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Posts Tagged ‘IRS’

IRS Whistleblower Program: Under Attack. Again.

Friday, April 12th, 2013

**UPDATE**

On March 13, 2013, the United States Tax Court issued an order calling for an evidentiary hearing to determine whether Joseph Insigna ever received a determination from the IRS.  Order, Joseph Insigna v. Commissioner of Internal Revenue Service, No. 4609-12W (March 13, 2013).  In his petition to the Court, Insigna argues that, although he has not received a final determination letter from the IRS, his whistleblower claims “have, as a practical matter, been denied, and that he has therefore received a de facto rejection.”

In response, the IRS argues that Tax Court lacks jurisdiction to hear the matter because it has not, in fact, issued a determination on Insigna’s claim.

While both sides seem keen on arguing over whether Tax Court has jurisdiction over a claim in a situation when the IRS unreasonably delays in failing to issue a determination letter, the Order makes clear that the Court does not intend to reach that question unless it must.  Instead, the Court will first focus on whether Insigna did, in fact, receive a determination — even a de facto determination .

Pursuant to the whistleblower statute, Tax Court has jurisdiction only if there has been “any determination regarding an award.”  Id.  To that end, the Court noted that the statute “does not explicitly require a ‘notice’ of a determination, nor a written determination, nor even any communication of a determination.”

The purpose, then, of the evidentiary hearing is to determine whether a de facto determination has, in fact, been made.  To reach that conclusion, the Court will seek to determine “whether the IRS has completed its consideration of petitioner’s claim; what, if anything, the IRS is still doing with regard to petitioner’s claim; and whether the IRS expects to do anything in the future with regard to petitioner’s claim.”  Id.  Notably, the Court states that “[i]f there has been a cessation of administrative action, then a reviewable determination may have been effectively made thereby.” Id.

 

 

A former bank executive recently filed suit against the Internal Revenue Service claiming that the IRS owes him a reward for blowing the whistle.

Joseph A. Insinga filed a claim for an award with the IRS Whistleblower Office in 2007, one year after Congress passed a law establishing the Whistleblower Office.  Under the Tax Relief and Health Care Act of 2006, tax whistleblowers may receive an award ranging from 15% to 30% of the total taxes, penalties, and interest collected by the IRS, with the actual percentage awarded based on an informant’s contribution to the case.

Insinga claims that the IRS collected proceeds from the allegedly fraudulent taxpayers based on information that he provided, but he has yet to receive a response from the IRS regarding an award.  As a result, Insinga filed a claim in the United States Tax Court, claiming the IRS owes him a portion of the proceeds it collected based on his information.

According to his petition, for at least two years, the IRS led him to believe that an award was forthcoming yet, following purported payments by the targeted taxpayers in November 2011, the IRS changed its tune, informing Insigna that his claims “were on life support.”  Moreover, the IRS claimed that there were “other sources” of the information Insigna provided nearly four years earlier. The IRS subsequently informed Insigna that a final decision would be issued soon.  According to Insigna, that statement was made in November 2011.  Following nearly four more months of silence, Insigna filed his petition in or around February 2012.

The news of Insinga’s claim does not come at an opportune time for the IRS, which earlier last week was the subject of a scathing article on Forbes.com, critical of its failure to reward whistleblowers for valuable information.  According to the author, Erika Kelton, an attorney at Phillips & Cohen who represents whistleblowers before the IRS, the problem with the IRS whistleblower program is not the “quality of the whistleblower information that the IRS is receiving” but rather “the IRS itself and institutional resistance to whistleblowers within the IRS.”

In FY 2010 alone, the IRS collected $464.6 million from taxpayers under its whistleblower program, so it is clear that the information is out there.  The problem is that the IRS hands out too few awards, and takes too long to pay them.

It has recently been suggested that the IRS establish a website to monitor the status of its whistleblower claims.  Even if personal data was redacted in accordance with IRS regulations, the website would at least reassure whistleblowers that their claims are being processed.

Whistleblowers should be viewed not as a burden, but rather as a weapon in the fight against fraud.  After all, the False Claims Act recovered over $4 billion in federal funds in FY 2011.  Given that the annual gap between what is owed in taxes and what is paid is approximately $385 billion (and growing), the IRS would be well served to use the tools Congress provided when it established the whistleblower program and follow in the footsteps of the False Claims Act in an effort to eliminate tax fraud and the $385 billion gap.

If you have knowledge of Tax Fraud and would like to discuss the possibility of a whistleblower award under the IRS Whistleblower Program, please contact our whistleblower attorneys today. Kenney & McCafferty will consult with you about your case, without obligation. All communications with Kenney & McCafferty attorneys regarding your case are confidential and protected by attorney-client privilege.

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K&M Presents Testimony on Whistleblower Program

Wednesday, May 18th, 2011

The IRS Building in Washington, D.C.

