IRS Whistleblower Claims Reporting Tax Evasion and "Overlooked" Returns

December 12, 2010

Tax whistleblowers using the new IRS Whistleblower Program have reported many instances of tax evasion involving domestic and foreign corporations, partnerships, and trusts, in addition to abusive offshore transactions about which we have written previously. These tax whistleblowers will allow the IRS to reduce the more than $300 billion "tax gap"--the difference between what tax cheats owe, but refuse to pay.

Tax evasion generally entails taxpayers understating taxes in the returns they file. In many cases evasion also entails taxpayers failing to file returns, especially information returns (as opposed to tax returns).

For example, partnership returns (Form 1065) are information returns and as such do not report tax payable. Cases of partnership tax evasion sometimes arise where filing Form 1065 is “overlooked." In many of these cases, the partners continue to file their own income tax returns, which typically understate taxable income and tax payable, as there are no K-1’s to report.

Another partnership information return frequently overlooked is Form 8275. This form should generally be filed where partners have made partnership contributions, and received partnership distributions, within a two year period. Failing to file 8275’s typically results in an underpayment of tax where the disguised sale rules operate to treat the contribution and distribution as a sale.

Cancellation Of Debt (“COD”) is another area where non-filing of information returns (generally Form 1099-C) often results in an underpayment of tax, particularly in relation to non-institutional debt.

The problem of overlooked returns is not limited to income tax. Another return that is frequently overlooked is Form 709. This form should be filed by individuals who gift property that does not qualify for exclusion from gift tax.

On the international side, taxpayer interests in foreign companies should often be information reported on Form 5471. Where taxpayers have interests in foreign companies that hold interests in other foreign companies, multiple 5471’s may need to be filed to reflect second tier or higher tier interests. Failing to file 5471’s typically results in an underpayment of tax where foreign company income is required to be included in US income, for example under the Subpart F rules.

Another common area of tax non-compliance occurs when U.S. companies are 25% or more owned by non-U.S. shareholders, and as a result, are required to file Form 5472. Failing to file 5472’s typically results in an underpayment of tax when, for example, transfer pricing has taken place between the U.S. company and foreign shareholders.

Trusts (and especially foreign trusts) typically entail significant information filing requirements. Transactions with foreign trusts generally need to be information reported (Form 3520), and foreign trusts with a US owner are required to file an information return annually (Form 3520A).

Failing to file these information returns typically results in an underpayment of tax where foreign trust income is taxable to US persons, for example under the grantor trust rules.

A number of other information returns are required to be filed under specific circumstances.

If you are aware of information returns that have not been filed, or suspect that tax information filed is incorrect, consider the IRS Whistleblower Program. Since December 2006 the IRS Whistleblower Program provides significant rewards of 15-30% for those filing successful tax whistleblower claims, as discussed in my interview with IRS Whistleblower Office Director Steve Whitlock.

From the start of the new IRS Whistleblower Program, our whistleblower lawyers at Finch McCranie, LLP have represented whistleblowers in the new program. We have represented tax whistleblowers with IRS Whistleblower claims in the hedge fund industry, other financial services industries, real estate, manufacturing, and many other industries, with many claims involving complex offshore transactions. We have also presented seminars with the IRS Whistleblower Office staff to educate lawyers on the best practices in pursuing IRS Whistleblower claims. The IRS Whistleblower claims that we have submitted involve billions of dollars in unpaid tax liabilities.

For a free consultation about a possible whistleblower claim, please call us at 800-228-9159, or email us HERE.