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

Trump/Mnuchin

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.

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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.

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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.

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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.

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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[1], 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.

 


[1] 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).

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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).

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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. 

Thumbnail image for Ferraro 500 2015 Blog Chart1.jpg

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. 

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Tax Court Rules that FBAR penalties are not "additional amounts" under section 7623(b)(5)(B).

Erica L. Brady | Monday, March 14, 2016

Today the Tax Court released its opinion in Whistleblower 22716-13W v. Commissioner, holding that FBAR civil penalties are not “additional amounts” within the meaning of section 7623(b)(5)(B), and they are not “assessed, collected, … [or] paid in the same manner as taxes”; therefore, FBAR payments must be excluded in determining whether the $2,000,000 “amount in dispute requirement” has been satisfied. 

This case appears to be the continuation of the saga of Whistleblower 22231-12W, whose petition to the Tax Court was dismissed for lack of jurisdiction because the IRS had not yet made a determination regarding his case.  However, on September 6, 2013, the IRS Whistleblower Office issued a final determination letter informing the whistleblower that his claim relating to Taxpayer 1 had been denied.  The letter stated that the claim had been denied because (1) the Government had obtained complete information about Taxpayer 1’s offshore accounts directly from the Swiss bank, without any assistance from petitioner; and (2) petitioner in any event could not qualify for a nondiscretionary award because his claim did not meet the $2,000,000 threshold in section 7623(b)(5)(B).  Petitioner petitioned the Tax Court for review of this determination.   Respondent moved for summary judgment on the basis of petitioner’s alleged failure to satisfy section 7623(b)(5)(B).

Judge Lauber’s opinion in this case gives a history of the Bank Secrecy Act, and FBAR penalties, and how enforcement of the Bank Secrecy Act came to be delegated to the IRS.  From there the case moves on to an analysis of the language of section 7623(b)(5)(B), and specifically the meaning of “additional amounts.”  The opinion traces the meaning of “additional amounts” throughout the Internal Revenue Code and how the Tax Court has interpreted this phrase in the past.  The Court also looked to Williams v. Commissioner, where the Court ruled that FBAR penalties were not additional amounts for purposes of determining Tax Court jurisdiction to hear deficiency and CDP cases.  Judge Lauber concludes that “additional amounts” as used in section 7623(b)(5)(B) means civil penalties set forth in chapter 68, subchapter A, and FBAR penalties are not among the tax penalties enumerated in that portion of the code.

It is interesting that the Court has taken the time to differentiate “additional amounts” in collected proceeds from the “additional amounts” in the monetary threshold.  We look forward to additional opinions weighing in on the definition of collected proceeds.  Even if FBAR penalties are ultimately found to be part of collected proceeds, whistleblowers will need to reach the $2,000,000 threshold of section 7623(b)(5)(B) based on tax, penalties, interest, additions to tax, and additional amounts.  Judge Lauber ended the opinion noting that the petitioner may be correct that section 7623 would offer stronger incentives to whistleblowers if FBAR civil penalties were treated like tax liabilities for purposes of deterring eligibility for nondiscretionary awards under section 7623(b)(5)(B), and might more effectively advance the objectives that Congress envisioned for it.  “But if this is a gap in the statute, it is a gap that only Congress, and not this Court, can fill.”

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IRS Enforcement Numbers Still Declining According to 2015 Report

Scott A. Knott | Tuesday, February 23, 2016

The 2015 IRS Enforcement and Service Report issued this week reveals that both individual and corporate audit rates are declining, with the respective audit rates at a record low .84% and .60% of returns filed.  This not only leaves tax dollars on the table for past years but also risks future taxpayer  non-compliance by not spending adequate resources to enforce the tax laws as they are currently written. 

Lots of well written articles have been released about the Report that are worth checking out:

 CNBC: IRS Audit Rates of Large Corporations Hit 10-Year Low.

 The Wall Street Journal: IRS Focuses Its Audits More on 1 Million Incomes.

 CBS: Afraid of an IRS Audit? Here's One Reason to Chill. 

As it relates to whistleblower claims, we and the Treasury Inspector General for Tax Administration’s Office (“TIGTA”) continue to shout the message that pursuing information from whistleblower claims is among the most efficient uses of scarce enforcement resources.  TIGTA’s own studies show that every dollar spent by the IRS on enforcement for whistleblower claims yields $6.88, whereas the normal enforcement return is four to one according to a November 2015 speech by Commissioner Koskinen.  However, the reality is that there are less agents now than there were 10 years ago to audit more returns than ever, and the IRS is being very picky about what cases they select for audit and what issues they move forward with in those audits.  This means that it is more important than ever that your whistleblower submission to the IRS be tight, concise, thorough, and persuasive to convince the IRS to take action in your case.  

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