Linda Stengle of Kenney & McCafferty, P.C. presented testimony before the IRS on May 11, 2011, on its proposed definition of “collected proceeds.” The definition, if approved, would form the basis of calculating whistleblower awards.

The IRS had four people on a panel to hear the comments. They were Tom Kane, Senior Legal Counsel; Stephen Whitlock, Director of the Whistleblower Office; Alexandra Minkovich, Attorney-Advisor; and Kirsten Witter, Chief of the Service’s Ethics and General Government Law Branch. The panel asked questions of a few presenters, including Stengle. Tom Kane stated that NOLs should be considered to be ordinary deductions and were not relevant to an award calculation. Kane also said there should be no 2 year waiting period imposed in cases involving a closing agreement and that further guidance would be issued with regard to whether whistleblowers can obtain a portion of criminal fines.

Stengle pointed out irregularities in the public comment process ordinarily required when the IRS changes a major regulation. Specifically, the IRS issued its Whistleblower Manual in June 2010 without public comment and narrowed the definition of “collected proceeds.” Senator Grassley, the author of the statute mandating IRS whistleblower awards, criticized the Manual and said that several sections worked to deter whistleblowers from reporting large scale tax underpayment. Stengle echoed Grassley’s request that the manual be held in abeyance while substantive sections undergo public comment.

Four other attorneys presented testimony on the topic. Among other comments, Richard Rubin observed that the proposed rule addressed the inclusion of specific categories of recovery into the definition, but no actual definition for “collected proceeds” exists anywhere in the regulations.

All those who presented stated that the proposed definition for collected proceeds needed to be broadened. The panel members gave no indication of when the IRS plans to publish the final version of the definition.

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Posted in Abusive Tax Shelters, Corporate Tax Fraud, Employment Tax Fraud, Estate Tax Fraud, IRS Whistleblower Office, Money Laundering Tax Fraud, Offshore Accouts Fraud, Tax Fraud, Uncategorized, Whistleblower Protection | Comments Off

IRS Goes Viral?

Thursday, April 14th, 2011

One of many IRS YouTube offerings.

Not exactly, but the IRS has introduced its own YouTube channel, along with an array of audio products to help taxpayers take advantage of tax benefits available in the American Recovery and Reinvestment Act. People can visit the site at www.youtube.com/irsvideos. The IRS YouTube channel caters to people of different backgrounds by offering videos in English, Spanish, and American Sign Language.

One video teaches viewers how to use the IRS Withholding Calculator. The IRS suggests that people who have more than one job or working spouses should especially check their withholding to ensure neither too much nor too little is being withheld. People can use the calculator to help determine if they should make adjustments. Another video of interest discusses the role of an interim appeals office and what taxpayers can expect from that office.

In another attempt to make the tax code more transparent to today’s filers, the IRS has also launched an ITunes podcast site featuring information about ARRA tax credits.

Unfortunately, the IRS tax whistleblower program has not been the subject of a YouTube video, at least not one produced by the IRS. However, interested tax fraud followers can go to YouTube and type in “irs whistleblower.” One of the results listed will be a video of an IRS Whistleblower Conference panel discussion starring K&M’s lead partner Brian Kenney.

Of course, if you would like to learn more about the IRS whistleblower program, there’s no need to look at YouTube at all. Call Kenney & McCafferty at 215-367-4333 for a free consult today.

 

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Posted in Abusive Tax Shelters, Corporate Tax Fraud, Employment Tax Fraud, Estate Tax Fraud, IRS Whistleblower Office, Money Laundering Tax Fraud, Offshore Accouts Fraud, Tax Fraud, Uncategorized | Comments Off

IRS To Hold Hearing on Definition of Collected Proceeds

Monday, April 4th, 2011

The IRS Should Target Large Corporations for Tax Fraud

The IRS has set May 11, 2011, as the hearing date for public comment on proposed regulations REG-131151-10 on the payment of rewards for whistleblowers. Chief among the areas of interest is the new definition of “collected proceeds.”

The proposed regulations do not make it clear whether corporations alleging a Net Operating Loss that is reduced by whistleblower information would result in an award for the whistleblower. Large corporations routinely rely on highly sophisticated tax experts to help them reduce their cash tax liability. The IRS’s proposed change in definition of “collected proceeds” appears to target individual taxpayers but fails to clearly identify large corporations who evade taxes. Tax underpayment by corporations, not individuals, should be the focus of the IRS. Corporations represent the greatest opportunity to capture much needed tax dollars for the US Treasury. Those blowing the whistle on large corporations should be incentivized to the same extent as those blowing the whistle on an individual taxpayer.

