DBTC Law Firm

Tax

Rewarding Whistleblowers with Secrecy

The Internal Revenue Code has long rewarded whistleblowers who report tax fraud by providing them a percentage of taxes collected as their reward. Such whistleblowers are frequently jilted lovers or disgruntled or fired bookkeepers, administrative assistants, or other insiders who get financial reward and revenge by reporting their employers’ indiscretions. Confidentiality of the whistleblower can accompany the award. Such whistleblowing has, however, become its own “big business” along with questions of confidentiality.

Internal Revenue Code §7623(b) awards a percentage of collected proceeds from a whistleblower’s information as a reward to the whistleblower. Rule 345(a) of the Tax Court Rules of Practice and Procedure provides privacy protection for those people who are allowed to request anonymity from the court. The reasons for anonymity must be factually demonstrated.

While in a conventional case this could protect the employment of an ongoing employee who has reported his employer, a Federal Court of Appeals case decided on July 26, 2019 (124 AFTR 2d, 2019-5090) disclosed that whistleblowing had become big business, and with it new questions regarding confidentiality.

The case disclosed that the whistleblower was not a jilted lover, disgruntled employee, bookkeeper or insider, but rather a self-described “analyst of financial institutions” who derived from publicly filed records probable tax evasion. In that case, this professional whistleblower claimed that the corporation had evaded paying nearly $100 million in taxes. Of more interest, the decision reflected that this particular whistleblower had as many as 56 separate whistleblower reports pending before the Tax Court and the Internal Revenue Service, indicating that this was a large scale and potentially highly profitable enterprise. The Tax Court created a new label for this phenomenon, “a serial claimant” or “serial filer.”

The Tax Court held that because the whistleblower was not risking loss of employment, there was no need to ensure anonymity. The United States Court of Appeals reversed the Tax Court, advising that whether this whistleblower, or any other whistleblower, was a “serial filer” was irrelevant to whether they were entitled to confidentiality, and declared that there was no precedent for a public policy disfavoring anonymity for serial filers who rely upon publicly available information.

The case was returned to the Tax Court to consider whether the whistleblower had made a factually supported basis for protecting his identity.

 

“How was your day at the office, honey?” “Don’t ask, you won’t believe it!”

The awesome sweep of federal law enforcement authority is often depicted dramatically in the movies. However, real life experiences demonstrate the overpowering reality of law enforcement when it intersects with the lives of ordinary citizens. Such was the seizure of the Mountain Pure water bottling facility in central Arkansas on January 18, 2012. This “wild west” story is an interesting interpretation of constitutional rights.

The Small Business Administration (“SBA”) and Internal Revenue Service (“IRS”) suspected that John Stacks, owner of Mountain Pure, LLC, and its 100,000 square-foot bottling facility in central Arkansas, had committed fraud in applying for disaster relief after a tornado allegedly damaged company property. So, on January 18, 2012, at 8:45 a.m., 35 federal and state law enforcement agents armed with search warrants arrived without prior notice at the plant with their sirens sounding and lights flashing. The agents wore ballistic vests, each carrying loaded handguns and secondary weapons. Upon their entry of the building, employees were pushed against a wall, threatened with pistols, gathered into the break room, had their cell phones confiscated, were detained there for the balance of the day with outside contact forbidden, and subjected to interrogation, while the 100,000 square-foot plant was scoured for evidence of the suspected fraud. It was a scared, unhappy, perplexed bunch of employees who were finally released to go home eight hours later at the end of their “work day.”

Some of the astonished and upset employees, believing their constitutional rights had been offended by these dramatic actions, sued. The United States District Court for the Eastern District of Arkansas, as affirmed by the United States Court of Appeals for the Eighth Circuit, ruled that these actions were reasonable under the Fourth and Fifth Amendments to the United States Constitution, did not violate the employees’ constitutional rights regarding search, seizure or interrogation, and thus gave no rise to any legal relief. Just another day at the office. Mountain Pure v. Cynthia Roberts, Eighth Circuit Court of Appeals, #15-1656, February 25, 2016.

Straight from the Horse’s Mouth

In its release “IR 2015-124” on November 5, 2015, the IRS provides comprehensive advice on how to select and evaluate tax return preparers, and ensure that their work is competent. The entire text of the IRS release is set forth below:

IR 2015-124

Noting that there is still some time before the next tax filing season, IRS has advised taxpayers to make use of that time to consider the appropriate options in choosing a tax return preparer.

Basic advice. IRS provides some basic tips that taxpayers can keep in mind when selecting a tax professional and filing their returns:

  • Select an ethical preparer; taxpayers entrust some of their most vital personal data with the person preparing their tax return.
  • Check on the service fees up front; avoid preparers who base their fee on a percentage of the refund or those who say they can get larger refunds than others.
  • Ask the preparer whether he has a current Preparer Tax Identification Number (PTIN); paid tax return preparers must have a current PTIN to prepare a tax return.
  • Research the preparer’s history; check with the Better Business Bureau, or, for the status of an enrolled agent’s license, check with the IRS Office of Enrollment. For certified public accountants, verify with the state board of accountancy, and, for attorneys, check with the state bar association.
  • Ask for IRS e-file; any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically.
  • Provide records and receipts; do not use a preparer who, against IRS e-file rules, is willing to e-file a return using the latest pay stub instead of Form W-2.
  • Review your tax return and ask questions before signing; taxpayers are legally responsible for what’s on their return, regardless of whether someone else prepared it.
  • Never sign a blank tax return; the preparer could put anything they want on the return, even their own bank account number for the tax refund.
  • Ensure the preparer signs and includes their PTIN; the preparer must also give the taxpayer a copy of the return.

