Tax fraud is not a victimless crime. Tax fraud is simply unfair. The beneficiaries are almost always large corporations and extremely wealthy individuals. And, when they pay less, everyone else in our society must pay more.
The IRS Tax Whistleblower Rewards Program was enacted in late 2006. Modeled after the enormously successful False Claims Act, which has recovered billions of dollars for the government, the IRS clearly hopes it too can capitalize on the significant information offered by whistleblowers. While becoming a Whistleblower under the IRS Tax Whistleblower Rewards Program can be very lucrative financially, we strongly believe being a Whistleblower is about far more than money.
Major IRS tax fraud often involves aspects of the following areas:
Offshore Tax Evasion Offshore
Tax havens — the Cayman Islands, Ireland, the Netherlands, Lichtenstein, Bermuda and dozens of other countries — are often involved in major tax fraud. Transactions created simply for the tax benefits they create are not legitimate in the eyes of the IRS.
Intellectual property ownership is a key area often manipulated as part of a major tax fraud scheme. Drug manufacturers, software companies and other industries that rely heavily on intellectual property are ripe for this type of fraud.
Transactions between related corporations, conducting business on a global scale, puts transfer pricing at the core of many major cases of tax fraud. Improperly allocating research & development, mispricing transactions and other financial machinations, exist with the sole intention of fraudulently lowering a company’s U.S. tax bill. Transfer pricing has been at the heart of billions of dollars of IRS tax settlements, and is likely behind billions of dollars of yet undiscovered tax fraud.
Suspect financial transactions are another source of substantial tax fraud. LILOs and SILOs are an example of complex financial transactions lacking any economic substance. These dizzying transactions served no business purpose other than to generate fees for the bankers, accountants and lawyers, while inappropriately lowering the tax bills of their clients.
Wall Street schemes focused purely on “tax minimization” are also abundant, including schemes such as using derivatives to inappropriately avoid paying taxes on dividends received and pricing municipal bonds in a manipulative way. Developed, then marketed, financial schemes designed by Wall Street are often sold to and used by many clients.
“A good lawyer with a briefcase can steal more than 10 men with machine guns.” - Al Capone
Armies of tax lawyers, bankers, accountants and other third-party advisors expend enormous amounts of effort to help corporations and extremely wealthy individuals minimize their tax burdens.
A foundation of our income tax system, as stated by the courts, is that the “incidence of taxation depends upon the substance of the transaction . . . . To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.” Put simply, if a given transaction would not have been executed, except for reason of the tax benefits achieved, then that transaction is likely to be challenged, and likely disallowed, by the IRS if discovered.
Importantly, the IRS Tax Whistleblower Rewards Program doesn’t require fraud to be present at all. Aggressive tax positions, where the merits of the underlying transactions appear questionable, have significant potential for underpayment of tax. The IRS Tax Whistleblower Rewards Program benefits any whistleblower who brings information that results in the IRS recovering underpaid tax of $2 million or more.