People who want to present oral comments at the hearing must submit a written outline of their comments to the IRS by April 19th. Each speaker will be allotted 10 minutes. The hearing will be held at the Internal Revenue Building at 1111 Constitution Avenue, NW, in Washington, D.C.

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Posted in Abusive Tax Shelters, Corporate Tax Fraud, IRS Whistleblower Office, Money Laundering Tax Fraud, Offshore Accouts Fraud, Tax Fraud, Uncategorized | Comments Off

Closing the Tax Gap

Friday, February 25th, 2011

The Internal Revenue Service (IRS) estimates that in any given year there is a tax gap of between $300 and $350 billion a year of uncollected taxes. The tax gap is the difference between the amount of taxes the IRS should have collected and the taxes the IRS actually collected.  Therefore, based on the IRS’s own estimate over $300 billion of taxes go uncollected every year. These are taxes are that would be paid if every taxpayer filed returns and those returns accurately reflected correct income and deductions.

The Tax Gap consists of three main categories:

Category I           Those who do not file returns and taxes are owed on these returns.

Category II          Those who do file returns yet fail to report all of their taxable income or overstate their deductions.

Category III         Those who file and owe tax but do not pay the tax with the filing of the return.

In Category I, individuals and companies that do not file tax returns could owe as much as $30 billion per the IRS. In Category II, those who file but fail to report accurately their correct income and/or deductions could owe as much as $ 292 billion. Remember, this is on an annual basis.

To address this situation, the IRS has focused its enforcement efforts, specifically audits and criminal investigations, in the following areas:

1.       Unreported Income

2.       Abusive Schemes

3.       High Income – high risk taxpayers

4.       High Income non-filers

5.       Employment taxes

Unreported Income

The IRS’s is focused on detecting unreported income for  any business that generates a large amount of cash as part of their total gross income. These are typically small businesses with 5 or fewer owners that have the ability to control the amount of cash that is deposited into the business’ bank accounts. The business entity could be a sole proprietorship, partnership or corporation. The important element is that the business is of a type that falls within a typical cash industry.

Abusive Schemes

These are schemes that generally are devised by promoters who have found the ultimate tax shelter that they promote will result in a taxpayer paying little or no tax to the government. These schemes generally sound too good to be true and are too good to be true. They are not valid tax shelter vehicles. They can range from setting up offshore trusts to hide personal assets to setting up a corporation to pay personal expenses under the guise they are business expenses.

High Income – high risk taxpayers

Many taxpayers who make substantial amount of income – over $ 250,000 a year – are usually involved in partnerships, trusts and corporations that are “pass-through” entities.  By layering their financial dealing  with these entities it is difficult for the IRS to trace income being earned by a taxpayer or to verify a loss generated by one of these entities and claimed on a taxpayer’s return.  Generally, a pass through entities generate a Form K-1 in the name of the taxpayer who is the investor or partner of the entity; however, the IRS has traditionally had problems matching these Form K-1s with the individual’s personal income tax return. In effect, taxpayers who claim large losses from an entity that they have an interest in have not been subject to close scrutiny by the IRS in the past. The IRS is determined to bring these taxpayers under closer scrutiny.

High Income Non-Filers

The IRS estimates that some High Income taxpayers – those who making more than $ 250,000 a year – simply don’t file returns. They are known by the IRS as High Income Non-Filers. The IRS is determined to identify and possibly prosecute these individuals.  These taxpayers typically have escaped detection as they are part of the underground cash economy and there is no traditional paper trail.

Employment Taxes

When a company withholds employment taxes, income and social security taxes from an employee’s pay, these tax withholdings are called trust funds. These trust fund taxes along with the employer obligation are to be sent to the IRS on a regular and timely basis depending on the amount of money withheld.

It is not uncommon for a company to fail to pay these funds to the IRS by their due date. Instead a company facing a cash crunch will use the money on current operating costs, with the intent to submit these funds to the IRS – after the mandatory deadline – when and if financial conditions improve.

The IRS is very aggressive in pursuing any officer, shareholder of a company or any “responsible person” for the payment of these trust fund taxes.  As noted above, this remains a top priority of the IRS enforcement program.

The IRS Whistleblower Program

Recent changes in the law requires the IRS to pay a reward on information provided to the IRS that results in collected proceeds (additional taxes, penalties and interest). The reward can range from 15% to 30% of the collected proceeds. The information provided needs to present the details of the noncompliance in a clear and organized manner. It has to be relevant and the person submitting the information should have firsthand knowledge.

As a result of these recent changes, if you happened to provide the IRS specific information that resulted in the collection of one year’s estimated tax gap or $ 300,000,000,000, your reward could  range between $45,000,000,000 to $90,000,000,000.