 

To help taxpayers determine return preparer credentials and qualifications, IRS offered the following information:

  • Any tax professional with an IRS PTIN is authorized to prepare federal tax returns.
  • Enrolled Agents—licensed by IRS—are subject to a suitability check and must pass a three-part Special Enrollment Examination, which is a comprehensive exam that requires them to demonstrate proficiency in federal tax planning, individual and business tax return preparation and representation. They must complete 72 hours of continuing education every three years.
  • Certified Public Accountants—licensed by state boards of accountancy, the District of Columbia and U.S. territories—have passed the Uniform CPA Examination and completed a study in accounting at a college or university and also met experience and good character requirements established by their respective boards of accountancy. In addition, CPAs must comply with ethical requirements and complete specified levels of continuing education in order to maintain an active CPA license. CPAs may offer a range of services; some CPAs specialize in tax preparation and planning.
  • Attorneys—licensed by state courts, the District of Columbia or their designees, such as a state bar—generally have earned a degree in law and passed a bar exam and have on-going continuing education and professional character standards. They may also offer a range of services; some attorneys specialize in tax preparation and planning.

Representation rights. Taxpayers can designate their paid tax return preparer or another third party to speak to IRS concerning the preparation of their return, payment/refund issues and mathematical errors. The third party authorization checkbox on Form 1040, Form 1040A and Form 1040EZ gives the designated party the authority to receive and inspect returns and return information for one year from the original due date of the return (without regard to extensions).

Enrolled agents, certified public accountants and attorneys have unlimited representation rights before IRS. Tax professionals with these credentials may represent their clients on any matters including audits, payment/collection issues, and appeals.

Preparers without one of these credentials (also known as unenrolled preparers) have limited practice rights. They may only represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees, including the Taxpayer Advocate Service. They cannot represent clients whose returns they did not prepare and they cannot represent clients regarding appeals or collection issues even if they did prepare and sign the return in question.

For tax return preparers that have an active PTIN (PTIN holders) but no professional credentials and do not participate in IRS’s Annual Filing Season Program (AFSP, a voluntary program requiring a certain number of continuing education hours), this is the final year that they will have those limited representation rights for returns they prepare and sign. For returns prepared beginning January 1, 2016, only AFSP participants will have those limited representation rights.

 

Getting Paid for Getting Revenge: THE IRS Whistleblower Provisions.

It was recently announced that an individual had collected $38 million from the IRS as a reward for information about a tax dodge involving a large corporation. The IRS does provide cash rewards for tips that lead to recovery of taxes otherwise lost from tax cheating. Referred to as the Whistleblower program, this is an interesting dynamic for businesses of any size. Almost always, low to mid level employees (bookkeepers, secretaries, administrators) are a necessary part of the “cheat” in order to process false paperwork. Armed with that sensitive information, they thus become a ticking time bomb against the employer if they are ever fired, demoted, as a paramour jilted, or otherwise offended by the boss – not only can they get revenge, they can get rich – legally!

26 United States Code, Section 7623 provides an award of 15% to 30% of amounts recovered from tax underpayments based upon information provided by individuals leading to that recovery. The reward can be reduced if the IRS has already developed other principal sources of information leading to that recovery. This process has been available for decades, but the process was completely overhauled in 2006.

The program requires an annual report to Congress. The 2014 report reflected that the IRS Whistleblower Office had received 14,365 claims during 2014. Because Whistleblower claims cannot be paid until the taxpayer audit is completed as well as all related appeals and refund claims have been made or expired, it is typically five to seven years before a Whistleblower claim is paid. The first awards under the 2006 Act were made in 2011, and included the $38 million dollar award first mentioned above. In that case, the audited corporation was never aware its audit was the result of a Whistleblower claim, much less who the Whistleblower was.

In 2014, the IRS paid 101 claims totaling over $52 million, representing about 16% of the monies recovered from Whistleblower claims. There are obviously many more claims, worth many times more than that, in the pipeline.

Cheap, Good, Simple Tax Advice:

More simple help than you may ever need on your income taxes can be found at the IRS website, www.irs.gov.  In particular, you can access a number of very helpful publications including Publication #17 with respect to your personal income taxes and Publication #334 with respect to small businesses and  income taxes.  These guides are easy to read, well organized and indexed, comprehensive, immediately accessible and free.  Finally, you can Google “Forbes Tax Guide” for some excellent, easy-to-read articles about a number of facets of taxation. You could probably scan all of these in a couple of hours and pick up a number of tips that would be helpful in managing your affairs and submitting your tax returns in a tax-wise way – and probably save considerable taxes in the process.