Blowing the Whistle on Tax Evasion to the IRS

Tax evasion has long been a critical concern for governments worldwide. While some might pose the question, “what’s tax evasion?” or even wonder about “tax evasion meaning”, it is crucial to first understand its implications for both individuals and the economy.

In this guide, we’ll define briefly define tax evasion and the steps whistleblowers can take to report evasion of taxes to the Internal Revenue Service (IRS), and how they can apply for a reward of between 15% to 30% of they monies collected for reporting their concerns

Tax evasion is an illegal activity done by a person or entity purposefully avoiding their genuine tax obligation. This evasion can happen either through the outright non-payment of taxes or the underpayment of taxes. For it to be termed as “evasion,” the IRS must conclusively show that the avoidance was a calculated and willful act by the taxpayer.

It’s pivotal to distinguish between tax evasion and tax avoidance.

While the former involves illegal measures to circumvent what’s owed, tax avoidance is a completely legal practice aiming to minimize tax obligations.

Tax evasion is more deliberate, and generally includes more sophisticated methods that entities or individuals might employ to evade their lawful tax obligations.

Examples of Tax Evasion include:

• Offshore Tax Evasion: Some entities and individuals resort to moving their funds to offshore tax havens to escape the obligation of reporting taxable income. These offshore havens offer attractive tax benefits that allow significant reduction or total avoidance of tax liabilities in the home country.
• Money Laundering Activities: This pertains to the method of concealing the origins of illegally acquired money, usually by blending it with the financial inflow of legitimate businesses. This technique is not only about evading taxes but also about legitimizing the ill-gotten wealth.
• Shell Company Manipulations: Here, entities create multiple businesses and associated bank accounts. Money is circulated amongst these businesses to manipulate financials and achieve added tax benefits or reduce reported taxable income.
• Fraudulent Financial Reporting: Companies or individuals might resort to fraudulent accounting practices. This could involve falsifying balance sheets, hiding assets in offshore locations, or engaging in other deceptive practices commonly known as “cooking the books.”
• Exploitation of Disaster Relief Funds: In this deceptive practice, entities establish multiple business fronts and then fraudulently apply for disaster relief funds under each of these businesses, capitalizing on funds meant to aid genuine victims of disasters.
• Employee Misclassification: Some businesses try to minimize their tax obligations by wrongfully classifying regular employees as independent contractors. This can lead to significant savings in payroll taxes and other employment-related expenses.
• False Revenue Reporting: This entails the deliberate underreporting of revenue or income on tax returns. It could also involve providing other false financial data, which results in reduced tax liabilities.
• Misuse of Tax-Exempt Status: Some entities or individuals falsely file their taxes under particular tax-exempt statuses, despite not meeting the qualifying criteria. This strategy allows them to avoid tax obligations unlawfully.
• Invalid Deduction Claims: This tactic involves entities or individuals claiming certain tax deductions to which they’re not genuinely entitled, thus artificially reducing their taxable income and, consequently, their tax liabilities.

Tax evasion is a felony and those found guilty of tax evasion face severe penalties. Not only are they liable for the payment of the unpaid taxes, but they can also be slapped with official charges, possibly leading to prison time.

As described by the IRS, the penalties for this crime can be severe: individuals may face up to five years in jail, fines up to $250,000, or both. For corporations, the fine can surge to a whopping $500,000, coupled with the costs of prosecution.

The IRS Whistleblower Reward Program is designed to incentivize individuals to report substantial cases of tax evasion.

Tax whistleblowers with credible information about evasion where the tax, penalties, and interest total more than $2 million—and in cases involving individuals, where the person has an annual gross income exceeding $200,000—can submit their findings via IRS Form 211.

Once submitted, the IRS evaluates the claim and, if validated, launches an investigation. If the IRS successfully recovers funds based on the whistleblower’s information, the informant may receive a reward ranging from 15% to 30% of the collected proceeds.

Please note: while the IRS endeavors to protect whistleblowers’ identities, certain situations, like judicial proceedings, might require disclosure.

“What are some other reasons to blow the whistle,” you may ask? Whistleblowing is essential for transparency, justice, and accountability. It helps unearth hidden illegal activities like income tax evasion and brings perpetrators and corporations seeking to bypass the system to justice.

With the IRS Whistleblower Program and the increasing emphasis on ethics in the workplace, whistleblowing plays a pivotal role in maintaining economic equilibrium and justice.