s motion do not preclude the existence of other records showing that the amount in dispute exceeded $2 million. Thus, respondent has not established that facts are not in dispute which are necessary to show that respondent is entitled to judgement as a matter of law on the point that the disputed amount does not exceed $2 million.
In Gonzalez, the Tax Court stated that:
Absent an affidavit or a declaration from an appropriate IRS representative stating that a diligent and comprehensive search of IRS records had been conducted, all appropriate personnel have been contacted, and there is no record that the IRS has asserted an underpayment of tax or made any effort to assess or collect tax in excess of $2 million from the taxpayers identified in petitioner’s claims or any taxpayers related to those taxpayers, respondent has failed to show that there is no dispute as to a material fact and that a decision may be rendered in his favor as a matter of law.
These cases illustrate the Tax Court’s continued push against the IRS’ attempts to limit the Tax Court’s review of its decisions and that the Tax Court will require litigants to prove every element of their caseComment on this article
Tax Court holds that waiver of right to seek judicial review in accepting an award is binding.
Erica L. Brady | Thursday, May 25, 2017
Today the Tax Court issued an opinion, Whistleblower 4496-15W v. Commissioner of Internal Revenue, granting the IRS’s motion for summary judgement. In this case, the informant had received a preliminary award determination for an award of $2,954,933. Congratulation to the informant in this case on the receipt of an award. The award was computed as follows in the Summary Report, which is attached to the Preliminary Award Determination letter:
- Tax, Penalties, interest, and other amounts collected based on information provided by Whistleblower: $14,489,227
- Recommended Award Percentage: 22%
- Collected proceeds (Line 1) x recommended award percent (Line 2): $3,187,630
- Budget Control Act reduction (Line 3 amount x 7.3 percent): $232,697
- Award after Budget Control Act Reduction (Line 3 less Line 4): $2,954,933
The informant in this case ultimately chose to accept the award amount in the preliminary award recommendation by checking the box captioned:
I agree with the preliminary award recommendation and accept it as the award determination. I waive all of my administrative and judicial appeal rights with respect to the award determination, including my right to petition the United States Tax Court.
The petitioner made this choice after his counsel consulted with the IRS for options of receiving the award but keeping the option to appeal just the Budget Control Act Reduction (more commonly referred to as the “sequester cut”). The IRS Whistleblower Office processed the paperwork and sent the informant a check for $2,135,826 ($2,954,933 - $819,107 of withheld taxes). Within 30 days of receiving the check the informant filed a petition with the Tax Court.
The IRS filed a motion to dismiss for lack of jurisdiction, which the Court found that it had because the petition was timely filed within 30 days of the IRS making an award determination in this case. The motion also urged the Court to dismiss because the petitioner had agreed to waive their right to appeal the award when they accepted the preliminary award recommendation. The Court treated the acceptance of the preliminary award recommendation as a settlement where the right to further administrative or judicial appeal has been waived. The Court pointed to the fact that the informant could have elected not to accept the award and when a final award determination was made by the IRS Whistleblower Office, they could have appealed to the Tax Court then. However, this would have delayed the receipt of the award.Comment on this article
IRS Formalizes Protection of Whistleblower Identities by Chief Counsel Attorneys.
Gregory S. Lynam | Friday, April 07, 2017
In the tax practitioner version of “Were I King,” nearly every one of us has had that moment where we smack our head at something the IRS does or does not do and think, “the IRS should just ….” It is a form of armchair quarterbacking that is easy to do because the IRS, frankly, has a lot to improve upon. We represent IRS Whistleblowers who provide high-quality information to the IRS about the underpayment of tax. A lot of IRS Whistleblowers – we had nearly a quarter of all 7623(b) awards last year. There are many things I would like to see the IRS do differently but when it comes to protecting the existence and identity of an IRS Whistleblower, I wouldn’t change a goddamn thing. My apologies for the profanity but I felt it necessary to convey the shock, and gratitude, I have for the IRS’s protection of tax whistleblowers.
The IRS Office of Chief Counsel just released CC-2017-005, Approval Procedures for Identifying Whistleblowers. The Notice provides a formal procedure for Chief Counsel Attorneys seeking approval to reveal the existence or identity of a whistleblower. Not to bore you with the minute details but I will share the people that must sign-off: 1.) Counsel must find out if the whistleblower agrees; 2.) then Division Counsel must approve; 3.) Division Counsel will seek approval from IRS-CI Director of Operations; 4.) then the Director of the Whistleblower Office must approve; and 5.) Deputy Chief Counsel (Operations) must approve.
This Notice formalizes what has always been a very strict non-disclosure policy protecting IRS Whistleblowers. Rarely is an IRS Whistleblower needed as a witness. We have had it happen. In a case where the target taxpayer was challenging the underpayment in Tax Court, IRS Counsel deemed the IRS Whistleblower essential to the case. In writing, Counsel, informed us that the IRS was willing to drop the case if our client did not want to be identified as an IRS Whistleblower. That level of dedication to the people helping you is nothing short of heroic in my book. Our client agreed to testify, approval was received, and the case immediately settled. Our client received a hefty award and left with the feeling that the IRS truly valued the client as a partner in the process.
CC-2017-005 is another step in the right direction by the IRS when it comes to protecting IRS Whistleblowers. If you have information about the underpayment of tax and want to learn more about how the IRS formally, and informally, protects your identity contact us at 1-800-275-3332 or visit www.tax-whistleblower.com today.Comment on this article
Fortune 500 Companies Are Avoiding $767 Billion in U.S. Taxes.
Scott A. Knott | Wednesday, March 29, 2017
A recent study by the Institute on Taxation and Economic Policy details how Fortune 500 Companies are holding a record $2.6 trillion offshore, thereby avoiding $767 billion in U.S. taxes. While we believe much of this amount is the result of lawful tax planning on the companies’ international operations and the use of tax haven entities, there remains a significant amount of aggressive tax planning here which is ripe for potential IRS whistleblower cases. For example, a byproduct of holding trillions of dollars offshore is that it is difficult to bring the money back to the U.S. to use it without paying taxes on those deferred profits. Therefore, many taxpayers have entered into abusive repatriation transactions to bring the cash back. Or taxpayers have used hyper aggressive tax planning strategies involving financing structures or transfer pricing to get the profits in the tax haven jurisdiction in the first place. While Congress may eliminate deferral or make other drastic changes to the Internal Revenue Code in the coming year, the fact remains that these tax underpayments already exist and thus are subject to IRS whistleblower claims. We suspect the transition rules to whatever new international tax regime Congress comes up with will be similarly and abusively gamed by these companies to wring out the last drop of tax savings.
While many of the Fortune 500 companies have set aside reserves for uncertain tax positions that would cover some of this tax avoidance, many other taxpayers have not reserved at all for these positions by convincing their financial auditors that the risk is minimal or by hiding the risk from them altogether. We’ve been carefully tracking these reserves since 2010 and have concluded that the answer is usually a little bit of both. Either way, whistleblowers with access to tax accrual workpapers would be able to see what those reserved weaknesses are, and whistleblowers who have unique insight to the unreserved positions have valuable information as well about what those skeletons in the closet are. We’ve had great success reporting both to the IRS under their tax whistleblower program, so if you know of either type of issue you should give us a call to discuss what your opportunities and rights are.Comment on this article
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