Tax Fraud & the IRS and New York State Whistleblower Programs

Tax fraud is major problem in the United States. It is estimated that 15% of the amounts owed in taxes each year are unpaid. The sums lost are equivalent to roughly three-quarters of the annual federal budget deficit. Tax evaders are not just cheating the IRS and federal and state governments. They are also in effect stealing from their fellow citizens who comply with tax laws and regulations and honestly pay what they owe.

The IRS Whistleblower program offers rewards of 15% to 30% of the amount the IRS collects for tips or reports of tax law violations and underpayments. Significantly, the program does not require that the targeted taxpayer underpaid intentionally or willfully. Rather, reporting an underpayment stemming from an innocent mistake or incorrect legal interpretation is sufficient. However, to be eligible for an award, the amount of the underpayment must be greater than $2 million – a threshold that includes interest, penalties, civil forfeitures, and criminal fines, which can quickly run up to significant sums.

Whistleblowers need not be U.S. citizens. In fact, a significant portion of whistleblower submissions to the IRS come from tipsters located in foreign countries.

Tax whistleblower filings are pouring in. In 2019, the IRS Whistleblower Office issued 181 awards to whistleblowers totaling more than $120 million.

Many states have their own versions of the False Claims Act designed to reward qui tam whistleblowers for exposing fraud against the state, its local subdivisions, and public authorities.

New York State’s False Claims Act is unique in that it authorizes whistleblowers to bring claims involving tax fraud. Whistleblowers can receive 15% to 30% of the amounts collected. And the statute applies not just to the nonpayment of New York state and local income taxes, but also, significantly, to sales taxes as well.

In fact, in one of the largest state false claims act settlements in history involved a case by New York State against Sprint Corp. for failure to collect and remit sufficient state and local taxes with respect to its wireless calling plans. Sprint paid $330 million in settlement. The whistleblower who filed the qui tam lawsuit received $62.7 million in reward.

Notably, the New York State False Claims Act requires knowledge on the part of the targeted taxpayer, unlike the IRS Whistleblower program, which applies even if the underpayment was unintentional. Knowledge under the statute, however, is defined broadly to include not just actual knowledge but also recklessness and “deliberate ignorance” of the truth or falsity of the information.

Most tax evasion schemes are committed by the self-employed and small businesses. Common evasive practices include:

• Maintaining multiple sets of books.
• Filing false returns.
• Misallocating or mis-apportioning income or receipts of multistate businesses.
• Falsifying or altering bookkeeping or accounting entries.
• Diverting corporate funds or income to pay personal expenses.
• Paying disproportionate levels of income to principal shareholders under the guise of salaries or other compensation.
• Concealing, hiding, or underreporting income.
• Overstating deductions
• The use of offshore or foreign accounts to hide assets, conceal transactions, or commit money laundering.
• Misclassifying personal expenses as business expenses
• Concealing or hiding assets or the ownership of property.
• The diversion of withheld payroll taxes.
• Failure to report as income funds received in the form of kickbacks, loans without an intent to repay, or the proceeds of embezzlement.

If you know about significant tax underpayment or fraud, reach out to us for a free and confidential consultation.