When our tax defense attorneys discuss tax evasion, we often focus on scenarios in which IRS audits and subsequent (or simultaneous) criminal investigations were triggered by “badges” or indicators of fraud, such as unfiled returns or unreported sources of income. But while most taxpayers are already wary of auditors, there is also another danger that many taxpayers are unaware of: IRS whistleblowers. Not only does the Internal Revenue Service allow taxpayers to report suspected tax cheats; federal tax laws incentivize taxpayers to do so. Under 26 U.S. Code § 7623(b)(1), the Internal Revenue Code establishes substantial rewards for IRS informants who provide the government with fruitful information, with payments ranging anywhere from 15% to 30% of any proceeds collected by the government. Even “less substantial contributions” may be rewarded, under 26 U.S. Code § 7623(b)(2), with payments as large as 10% of the proceeds collected. These rules actively encourage taxpayers to report suspected fraud, creating a risk for individuals and businesses that have been willfully noncompliant. If you have concerns about a potential state or federal tax compliance issue, it is in your best interests to contact an experienced tax attorney for immediate guidance.
What is Meant by the Term ‘Tax Fraud?’
Perhaps the most common type of tax fraud that someone might report to the IRS is the commission of tax evasion. Tax evasion can be separated into two subclasses: evasion of tax assessment and evasion of tax payment. Evasion of tax assessment is, for example, deliberately underreporting income to avoid being assessed taxes in the first place, while evasion of payment might involve failing to disclose all your assets or income to avoid having to pay a tax bill that has already been assessed.
Aside from tax evasion, there are a multitude of other actions that might constitute tax fraud, including but not limited to filing a tax return in someone else’s name without their permission, claiming deductions to which you are not actually entitled, filing false documents in connection with a return, failure to collect & remit employment taxes, and failing to file a tax return entirely. In order for tax fraud to be charged and proven, your behavior must have been “willfully” designed to defraud the IRS, rather than an honest mistake. In certain areas, “willful blindness,” or being deliberately ignorant to what is happening, has been found to meet this standard. Of course, tax fraud can also be charged at the state and local levels, such as through the California Franchise Tax Board, which collects state income taxes in California.
What to Do If You Believe Someone Reported You for Tax Fraud
Sometimes, you may have no idea that someone has decided to take the initiative to report your alleged tax fraud to the IRS or to a state or local agency, especially due to the lengths the anciencies go to protect the identities of whistleblowers. However, it is possible that the person who turns you in may actually tell you that they did so, or that you may be able to infer from their words or actions that they might have done so. Even if you have only the slightest suspicion that this has occurred, you should take it very seriously, especially if you did in fact commit tax fraud that this person would know a lot about. The IRS for example offer’s whistleblower awards of up to 25% of whatever the IRS recovers from you. That is a lot of financial incentive to turn you in!
The best thing you can do if you believe that someone has reported you for tax fraud or is planning on doing so is to contact an experienced tax defense attorney like those at the Tax Law Offices of David W. Klasing as soon as possible. If the fraud occurred very recently, we may be able to simply amend your returns. In other situations, so long as the agency has yet to open a formal audit or investigation into your actions, you may be eligible for a voluntary disclosure or streamlined disclosure program. These programs allow you to disclose your past misdeeds in exchange for a near-guaranteed pass on criminal prosecution as well as less harsh fines and other financial penalties.
If the investigation into your conduct has already begun, and it is too late for a voluntary or streamlined disclosure program, we can work to try and explain your behavior in terms of negligence rather than willful criminal behavior to attempt to prevent criminal charges from being filed against you. This may include you paying what you owe, plus large fines, and having to face increased oversight by the IRS in the coming years. We can also parallel the investigation coupled with cooperating with the investigation or attempting through law and motion to prevent a taxing authority with gathering the evidence they need to prosecute you. We can also utilize affirmative defenses to criminal charges where they are available.
How is Suspected Tax Fraud Reported to the IRS?
Many taxpayers are afraid of being “caught” by the IRS. However, due to IRS whistleblower laws, other taxpayers may pose an even greater danger. Taxpayers can reap generous financial rewards in exchange for providing the IRS with useful information about criminal tax activity, such as legitimate tips about tax evasion (26 U.S. Code § 7201), failure to file returns (26 U.S. Code § 7203), or filing false returns (26 U.S. Code § 7206(1)). In fact, the IRS has gone out of its way to make reporting suspicious activity simple for taxpayers, who need only file the appropriate form, as follows:
- Form 3949-A (Information Referral) – This form is used to report suspected failure to pay taxes, failure to report income, failure to withhold federal employment and/or income taxes, and scenarios where the noncompliant taxpayer has improperly claimed false tax deductions or exemptions.
- Form 14157 (Return Preparer Complaint) – As its title suggests, this IRS form is specifically used to report tax professionals who are suspected of engaging in fraud, such as tax attorneys, CPAs, EAs, or other professional tax preparers and service providers. As our tax preparer fraud attorneys have discussed in previous articles, return preparer fraud can lead to prison time, along with huge fines, possible probation, and the likely loss or suspension of various professional licenses and certifications.
- Form 14242 (Report Suspected Abusive Tax Promotions or Preparers) – This form is used to report suspected abusive tax shelters. The term “abusive tax shelter” broadly refers to any sort of scam or system that has been structured to artificially reduce a taxpayer’s liabilities – even though his or her income and assets have not actually changed. In other words, an abusive tax shelter enables a taxpayer to unlawfully pay less than the full amount he or she owes the IRS. Micro-captive insurance tax shelters, which have become a growing problem in recent years, are common examples of abusive tax shelters.