Keeping in mind that the IRS is concentrating on the areas of non-compliance listed above, a potential whistleblower should be aware that the IRS is looking for these schemes arising in abusive and egregious situations. The IRS is not looking for one spouse reporting another, or the next door neighbor who heard someone down the block is not paying their taxes. The IRS prefers substantive, specific violations of the tax code. As noted, the failure to report substantial taxable income or deducting personal expenses under the guise of a corporate business expense are prime areas that should be reported to the IRS under the whistleblower program. Also, promoter schemes that are advertised as legitimate tax savings vehicles that, following some due diligence, are exposed as patently fraudulent would constitute a solid IRS whistleblower claim.

If you are in a position where these types of scenarios are evident and you have information that would result in a tax recovery of more than $2,000,000, then you are a prime candidate to benefit from the revised IRS Whistleblower law.

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IRS Proposes Changes to Whistleblower Reward Program

Wednesday, February 23rd, 2011

Better Incentives for Reporting Corporate Tax Fraud

Proponents of the IRS Whistleblower Program can encourage the IRS to adopt a change in an award calculation rule that could increase payments to whistleblowers who report corporate tax underpayments. On January 18, 2011, the Service published a revision to IRC Section 301.7623 that would expand the scope of “collected proceeds” to include “amounts collected prior to receipt of the information if the information provided results in a denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.”  Those interested in encouraging folks to report corporate tax fraud should write to the Service and ask that the definition be specified to include offsets against NOLs.

 So…why the change?

 The IRS issued its whistleblower manual in June 2010.  The Service adopted a definition of “collected proceeds” that disallowed payments to whistleblowers when the defendant taxpayer satisfied the tax debt by reducing a previous tax credit balance.  The new definition expands the term “collected proceeds” to include offsets against credit balances.

Here’s the problem. In the case of large corporations, the reference to “credit balance” is not generally used.  Corporations either have a taxable balance, or they are in a Net Operating Loss (NOL) position in which case they don’t pay tax in the current tax period.  Instead, the corporations apply a portion or all of the NOL balance to current period taxable income.  In addition, corporate credit balances (NOLs) result from many reasons other than tax “overpayment.” For example, a corporation can achieve an NOL balance through the acquisition of another company – and not pay tax for that period.

To boil it down, a whistleblower reports that MegaCorp underpaid $ 100M in taxes for the year 2008.  The IRS confirms that MegaCorp underpaid $ 100M in taxes for the year 2008. However, MegaCorp bought MiniCorp and incurred a NOL of $ 100M.  MegaCorp says to the IRS, “Okay, just take the $ 100M from the NOL, and we’ll call it even.”  The IRS says okay, and the whistleblower gets nothing.  That is, nothing under the June 2010 Whistleblower Manual.  And, unless NOL offsets are explicitly addressed in the new expanded definition of “collected proceeds,” whistleblowers could be denied rewards for NOL offsets because they are not technically “credit balances.”

 Changing the definition of “collected proceeds” to specify inclusion of NOL offsets would incentivize whistleblowers to report tax fraud being committed by large corporations.  The IRS is asking for public comment on the rule change.  Those who want to comment on the change should send written comments to:

CC:PA:LPD:PR (REG-131151-10)

Room 5203

Internal Revenue Service

P.O. Box 7604

Ben Franklin Station

Washington, DC 20044

The IRS will consider timely submissions of written comments that include the original letter and eight copies.  Submit your comments by April 1, 2011.

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New IRS Regulation is Good News for Whistleblowers

Wednesday, February 9th, 2011

The Internal Revenue Service [IRS] recently issued a new regulation aimed at encouraging more whistleblowers to report tax fraud by allowing them to collect rewards on a broader range of claims.

In December 2006, Congress established the IRS Whistleblower Office and updated its procedures for collecting rewards that led to the collection of additional taxes.  The new procedures were modeled after the successful federal False Claims Act [FCA].

However, archaic IRS regulations prevented the program from being as successful as the federal FCA.  Under its old regulations, the IRS denied reward claims to whistleblowers who provided information that led to either preventing improper refunds or reducing the credit balance of a taxpayer.

In January 2011, the IRS issued a new regulation designed to fix the flaw in its regulations.  The new rule provides that rewards may now be paid on “amounts collected prior to the receipt of information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.”  In short, whereas the old rule permitted rewards only for information that led to the collection of additional taxes, the new rule allows rewards for reducing refunds or credit balances.

In a statement, Senator Charles Grassley (R-Iowa) proclaimed that the “regulations are good news for whistleblowers.”  Senator Grassley, the Senate Finance Committee ranking member and architect of the federal FCA and the IRS whistleblower statute, added that “the Commissioner made the common-sense decision of ensuring that individuals who blow the whistle on improper refund claims will be rewarded, as I intended when I wrote the law.”

Kenney & McCafferty would like to help you assess whether you have a viable whistleblower claim.  If you have knowledge of tax fraud, call K&M for a free consultation.

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