A Guide to Exposing Criminal Tax Evasion to the IRS

It’s important to note that these crimes are not in and of themselves tax crimes. The relevant issue for the IRS would be whether the income from those activities is being accurately reported and taxed. All income, lawful or unlawful, is subject to federal income tax.

When organized crime syndicates or individuals fail to report this income, they’re essentially stealing from the public coffers. Thus, the IRS whistleblower program was created and is designed to encourage individuals to come forward with information about significant tax underpayments from unlawful income.

Insiders who provide specific, credible information that leads to the IRS taking action, such as collecting taxes, penalties, and interest, may be eligible to receive a whistleblower reward from the IRS. This reward can range from 15% to 30% of the collected proceeds. However, the information provided should relate to a tax issue in which the tax, penalties, interest, additions to tax, and additional amounts in dispute must exceed $2 million.

The IRS whistleblower program is particularly relevant for tax evasion cases, where large amounts of tax revenue might be at stake. Revenues such as those coming from drug trafficking, gambling, loan sharking, and other major criminal operations.

The prospect of reporting tax violations from organized crime can be daunting due to fears of retaliation. Fortunately, the IRS offers protections to whistleblowers.

First and foremost, the IRS is required by law to protect the identity of whistleblowers. While there are certain limited exceptions, the IRS typically doesn’t disclose the identity of the informant.

Secondly, the Taxpayer First Act, signed into law in 2019, added new anti-retaliation provisions. This means whistleblowers who face retaliation from their employers after reporting tax violations can seek legal remedies.

As stated above, reporting organized crime can be dangerous. If you’re considering reporting a criminal organization involved in tax evasion, you should take precautions to ensure your safety and consult with legal counsel.

Here are three popular cases, although details might be limited due to confidentiality and security concerns:

1. UBS AG Whistleblower Case (2009) – our firm represented Bradley Birkenfeld, a former UBS banker, blew the whistle on the bank’s practices of helping wealthy Americans evade taxes by hiding their money in secret offshore accounts. His disclosures led to a massive crackdown on offshore tax evasion. UBS had to pay $780 million in fines and penalties and agreed to turn over the names of over 4,500 American account holders suspected of tax evasion. Bradley Birkenfeld received a record whistleblower award of $104 million from the IRS.
2. Caterpillar Whistleblower Case (2014) – while not a traditional “criminal organization”, the Caterpillar case is worth noting. Daniel Schlicksup, an employee, alleged that Caterpillar used a parts subsidiary in Switzerland to improperly allocate profits which reduced the company’s U.S. tax bill. This sort of profit shifting and tax avoidance, while legal in some instances, becomes tax evasion when improperly executed. The IRS found the allegations to be credible and the company had to pay $2.3 billion to settle tax and penalty claims.
3. Anonymous Whistleblower Case (2018) – name hidden due to confidentiality. An anonymous whistleblower provided detailed information to the IRS about a tax evasion scheme involving several influential individuals and entities. The information was related to tax evasion via offshore accounts and shell corporations. The IRS acted upon the information, leading to the collection of substantial unpaid taxes, penalties, and interest. The whistleblower received a significant award for their role in the revelation, though exact amounts and identities were kept confidential.

It should be noted that the line between traditional “criminal organizations” and entities involved in large-scale tax evasion can sometimes be blurred. The primary focus of the IRS whistleblower program is to address tax evasion, regardless of the nature of the organization involved.

Of course, the best way to prevent retaliation is for employers to never know you are reporting them to begin with. At Kohn, Kohn & Colapinto, we walk our clients through a specific process of reporting to avoid identity being exposed. Below are some of our best tips:

1. Gather Concrete Evidence – while anonymous tips can be good, it’s essential to have strong evidence that clearly points to tax evasion. This can include financial records, bank statements, invoices, emails, or other written communication that directly or indirectly shows the evasion. Furthermore, it’s not enough just to know that someone is evading taxes; you must provide the IRS with information about how, when, and where the evasion is happening. The more specific you can be, the better. Ensure that the way you obtain evidence is legal and does not infringe on privacy rights. It’s also crucial to maintain copies securely, ensuring they don’t fall into the wrong hands or get destroyed.
2. Use Form 211 – this is the formal channel for reporting potential tax violations. The form asks for information about the taxpayer you believe is violating the tax laws, the tax years in question, the amounts involved, and other supporting evidence you might have. When filling out Form 211, it’s important to be as thorough and detailed as possible. If you have multiple instances or evidence of evasion, each instance should be detailed. With Form 211, attach any evidence or documents that support your claim.
3. Get Legal Counsel – reporting tax evasion, especially if it involves organized crime, can have legal and personal implications. A lawyer can guide you on how best to present your information, what risks you might be taking, and the protections available to you. Keep in mind: not all attorneys are familiar with the intricacies of the IRS whistleblower program. Ensure you consult with a lawyer who has experience in this specific area, as they can help you navigate the process more effectively.
4. Submit Form 211 – place the completed Form 211 and any supporting evidence into an envelope. Ensure everything is labeled clearly and is organized in a manner that’s easy for the IRS to review. Consider using a trackable mailing option, so you have a record that your package was sent and received. And before sending anything to the IRS, make copies of all documents for your own records. This ensures you have a backup of everything you’ve submitted.
5. Waiting – once the IRS receives your information, they’ll review it to determine if an investigation is worthwhile. Not all submissions lead to investigations, so it’s important that your evidence is compelling. The IRS might contact you if they need additional information or clarification. Always respond promptly and provide any information they request. Investigations vary in length based on the complexity of the case, the amount of evidence, and the specific details involved. Some investigations might take just a few months, while others can extend for years, so keep that in mind.