Duona Liu

Tax fraud is a general term used to describe the taxpayer’s intent to defraud the government by evading tax. Mere negligence is not enough to establish fraud. The Internal Revenue Service (IRS) may charge individuals suspected of tax fraud with either civil penalties, under the Internal Revenue Code (IRC), or criminal penalties, under the United States Code (USC).

The government tends to file civil penalties rather than criminal penalties due to the taxpayer’s frequent ability to beat criminal charges based on a reasonable legal argument for why the tax due was not paid or underpaid; however, both civil and criminal tax fraud is taken seriously by the IRS and taxpayers should understand the difference between them.

Significantly, civil tax fraud penalties are monetary penalties—it does not result in criminal prosecution. The civil tax fraud penalty is described under IRC §6663(a), which provides that:
If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

Furthermore, the IRS emphasizes that:
If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.

A common example of civil fraud is the filing of a fraudulent return. If such action is established as fraudulent, the taxpayer incurs a penalty in the amount of 75% of the underpayment amount.

On the other hand, criminal tax fraud can result in monetary penalties and jail time. Criminal tax fraud, also known as “tax evasion,” is treated under IRC §7201, which states that:
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

In other words, IRC §7201 creates two offenses: (1) the willful attempt to evade or defeat the assessment of a tax, and (2) the willful attempt to evade or defeat the payment of a tax.

1. Evasion of Assessment is the most common form of tax evasion. This occurs when there is a willful attempt to evade or defeat the assessment of a tax through filing a false return that omits income, credit, or deductions to which the taxpayer was not entitled. This can also occur when the tax reported on a deduction is falsely and purposefully understated. Consequently, willful under reporting is an attempt to evade or defeat the assessment of tax.

2. Evasion of Payment occurs when (1) there is an attempt to evade or defeat a payment (2) of an established owed tax, and (3) there was an affirmative or willful act of concealment of money or assets from which the tax could have been paid.

In other words, tax evaders intend to avoid tax assessment and/or payment of taxes owed. Anyone found guilty of evading taxes can face jail time and/or significant fines.

Examples of tax evasion include, but are not limited to:
– Intentionally concealing assets to hinder the IRS’s ability to determine how much tax is owed;
– Under reporting income; 
– Claiming fake business expenses; 
– Claiming illegitimate dependents; and 
– Not filing returns

It is also important to understand that the broad scope of the language of IRC §7201 means that anyone helping the taxpayer evade taxes, such as an accountant or bookkeeper, may be prosecuted, as well.

The Internal Revenue Service (IRS) is responsible for investigating claims relating to the Internal Revenue Code (IRC). Within the IRS there are multiple divisions focused on either civil or criminal tax fraud.

Per Internal Revenue Manual (IRM) 25.1.6.1 (11-05-2014): 
Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing. Intent is distinguished from inadvertence, reliance on incorrect technical advice, sincerely held difference of opinion, negligence or carelessness.

Where a claim for civil tax fraud is investigated, it will first be seen by a Fraud Technical Advisor (FTA) and the Examination Group Manager to determine that civil fraud has occurred. Where the FTA and Examination Group Manager agree, the proceeding will move forward. The FTA will then work with an examiner to confirm that the penalty narrative does “substantiate the assertion of the civil fraud or fraudulent failure to file penalties.” The affirmative acts must be described in detail as to clearly show the indicators of fraud.

The FTA will make a recommendation on which actions to take regarding the civil fraud case, however, the ultimate decision to proceed is made by the Examination group manager.

Criminal tax fraud, frequently known as tax evasion, is investigated by the IRS Criminal Investigation Division.

Under IRC §7201 tax fraud exists where there has been (1) the willful attempt to evade or defeat the assessment of a tax; or (2) the willful attempt to evade or defeat the payment of a tax.

Findings are then referred to the Department of Justice (DOJ) for recommended prosecution. Criminal investigations can be initiated from information obtained within the IRS when a revenue agent (auditor) or revenue officer (collection) detects fraud. This information is routinely received through the public, law enforcement officials, and the various United States Attorneys’ offices across the country.

A primary investigation, once opened, will be analyzed by a special agent to determine if criminal tax fraud has occurred. The front-line supervisor then reviews the preliminary information and decides whether to approve or decline for further investigation. If the supervisor approves for an investigation, the head of the office will initiate a Subject Criminal Investigation. By this time, a minimum of two lawyers of CI management will have reviewed the primary investigation material and determined if there is enough evidence to begin a subject CI.

Special agents are responsible for obtaining facts and evidence needed to establish the elements of criminal activity. These agents use techniques such as interviewing third party witnesses, conducting surveillance, executing search warrants, subpoenaing bank records, and reviewing financial data. The agents work closely with the CI lawyers throughout the investigation.

After all the evidence is collected, the special agent or supervisor will decide whether the evidence substantiates criminal activity, otherwise the case is discontinued. If the determination is made that there is enough evidence, a recommendation for prosecution will be made.

