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April 13, 2011

Tax Dodgers and Whistleblower Ethics

A curious section of the Internal Revenue Code allows the IRS to pay money to people who blow the whistle on persons who fail to pay taxes owed. Particularly curious when the whistleblower may be the tax dodger's own accountant!

The amount of the reward is determined by the IRS' "Whistleblower Office," and depends on the extent to which the whistleblower "substantially contributed" to the administrative or judicial action the IRS brings based on the information. All relevant factors, including the value of the information furnished in relation to the facts developed by an investigation of the violation are taken into account in determining the amount of the reward.

Section 7623 allows the Secretary to pay an "informant award" of at least 15 percent, but not more than 30 percent of the amount collected if the taxes, penalties, interest and other amounts in dispute exceed $2 million. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court.

There is also an award program for other whistleblowers -- generally those who do not meet the dollar thresholds mentioned above. Awards in the smaller cases are discretionary and the informant cannot dispute the outcome of the claim in Tax Court.

Recently, the IRS paid $4.5 million to an accountant who "blew the whistle" on his employer, and found something like $20 million for the government. Sounds like a "win-win," but the notion of Uncle Sam encouraging advisors to turn in their employers and clients is unsettling to say the least. Most of us consider our first obligation to provide honest, reputable advocacy to all of our good and valued clients, and not to function as government cops, policing the collection of revenue.

But if you're so inclined, consider IRS Form 211: Application for Award for Original Information.

March 23, 2011

Odds of an Audit: Interesting IRS Stats

So you're thinking about playing the old "audit lottery," and wonder what the stats show regarding your chances of getting caught, and what the consequences might be.

Check out the IRS 2010 Data Book (Publication 55B) which is supposed to be printed by mid April. The info there covers IRS fiscal year 2010, and covers not only tax audit rates, but other items, such as the categories of returns which interest the IRS most, and collections efforts.

In terms of the overall changes of being audited, only about 1.1% of all individual returns filed in the fiscal year were audited -- up from 1.0% in the prior year. And only 21.7% of the individual audits were actually conducted by revenue agent folk. The other 78.3% were correspondence audits.

Here are some key stats regarding individual audits (other than audits of taxpayers claiming the earned income tax credit):

  • Business returns (other than farmers) showing total gross receipts of $100,000 to $200,000: 4.7% audited
  • Business returns showing total gross receipts of $200,000 or more: 3.3% audited
  • Farmers (Schedule F filers): 0.4% audited
  • Individuals with adjusted gross income (AGI) between $100,000 and $200,000: 0.71% audited
  • Individuals with AGI between $200,000 and $500,000: 1.92% audited
  • Individuals with $1 to $5 million AGI: 6.67% audited

As for corporations (other than those filing Form 1120S), 1.4% were snagged for audit overall. But small corporations with assets of $1 to $5 million experienced a 1.7% audit rate.

Some more interesting stats: the total number of individual returns actually filed dropped 2% from the year before. When times are bad, the number of filers drops off. Nonetheless, IRS continues to find a way to penalize very many filers -- the top three penalties in percentage terms were 57.3% for failure to pay, 27.3% for underpayment of estimated taxes, and 13% for filing taxes late.

And beyond the common civil penalties, the stats show that crime doesn't pay -- IRS initiated 4,706 criminal investigations in 2010, and of those convicted, 81.5% were incarcerated - up from 81.2% the year before.

Learn how to stay off the IRS radar -- and get tips on what to do if you are audited -- in Nolo's articles How to Reduce the Chance of an Audit and Top 10 Tips for Surviving an Audit.

March 14, 2011

Got Offshore Income? IRS Announces New Disclosure Initiative

Ever on the lookout for international tax evaders, IRS recently announced yet a second special program to allow folks with previously undisclosed income from hidden offshore accounts to fess up. Not exactly what you would call an "amnesty," but still probably better than risking the alternative of continued silence, and later getting caught.

The new voluntary disclosure initiative will be available until August 31, 2011. "As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing," noted IRS Commissioner Shulman recently. "This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them."

The new initiative is different, in some ways, from its precursor in 2009. The overall penalty structure under the new program is higher than before, so that folks who did not come forth before will not be rewarded for remaining silent in the mean time.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign account(s) in the year with the highest aggregate account balance during the 2003 to 2010 period. Some taxpayers will be eligible for 5 percent or 12.5 percent rates of penalty. All participants will be required to pay all back taxes and interest, as well as the appropriate late payment and delinquency penalties.

IRS continues to discourage what it calls "quiet disclosure," by which a taxpayers may just file amended returns on their own, and pay related tax and interest for previously unreported offshore income without otherwise notifying IRS in a formal way.

Folks trying this approach run the risk of being examined and potentially criminally prosecuted for all applicable years. That's right -- "criminal" sanctions loom on the horizon and are generally not "pretty." IRS says it has identified, and will continue to identify and closely review amended returns coming their way which report increases in income.

This is a difficult and touchy area -- even though it appears in some sense that IRS is expressing some degree of leniency, perhaps the best approach for anyone with problems of this nature is to consider consulting with tax legal counsel, particularly if the amounts involved are large.

For more information on income earned abroad and how to handle back taxes you owe, check out Nolo's Filing a Tax Return When You Live Outside the U.S. article and Nolo's Back Taxes & Tax Debt section.