The federal False Claims Act (FCA) and its state counterparts prohibit making claims to the government for payment of money to which a person is not entitled. These laws also prohibit so-called “reverse” false claims—unlawfully withholding money that someone owes to the government. However, these laws typically don’t allow whistleblowers to report tax fraud.
Fortunately, whistleblowers still have a few methods to take down tax cheats. First, a whistleblower can submit a tip directly to the Internal Revenue Service (IRS). Second, the state-level FCAs in New York and other states allow whistleblowers to report the underpayment of state taxes.
The IRS Whistleblower Program
The IRS estimates that approximately 14% of federal taxes go unpaid, leaving the government with a “tax gap” of over $400 billion every year. According to the IRS Taxpayer Advocate Service, ordinary taxpayers pay an average of $3,000 per year in extra taxes to make up for this lost revenue.
To help combat tax underpayments, Congress established the IRS Whistleblower Program in 2006. Under this program, a whistleblower is entitled to an award of 15% to 30% of proceeds collected if all of the following conditions are met:
- The whistleblower provides a tip with relevant information
- The tip identifies the underpayment of taxes within 3 years of filing the incorrect tax return (or 6 years if the tax return understates income by at least 25%)
- The tip identifies the underpayment of federal taxes, whether intentional or by mistake
- The IRS acts on the tip and collects tax underpayments, whether intentional or not
- The amount in dispute (including interest and penalties) exceeds $2 million
- If the taxpayer is an individual (instead of a corporation), the individual’s gross income exceeds $200,000 for at least one of the years at issue
The IRS Whistleblower Office has collected over $5.7 billion in unpaid taxes and awarded nearly $1 billion to whistleblowers. An experienced attorney can help a whistleblower by:
- Drafting and submitting the strongest possible tip, using information and language that will get the attention of the IRS Whistleblower Office
- Maintaining the whistleblower’s identity to the maximum extent permitted by law
- Fighting for the highest possible award following a successful enforcement action
- Protecting the whistleblower from retaliation from his or her employer
The New York False Claims Act
While the IRS Whistleblower Program covers the underpayment of federal taxes, New York permits whistleblowers to report the underpayment of state taxes. New York’s Taxpayer Protection Bureau has been extremely aggressive in pursuing tax cheats and strongly encourages whistleblowers to assist the state in its efforts.
Because New York combats tax fraud through its FCA, it operates more simply than the IRS Whistleblower Program. An individual with knowledge of underpayment of taxes to New York can file a lawsuit against the fraudster. This lawsuit must prove that the fraudster knowingly made or used false or fraudulent claims, records, or statements to obtain or withhold money or property that belongs to the state government. The statute permits lawsuits only against companies or individuals with over $1 million in taxable income per year and where the unpaid tax bill totals at least $350,000. If the lawsuit is successful, the whistleblower is entitled to between 15% and 30% of the recovery.
This law is an example of a public-private partnership with enormous benefits for the taxpayers and for whistleblowers. For example, in 2018, Sprint agreed to pay $330 million to resolve allegations that it failed to collect and remit state and local sales taxes. The whistleblower who brought this fraud to the government’s attention was rewarded with $62.7 million.
Other State False Claims Acts
Although New York is the most prominent state in the fight against tax fraud, several other states permit tax-related whistleblower suits, as well:
- Illinois permits whistleblowers to report the underpayment of taxes—excluding income tax. In January 2021, a telecommunications company paid $2.5 million to resolve a whistleblower lawsuit alleging it failed to collect and remit state taxes.
- Indiana permits whistleblowers to report the underpayment of taxes—excluding income tax. In 2019, Sephora paid $227,642 to resolve allegations it failed to pay taxes on goods purchased via the internet and shipped to Indiana.
- Maryland recently amended its FCA to add a provision mirroring the New York FCA. The new law permits whistleblowers to report the underpayment of taxes against companies with over $1 million in annual taxable income or individuals with over $250,000 in annual taxable income, as long as the unpaid tax bill totals at least $250,000.
- Rhode Island also permits whistleblowers to report the underpayment of taxes—excluding income tax.
- Washington, DC recently amended its FCA to add a provision mirroring the New York FCA. The new law permits whistleblowers to report the underpayment of taxes against companies or individuals with over $1 million in taxable income per year and where the unpaid tax bill totals at least $350,000.
The Role of Whistleblowers
Whistleblowers are essential in identifying, reporting, and stopping tax fraud. Whistleblowers are typically employees (or former employees) of businesses that have committed tax fraud, with inside information about how the company has avoided paying its fair share. Sometimes, non-employees can come across similarly compelling information, as well.
Tax fraud comes in many forms. Common schemes include:
- Underreporting income
- Overstating deductions or losses; claiming false deductions or losses
- Hiding income in offshore tax havens
- Making false entries in books and records
- Using shell accounts to transfer money and hide assets
- Claiming personal expenses as business expenses
- Money laundering
- Failing to pay payroll taxes
The IRS Whistleblower Program and the various state FCAs entitle a successful whistleblower to between 15% and 30% of the amount the government recovers.
With more than 30 years of experience, the attorneys on Baron & Budd’s whistleblower representation team have represented dozens of clients in government fraud cases returning over $5.4 billion to federal and state agencies, with whistleblower recovery shares as high as 49%. They are ready to help if you have evidence of tax fraud.
Please call (866) 401-5971 or complete our contact form if you would like more information. For more information, see What You Need to Know About Becoming a Whistleblower. Please understand that contacting us does not mean that you have established an attorney-client relationship with Baron & Budd, P.C.