A ‘special agent report’ is drafted including the details of laws and violations committed and recommendation for prosecution. The ‘special agent report’ is reviewed by:
1. The agent’s front line supervisor (supervisory special agent);
2. A CI quality review team, (Centralized Case Review); 
3. CI assistant special agent in charge; and 
4. CI special agent in charge.

After review, the prosecution recommendation is forwarded to:
1. The Department of Justice, Tax Division (assuming it’s a tax investigation), or
2. The United States Attorney for all other investigations.

A person reports tax fraud to the IRS. To report an individual or business suspected of committing tax fraud or tax evasion, file Form 3949-A, Information Referral, by mailing it to: 
Internal Revenue Service
Stop 31313 
Fresno, CA 93888

Both individuals and businesses can be reported for suspected tax fraud. Reporters may not submit this form electronically or by facsimile.  
Form 3949-A requires a significant amount of information such as the name and address of the individual or business, and any documents available to substantiate the claims. Documentation or evidence of the claims provided is not required. 

Significantly, while Form 3949-A requests the reporter’s name and address, it is also permitted to use Form 3949-A to report tax fraud or tax evasion anonymously. 

On the other hand, tax whistleblowers seeking a reward are required to complete Form 211, Application for Award for Original Information. Form 211 may also be used to report an individual or business entity. 

Information provided with Form 211 will be considered by the Whistleblower Office in the Internal Revenue Service in determining the reward given. If documents or supporting evidence are known but not in the possession of the whistleblower, the whistleblower should describe these documents and where to locate them. The whistleblower should include any supporting documents available within the initial submission. However, there is no specific format in which to submit exhibits, documentation, or evidence.

Whistleblowers may not submit this form electronically or by facsimile. Rather, whistleblowers must mail Form 211 to:
Internal Revenue Service
Initial Claims Evaluation Team
1973 N. Rulon While Blvd.
M/S 4110
Ogden, UT 84404

Whistleblowers should note that in Whistleblower 21276-13W v. Commissioner, the Tax Court ruled that a whistleblower may still qualify for an award even if the Form 211 was submitted after the whistleblower provided the information regarding evasion directly to IRS agents. Specifically, the whistleblower in Whistleblower 21276-13W v. Commissioner participated in illegal activities and was arrested. In order to minimize his punishment, he provided information to the IRS regarding his clients’ schemes. Later, he submitted a Form 211, and the Tax Court considered the timing appropriate. Significantly, the court noted that even Form 211 itself contemplates this timing since it requests information about anyone to whom the whistleblower may have first reported the evasion.

A reporter may also report tax fraud by calling the IRS at 1-800-829-1040 for the Criminal Investigation Hotline in your area. However, in order to receive an award after reporting anonymously over the Criminal Investigation Hotline, a whistleblower must also file a Form 211.

The IRS does not provide an online reporting process for issues relating to tax fraud. The IRS generally requests that forms be completed online or by hand, then printed and mailed directly to the Internal Revenue Service. The IRS provides comprehensive instructions for reporting and mailing suspected tax fraud activity at: https://www.irs.gov/individuals/how-do-you-report-suspected-tax-fraud-activity¹.

Tax whistleblowers seeking a reward are required to complete Form 211, Application for Award for Original Information. Whistleblowers may not submit this form electronically or by facsimile².

Rather, whistleblowers must mail Form 211 to:
Internal Revenue Service
Initial Claims Evaluation Team
1973 N. Rulon While Blvd.
M/S 4110
Ogden, UT 84404

Whistleblowers should note that in Whistleblower 21276-13W v. Commissioner, the Tax Court ruled that a whistleblower may still qualify for an award even if the Form 211 was submitted after the whistleblower provided the information regarding evasion directly to IRS agents³. Specifically, the whistleblower in Whistleblower 21276-13W v. Commissioner participated in illegal activities and was arrested. In order to minimize his punishment, he provided information to the IRS regarding his clients’ schemes. Later, he submitted a Form 211, and the Tax Court considered the timing appropriate. Significantly, the court noted that even Form 211 itself contemplates this timing since it requests information about anyone to whom the whistleblower may have first reported the evasion⁴.

A whistleblower can report an individual or business for suspected tax fraud by filing Form 211, Application for Award for Original Information, through the Whistleblower Office at the Internal Revenue Service (IRS).

The intake and initial review process generally takes between 30 and 60 days at which point the Whistleblower’s Office makes the determination as to how they will proceed with the claim.

If the claim is rejected, the IRS will issue a “rejection or denial letter” to the whistleblower explaining why the claim was rejected. Per the IRS:
Claims rejected or denied as a § 7623(b) claim have an administrative proceeding and are eligible to be petitioned to the tax court.

For example, if the claim is rejected because the claim was missing information and/or is incomplete, the whistleblower has the option to bring their claim to the tax court for a secondary review. Common Initial Review Rejection/Denial Reasons:
– No specific or credible tax issue,
– Claim is missing information,
– Claim is purely speculative,
– Insufficient Assessment Statute, or
– Assessment Statute Expired

If the claim survives the initial intake a review process the IRS will assign a Subject Matter Expert (SME) who reviews the submission. This SME review generally takes 90 days.

