A tax whistleblower is an individual who provides information to the Internal Revenue Service (IRS) about a significant tax fraud, evasion scheme, or violation committed by their employer or an individual. They play a significant role within the tax system, ensuring it is fairer and more equitable for all who contribute to making the United States a great country.

Tax whistleblowers come in many different forms:

• Ethical Whistleblowers: Driven by a strong sense of justice and a belief in a fair tax system. They prioritize ethical concerns over personal gain.
• Financial Motivated Whistleblowers: Primarily driven by the potential financial reward offered by the IRS Whistleblower Program.
• Concerned Employees: Employees within a company who become aware of illegal tax practices and report them to protect the company or their colleagues.
• Former Employees: Individuals who have left a company but still possess knowledge of illegal tax activities.
• Industry Insiders: Professionals like accountants, lawyers, or financial advisors who become aware of tax fraud through their work.

Tax whistleblowers are motivated by a combination of factors beyond financial incentives and legal protections. This may include a strong sense of civic duty and a belief in a fair and just tax system for all. They may also be driven by a desire to ensure fairness in the marketplace and to protect society from the harm caused by tax evasion. In some cases, whistleblowers act to protect their employer or prevent personal harm.

It’s important to remember that these categories are not mutually exclusive, and many whistleblowers may have a combination of motivations.

The IRS Whistleblower Program rewards individuals who provide information leading to the collection of significant tax penalties. Rewards can range from 15 to 30% of the collected amount, but the total penalties must exceed $2 million. The IRS prohibits retaliation against whistleblowers for reporting tax fraud, underpayment, avoidance, or other illegal activities.

The main reason people avoid paying taxes is often a combination of factors, but financial gain is typically the primary motivator. Another is reason for not paying taxes could be a personal disagreement with government spending.

Tax whistleblowers can report a range of tax violations. These include criminal tax fraud, which involves intentional and illegal acts to avoid paying taxes. They can also report non-criminal tax fraud, which may involve violations of tax laws that are not intentional or criminal in nature.

Additionally, whistleblowers can report the underpayment of taxes, whether it was intentional (tax avoidance) or due to neglect. These violations can be committed by anyone, including corporations, individuals, trusts, and estates.

The type of tax evasion whistleblowers most often report includes the following:

• Underreporting Income: Failing to report all income or inflating deductions. This may include underreporting income from cash businesses or rental properties, or gambling winnings. This may also include claiming personal expenses, overstating deductions, or falsely claiming dependents.
• Offshore Accounts: Hiding assets or failing to report foreign offshore accounts. This may include hiding assets in foreign bank accounts that have strict privacy practices or holding digital assets in offshore exchanges to avoid reporting income.
• Fraudulent Tax Returns: Filing false returns or using stolen identities. This includes filing tax returns using stolen Social Security numbers, claiming non-existent dependents or dependents who are not actually eligible.
• Corporate Tax Evasion: Manipulating prices or abusing tax shelters. This may include setting up shell corporations in tax havens to avoid taxes or claiming excessive research and development expenses to reduce tax liability.
• Payroll Tax Fraud: Misclassifying employees or failing to withhold taxes. This can occur when a company misclassifies employees as independent contractors to avoid paying social security, Medicare, or unemployment taxes.
• Money Laundering: Using the tax system to launder illegal proceeds. This occurs when a company uses shell corporations to disguise the original of illegal funds, or when they overvalue assets to inflate deductions or losses, or in structuring transactions.
• Bribery and Corruption: Bribing public officials for favorable tax treatment. This happens when government officials are bribed so that a corporation can obtain favorable tax treatment or to avoid tax penalties altogether.

This is a list of the most common types of tax violations the IRS has identified.

However, given the nuanced nature of tax evasion, fraudsters continue to exploit transnational tax loopholes that allow them to evade taxes undetected. And given significant constraints and understaffing at the IRS, prosecuting tax violators can be quite difficult. This is why tax whistleblowers are so important.

Insiders at large corporations may possess insights and information about a potential tax fraud or scheme that the IRS might not have been aware of. And this information is incredibly important when building or investigating a potential tax fraud or evasion case.

In other words, tax whistleblowers allow the IRS to pursue more tax fraud cases and ensure that high-income individuals and large corporations are paying their fair share of taxes. They also have a deterrent effect on those thinking about engaging in tax evasion.

It’s important 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 includes more sophisticated methods that entities or individuals might employ to evade their lawful tax obligations.

The IRS Whistleblower Office, created by the Tax Relief and Health Care Act of 2006, investigates tips about potential tax fraud submitted by individuals. These tips can come from anywhere, such as the workplace, personal business dealings, or everyday observations.

Under the IRS Whistleblower Program, if the IRS successfully collects over $2 million in taxes, penalties, and interest based on the information provided, the whistleblower may receive a reward of 15 to 30 percent of the collected amount. For individual taxpayers, their gross income must exceed $200,000.

The Whistleblower Office assesses the credibility of each tip and then assigns promising cases to the relevant IRS office for further investigation.

Tax whistleblowers are also protected from retaliation for reporting potential tax issues. This protection extends to both reporting to their employer and to the federal government, as well as for other lawful activities related to these matters.

Our firm is behind the largest IRS tax whistleblower award cases in history, including the $104 million award obtained by Bradley Birkenfeld.

Birkenfeld was an international banker and wealth manager at UBS Bank in Switzerland, who blew the whistle on a massive tax evasion scheme under the IRS whistleblower program. UBS was forced to pay a fine of $780 million and turn over the names of over 4,450 U.S. taxpayers.

If you’re a tax whistleblower and would like to report tax evasion or avoidance, contact our legal team today for a free and confidential consultation.