Tax Fraud Costs the Government up to $1 Trillion Per Year
On April 9, 2021, the Commissioner of the Internal Revenue Service, Charles Rettig, testified before the Senate Finance Committee regarding the so-called “tax gap,” which represents the shortfall between the amount of taxes that should be paid each year versus the amount actually collected. Rettig estimated the current the tax gap could be as high as $1 trillion, much of this due to tax fraud.
The IRS Whistleblower program can and should play a role in closing this gap. Unfortunately, as Rettig noted, the size of the IRS enforcement division has declined sharply in recent years due to cuts in funding. Hopefully, this will change soon as the new administration has proposed a 10% increase in funding for IRS enforcement efforts.
This is welcome news to lawyers who represent IRS whistleblowers. All too frequently, whistleblowers present the IRS with information on the proverbial “silver platter” to prove multimillion dollar tax fraud, only to watch the matter languish because the IRS does not have enough resources for a proper investigation. As Rettig noted during the Senate hearing, the IRS estimates that a large portion of the tax gap can be attributed to tax fraud committed by wealthy individuals and large corporations.
It is one thing to be in favor of tax cuts, but nobody should be in favor of tax fraud. Stopping this type of tax fraud should be a bipartisan issue, and the IRS should be given proper funding to properly investigate tax fraud allegations presented to them.
Whistleblowers play a key role in combating tax fraud because they are usually insiders who possess the crucial evidence necessary to proving tax fraud. Indeed, Whistleblowers often have access to evidence that normal IRS auditors might never find, because tax cheats make deliberate efforts to hide that very evidence! Under Section 7623(b) of the Internal Revenue Code, the IRS is authorized to pay monetary awards to whistleblowers for information leading to the underpayment of taxes. The program only applies when the amount of underpaid taxes exceeds $2 million. If the whistleblower’s tip leads to collection of unpaid taxes by the IRS, the whistleblower can receive a reward of between 15% and 30% of the collected proceeds.
The IRS whistleblower program has had some enormous victories in the past, but these victories are the tip of the iceberg. If the IRS enforcement divisions had the resources necessary to properly investigate the IRS whistleblower cases currently on file, it would go a long way to closing the $1 trillion tax gap.
All IRS whistleblower tips are processed through a central IRS Whistleblower Office. The whistleblower prepares his or her information with as much detail as possible and then files it with the IRS Whistleblower Office, usually aided by counsel. Whistleblowers typically wait several years without receiving much information from the IRS, due to taxpayer confidentiality concerns. Under the rules of the program, the IRS is authorized to pay whistleblowers only from “collected proceeds.” This means the IRS must complete its audit of the taxpayer, issue a demand to the taxpayer, and allow the taxpayer to exhaust all avenues of appeal, including those available in Tax Court, before the whistleblower receives his or her reward. As a result, the time period between filing a whistleblower complaint and receiving a reward can be lengthy.
The IRS Whistleblower program can be difficult to navigate, especially if you attempt to do so without a lawyer who has been through the process before. If you think you have a potential IRS whistleblower claim, contact one of our lawyers for a free and confidential consultation.