More whistleblowers reporting tax fraud, but cases moving slowly

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As tax season ends, tax fraud is in the air.

Lawyers have seen an uptick in people reporting employers, financial companies or high-worth individuals for ripping off the Treasury.

Under a relatively new and lesser known whistleblower law, anyone can report suspected tax fraud to the IRS, and if the government prosecutes the case and recovers unpaid taxes, the individual shares in the recovery.

“It’s definitely recently started picking up speed. People are realizing they have an opportunity to receive a reward,” said David Scher, a principal of the Employment Law Group in Washington, a plaintiffs’ firm. “We’ve had several cases walk in the door in the last couple of months.”

Lawyers who represent either employers or employees in workplace retaliation matters may come across potential tax fraud cases.

“It’s a real possibility. Clients may be fired because they were complaining to their company about tax noncompliance or a problem with the company’s accounting or tax reporting,” said Bryan C. Skarlatos, an attorney with Kostelanetz & Fink in New York, N.Y.  Skarlatos is a tax litigator who has several pending IRS whistleblower claims totaling $2 billion.

In one recent week alone, he fielded calls on both sides of the tax whistleblower law, one from an employee who claimed his job was downsized after his CFO and CEO told him to stop being such a stickler about the company’s accounting, and the other from an employer who had just received a letter from an accountant it fired six months ago, notifying it that he blew the whistle on the company and it might be hearing from the IRS.

Another area where the IRS has expressed interest is uncollected taxes derived from the misclassification of employees as independent contractors.

But these cases are not for the generalist or those new to whistleblower claims.

Not only is the process unlike that under other whistleblower statutes like the False Claims Act, but it can also take 10 years to hear back from the IRS.

“My strongest recommendation is to partner with somebody who has been down this road before. The IRS whistleblower pipe is a narrow and tough road,” said Patrick Burns, communications director for Taxpayers Against Fraud in Washington.

IRS whistleblower program

The whistleblower program was included in the Tax Relief and Health Care Act of 2006 and required the IRS to set up an office and pay rewards to those who blow the whistle on tax fraud beginning in 2007.

Unlike with qui tam statutes, there is no lawsuit; the whistleblower reports the claim directly to the IRS.
For claims of unpaid taxes under $2 million, a whistleblower can collect up to 15 percent of what the IRS collects. For claims over $2 million against a taxpayer that had at least $200 million in income, the whistleblower can collect 15 to 30 percent.

The $2 million benchmark includes penalties that are often significant and mount very quickly, so “it’s not that hard to get to $2 million,” said Scher.

If someone other than your client has already blown the whistle on the taxpayer or if the IRS is already auditing the taxpayer, your client cannot collect a reward, so it’s important to find out if someone else has already submitted a claim.

“Your best source of information is your client in terms of probability of whether or not someone else has submitted on the issue,” said Paul D. Scott of the Law Offices of Paul D. Scott in San Francisco, a former Department of Justice trial lawyer who now represents whistleblowers.

In the first whistleblower reward under the statute, the IRS paid $4.5 million last April to a CPA and auditor at a Fortune 500 financial services firm who discovered $20 million in unreported taxes.

“He reported what he believed was just an accounting error but the company decided to turn a blind eye to it,” said Eric L. Young, a partner at Egan Young in Philadelphia.

Young got involved in the case after the client filed his claim pro se but had heard nothing from the IRS after more than two years.

Once a whistleblower files a claim, it disappears into a black hole of secrecy, so lawyers have to make sure the filing is as solid as possible.

“For the most part, if the IRS isn’t interested in the claim, that’s the end of it,” said Young.

The right to appeal to the Tax Court only kicks in if the IRS has gotten a recovery, such as where the taxpayer appeals the audit or where the whistleblower appeals the reward.

So “if you file a claim and the IRS gives you 20 percent of the recovery and you think it should be 30 percent,” you can appeal to the Tax Court, said Skarlatos.

However, for claims valued under $2 million the whistleblower doesn’t have the right to appeal.

Huge backlog

Lawyers are also frustrated with the program because of the long delays in getting claims resolved.

“Even in a meritorious claim, you may not get the money for seven to 10 years,” lamented Skarlatos.

Approximately 10,000 tax whistleblower cases have been filed and are backlogged, representing at least $20 billion in uncollected taxes, said Burns.

Compounding what seems to be a lack of priority for whistleblower audits is the confidentiality required in tax cases.

“The IRS and the whistleblower office cannot tell anybody about what they’re doing with respect to a taxpayer. They can’t … say whether they’ve opened an audit, what’s happening in an audit, if they’ve collected taxes or whether they’re waiting for the statute of limitations to run on a refund claim. They can’t say anything,” said Skarlatos.

Delays are also lengthened by an IRS policy that requires the agency to wait for the statute of limitations to run on the taxpayer’s refund claim before it will pay a successful whistleblower his or her reward money.

According to Burns, the IRS will be resolving a few significant cases within the next year, and he hopes that will put some teeth into the law.

“A lot of law is just developing now. It’s … taking a surprisingly long time for the government to investigate these matters and reach a resolution. … The Service isn’t making it easy for whistleblowers,” said Scott.