Many whistleblowers incorrectly believe that (i) there must be fraud, and (ii) that the IRS can go back and audit as many years for which they have specific and credible information.
The first misconception is that fraud is required for the IRS to take action under the whistleblower program. In fact, the IRS will pay an award for information that leads to an action (administrative or judicial) with respect to any underpayment of tax, including an innocent mistake by a taxpayer. There does not need to be fraud; only the collection of proceeds as a result of the IRS action.
The second misconception is that the IRS will go back as many years as necessary to enforce the law and collect the tax. However, the statute of limitations prevents the IRS from auditing taxpayers after a set number of years have passed.
Reasons for Underpayment of Tax.
There are many reasons taxpayers underpay their taxes. All of these reasons qualify for an award under the whistleblower program.
Late filing of an election
Error in calculation
Misunderstanding of the law
Misinterpreting the Law (or the Facts)
From friends or professionals
Tax shelters/tax schemes
Failing to address the facts
Unexpected income (lottery/gambling winnings)
Lack of proper bookkeeping.
Fraud - Intentional acts to underreport income – See prior blog on Fraud
Statute of Limitations.
The IRS may be interested in your “specific and credible” information with respect to a taxpayer’s underpayment of tax under the Whistleblower program, but only if there is sufficient time to conduct an examination.
Typically, the IRS has two goals when conducting examinations of a taxpayers’ returns. The first goal is obtaining past compliance (enforcement of the tax laws) which is done by audit of the tax return and collection of additional taxes due. The second goal is obtaining future compliance. This is done by simply sending a message to the taxpayer. Often, the second goal is easier for the IRS to obtain as it (i) allows the taxpayer to get away with their past sins, and (ii) requires less resources by the IRS. Future compliance is obtained by the IRS by simply reminding the taxpayer that it is present, and it is monitoring the taxpayer. Therefore, the IRS will often only audit one or two years brought to its attention by a whistleblower rather than as many years as it would otherwise be allowed to audit. It will also simply audit one or two issues rather than all issues presented by the whistleblower in an effort to obtain future compliance rather than past compliance
Below is a list of the statute of limitations that a whistleblower should be aware of.
3-Year Statute of Limitations – the normal statute of limitations for the IRS to assess taxes on a taxpayer is three (3) years from the due date of the return or the date on which it was filed, whichever is later. A return is considered to be timely filed if it was filed on or before its due date.
6-Year Statute of Limitations - The statute of limitations is six years if the tax return includes a “substantial understatement of income.” Generally, this means that the taxpayer failed to report more than 25 percent of the gross income. Suppose that the taxpayer earned $200,000 but only reported $140,000. Given that the taxpayer omitted more than 25 percent of its income, the taxpayer can be audited for up to six years. This is true even if the understatement was unintentional or you reported in reliance on a good argument that the extra $60,000 was not your income.
No Statute of Limitations – there is no deadline to assess the tax where the IRS can establish that a taxpayer has: (i) filed a false or fraudulent return; (ii) willfully attempted to evade tax; or (iii) failed to file a return. Unlike the circumstances above where tax returns are filed (even with errors), these are cases in which a taxpayer is willfully or intentionally not filing tax returns or is filing fraudulent return(s). It should be noted that the IRS would have the burden of proof if it is relying on the fact that the return was false or fraudulent, or that the taxpayer is willfully evading tax. For purposes of whistleblower claims, the IRS does not like having the burden of proof.
The IRS may, for practical reasons, not take advantage of the statute of limitations even if there is sufficient time in which to conduct an examination. A rule of thumb the Whistleblower should keep in mind is that it could take as long as a year after the submission of the claim, for the claim to make its way to the examination team. The IRS typically requires a minimum of a year remaining on the statute of limitations in order to begin an examination in order to allow it sufficient time to complete an audit. However, the taxpayer and the IRS may always agree in writing (Form 872) to extend the statute of limitations to give the IRS ample time to conduct an examination.
Analyzing the impact of statute of limitations to your potential claim may get complicated and should be thoroughly vetted with a professional before spending too much time and effort in submitting a whistleblower claim.
For instance, another hot-button issue these days involves offshore accounts, and there is an exception to the usual statute of limitation rules. The IRS is still vigorously pursuing offshore income and assets, which dovetails with another IRS audit rule: the normal three year statute of limitations is doubled if the taxpayer omitted more than $5,000 of foreign income (say, interest on an overseas account). This rule applies even if the taxpayer disclosed the existence of the account on the tax return, and even if the taxpayer filed an FBAR reporting the existence of the account. This six year matches the audit period for FBARs. FBARs are offshore bank account reports that can carry civil and even criminal penalties far worse than those for tax evasion.
Certain other forms related to foreign assets and foreign gifts or inheritances are also important. If the taxpayer misses one of these forms, the statute of limitations is extended. In fact, the statute never starts to run, if a taxpayer receives a gift or inheritance over $100,000 from a non-U.S. person and the taxpayer fails to file Form 3520.
If you have substantial and credible information related to a taxpayer that has failed to pay their substantial tax liabilities (over $ 2,000,000), please call us to discuss your potential tax whistleblower claim.