One stipulation of the tax whistleblower program is of particular cause for concern: the IRS states that only “specific and credible information” will be rewarded, and that furthermore, an award may be given only if the data provided actually leads to “the collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer.” Therefore, if a whistleblower has already stepped forward to the IRS, it suggests that he or she possesses (or believes that he or she possesses) valuable, detailed information – otherwise, there would be no possibility of an award.
As a warning to whistleblowers that have dirty hands themselves, the IRS would rather prosecute you for your own crimes than reward you for turning others, especially where you participated in the crimes you are attempting to blow the whistle on. I.E. an employee that “cooks the books” of his or her employer and then turns in the employer.
Federal Income Tax Evasion Defense Attorneys in California
In order for a tax whistleblower to receive financial rewards, he or she must provide the IRS with comprehensive and useful information about your activities. It is therefore absolutely critical to shield yourself and limit your criminal tax exposure as early and aggressively as possible.
When the stakes are this high, there is no margin for error. Give yourself the strongest defense by selecting an award-winning, nationally recognized tax evasion defense attorney with three decades of experience dealing with the IRS. Contact the Tax Law Office of David W. Klasing online to schedule an appointment or call our main tax office at (800) 681-1295 for a reduced-rate consultation.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship. With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link. Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.
Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company? Absolutely not! See our policies that address this issue here:
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Questions and Answers for Criminal Tax Representation
- When tax defense counsel parallels tax crime investigation
- Guilty of tax obstruction by backdating documents?
- To be found guilty of tax obstruction must a person actually be successful in impeding the IRS’s functions?
- Help! The Document I Gave the IRS Had False Information
- Tax crime aiding or assisting false return IRC §7206(2)
- What is the crime known as tax obstruction § 7212?
- What is the difference between tax perjury and tax evasion?
- What is the tax crime commonly known as tax perjury?
- What is a Klein Conspiracy?
- Increased possibility of civil action in IRS investigation
- Am I Guilty of Tax Evasion if the Law is Vague?
- What happens if the IRS thinks I committed tax crimes?
- What are ways to defend against a tax evasion charge?
- Difference between criminal tax evasion and civil tax fraud
- What accounting method does the IRS use for tax fraud
- Can I Change Accounting Method to the Accrual Method
- What is the willfulness requirement for tax evasion?
- I didn’t know I committed tax fraud. Can I get off?
- Concealed assets from IRS. Can I avoid tax evasion charges
- How government proves I willfully engaged in tax evasion
- What is the venue or court where a tax crime case is heard?
- Must the IRS prove tax crimes beyond a reasonable doubt?
- Is it a crime to make false statements to the IRS?
- Will the IRS overlook my tax evasion if it’s minor?
- Failed to tell IRS about my nominee account
- Audit risk with cash based business transactions
- How to defend a client charged with tax evasion
- Is it tax evasion if I didn’t file income tax return?
- Government says I attempted to evade my taxes. Now what?
- I forgot to pay my taxes or estimated tax. Is this a crime?
- Government proof I “willfully” failed to pay taxes
- How to respond to willful tax evasion charges
- Being audited after using a tax professional
- Rules for what an IRS agent can do while investigating me
- How tax preparers, attorneys and accountants are punished
- How the IRS selects tax crime lead for investigation
- How does the IRS prosecute suspected tax crimes?
- Does IRS reward informant leads for suspected tax crimes?
- How the government proves deficiency in a tax evasion case
- Do prior tax crimes factor into new IRS tax convictions?
- Requesting conference before investigative report is done
- Requesting conference after IRS Special Agent Report
- What are my rights during an IRS criminal investigation?
- Avoid prosecution for tax crime with voluntary disclosure?
- Defense tactics that make it hard for to prove willfulness
- How a tax attorney can stop your criminal tax case?
- What can you generally tell me about tax crimes?
- Continuing filing requirement with investigation pending
- Federal criminal code crimes that apply to tax issues
- Penalty for making, subscribing, and filing a false return
- CID special agent’s report for criminal prosecution
- What is the discovery process in a criminal tax case?
- What the IRS includes in indictment for tax case
- What is the hardest element of a tax crime to prove?
- IRS methods of gathering evidence to prove tax crime
- What does a grand jury do in IRS tax crime prosecution?
- Failure to keep records or supply information
- Failure to make a return, supply information, or pay tax
- What is attempting to evade payment of taxes?
- What is income tax evasion and how is it punished?
- What is attempted income tax evasion?
- What is the crime of failure to pay tax? What is punishment
- Crime of making or subscribing false return or document
- Criminal Investigation Division investigation tactics
- Tax crimes related to employment tax forms and trust funds
- Tactics to defend or mitigate IRS criminal tax charges
- How the IRS generates leads about suspected tax crimes
- What is the crime ”evasion of assessment” of tax?
- Specific examples of “attempting” to evade tax assessment
- What is the so-called Spies evasion doctrine?
- Does overstating deductions constitute tax evasion?
- Is it tax evasion if my W-4 contains false statements?
- IRC §7201 attempt to evade vs. common-law crime of attempt
- What are the penalties for Spies tax evasion?
- How government proves a taxpayer attempted tax fraud
- What is a tax that was “due and owing.”
- What is evasion of assessment for tax liability?
- Is evasion of assessment different from evasion of payment
- Does the IRS have a dollar threshold for tax fraud?
- What is the IRS burden of proof for tax fraud convictions?
- Are Tax Laws Constitutional?
- What is the source of law that defines tax evasion?
- Does section 7201 create two distinct criminal offenses?
- Does tax evasion definition include partnership LL
