Tax Underpayments: How and Why
What is an Underpayment of Tax?
The number one misconception people have about the new tax whistleblower statute is that the underpayment in question must involve fraud or intentional deception of some kind. This is absolutely NOT TRUE.
The truth is that an “underpayment” does not have to stem from fraud or evasion by the taxpayer in any sense. In fact, it can stem from any normal issue that results in the payment of less tax than would otherwise be due if the taxpayer had computed its tax properly or had adopted a less aggressive tax position on its tax return. An underpayment can even be the result of an innocent transposition of digits. Regardless of the situation, as a tax whistleblower with information about the underpayment, you are entitled to receive a portion of any tax, penalty, and interest recovered by the IRS.
The IRS has identified many issues that commonly result in underpayments. If you have any knowledge about any of the below listed issues, you should seriously consider hiring an attorney and submitting information to receive a percentage of any tax and underpayment penalty recovered under the IRS Whistleblower Rewards Program.
Large Corporations — Since 2006, the IRS has used the “Tiered Issue Process” in order to rank those issues that presented the highest risk for abuse of the tax laws. As of 2012, the IRS was no longer ranking issues and all issues are risk-assessed and examined in the same manner on audit. In 2020 and beyond the IRS is using data analytics metrics to select taxpayers for audit and determine what issues should be addressed. Although formal ranking is gone, high risk issues will remain high risk issues. Historically, the IRS identified the following issues which are most commonly subject to abuse by large and mid-size corporate taxpayers:
- § 118 Contributions to Capital of a Corporation
- § 162(f) – DOJ settlements
- § 936 Exit strategies
- Backdated stock options
- Domestic production deduction – IRC § 199
- Foreign earnings repatriation
- Foreign tax credit generators
- International hybrid instrument transactions
- § 263A Mixed service costs
- Nonqualified deferred compensation (§ 409A)
- Research & experimentation (R&E) credit claims
- Transfer of intangibles offshore/cost sharing
- Tax shelter – distressed asset/debt
- Tax shelter – redemption bogus optional basis
- Abusive tax shelters – Any transaction identified by the IRS as a “listed transaction” is a tier I issue
Historically, the IRS has identified the following so-called “Tier II” areas of abuse that often give rise to underpayments and are subject to penalties:
- Casualty loss: single identifiable property / capital vs. repairs
- Cost-sharing-stock based compensation
- Enhanced oil recovery credit – IRC 43
- Extraterritorial income exclusion effective date and transition rules
- Gift cards: deferral of income
- Basis-shifting transactions
- Corporate tax accounting and disclosure issues
- Healthcare accounting issues: contractual allowance
- Interchange and merchant discount fees
- Non-performing loans
- Specified liability losses, IRC 172(f)
- Super completed contract method
- Upfront fees, milestone payments & royalties in the biotech & pharmaceutical industries and also Deferred Income under a Collaboration Agreement
These are just some examples of corporate issues the IRS believes frequently result in significant underpayments of tax. You should in no way feel limited to these issues. If you have information about any underpayment, relating to an individual, corporation, trust, or other entity, either foreign or domestic, you may be entitled to a reward.
Confidential Consultations, Nationwide Practice — 202-775-1630
Lynam Knott P.A. represents U.S. citizens and foreign nationals from across the globe in reporting large-scale tax underpayments of ANY type to the IRS. As your lawyers, we will fight to maximize your portion of the underpayment penalty while protecting your identity from the taxpayer in question.
If you would like to discuss a potential claim and get a better idea of the tax and underpayment penalty involved in your case, call or contact us directly.