Field Examination occurs after the SME review and takes one to three years. During this time, IRS reexamines the case and contacts the suspected fraudulent taxpayer with their findings.

The whistleblower has two possible outcomes: if the taxpayer agrees with the findings of the IRS, the case moves to a Preliminary Award Recommendation, which takes roughly 60 days. If the taxpayer does not agree with the exam, the case moves to Appeals/Tax Court, which generally takes three to ten years.

If the Tax Court rules in the taxpayer’s favor, the claim gets rejected and the whistleblower is issued the Rejection or Denial Letter. If the Tax Court rules in favor of the whistleblower’s claim, the case moves on to the Preliminary Award Recommendation step.

Once the IRS has determined the whistleblower’s claim is valid, the taxpayer must either agree to the field exam or the Tax Court has rules “all or some adjustments [were] upheld.” For the IRS to issue an award at this step, the fraudulent taxpayer must pay back the taxes owed. According to the IRS, this step in the process “may take up to the full collection statute of 10 years.”

Once the taxpayer has complied by paying the owed amount in full or a partial payment, the case moves to the Award Determination process, which generally takes 90 days.

The Award Determination process “starts the administrative proceeding” at which point the IRS will issue a Preliminary Award Recommendation Letter (PARL) to the whistleblower. The PARL may be accepted or rejected by the taxpayer. If the whistleblower agrees to PARL, the case moves on to Award Payment Processing. If the whistleblower does not agree to PARL or doesn’t respond to the PARL, the IRS issues a Final Determination.

The whistleblower may petition the Tax Court if they do not agree with the PARL. If they choose not to petition in Tax Court, the case moves to the Award Payment Processing step, as outlined above.

Under Internal Revenue Code (IRC) §7623, there are two different kinds of whistleblower rewards: discretionary rewards under IRC §7623(a) and mandatory rewards under IRC §7623(b). 

IRC §7623(a) is applicable and provides that a reward is “authorized,” but not required, for (1) claims submitted before December 20, 2006, or (2) claims that do not meet the IRC §7623(b) threshold. Significantly, where an IRC §7623(a) claim is made, the informant has no right to appeal in the case of an adverse determination. However, once negotiations establishing the reward amount have occurred, the whistleblower has a legitimate cause of action to enforce a contract for payment.

The Tax Relief and Health Care Act of 2006 (TRHCA)imposes a mandatory whistleblower reward under IRC §7623(b). Under IRC §7623(b), an eligible whistleblower must provide information regarding both an “amount in dispute” exceeding $2 million, and if the case involves an individual, the individual’s gross income for any year in question must exceed $200,000. 

If the IRS is able to proceed with an action and collect, based on information provided by the whistleblower, then the whistleblower is entitled to an award. The amount of the award will be “at least 15 percent but not more than 30 percent of the proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action.”

Significantly, “[t]he determination of the amount of such award by the Whistleblower Office (WO) shall depend upon the extent to which the individual substantially contributed to such action.” The regulations provide a list of factors (described as “negative” and “positive”) that the WO will use to determine whether a claim gets a smaller or larger percentage.

Tax fraud is a general term used to describe the taxpayer’s intent to defraud the government by evading tax. Mere negligence is not enough to establish fraud. The Internal Revenue Service (IRS) may charge individuals suspected of tax fraud with either civil penalties, under the Internal Revenue Code (IRC), or criminal penalties, under the United States Code (USC).

The government tends to file civil penalties rather than criminal penalties due to the taxpayer’s frequent ability to beat criminal charges based on a reasonable legal argument for why the tax due was not paid or underpaid; however, both civil and criminal tax fraud is taken seriously by the IRS and taxpayers should understand the difference between them.

Significantly, civil tax fraud penalties are monetary penalties—it does not result in criminal prosecution. The civil tax fraud penalty is described under IRC §6663(a), which provides that:
If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

Furthermore, the IRS emphasizes that:
If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.¹

A common example of civil fraud is the filing of a fraudulent return. If such action is established as fraudulent, the taxpayer incurs a penalty in the amount of 75% of the underpayment amount.

On the other hand, criminal tax fraud can result in monetary penalties and jail time. Criminal tax fraud, also known as “tax evasion,” is treated under IRC §7201, which states that:
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

In other words, IRC §7201 creates two offenses: (1) the willful attempt to evade or defeat the assessment of a tax, and (2) the willful attempt to evade or defeat the payment of a tax.²

1. Evasion of Assessment is the most common form of tax evasion. Thisoccurs when there is a willful attempt to evade or defeat the assessment of a tax through filing a false return that omits income, credit, or deductions to which the taxpayer was not entitled. This can also occur when the tax reported on a deduction is falsely and purposefully understated. Consequently, willful under reporting is an attempt to evade or defeat the assessment of tax.³

2. Evasion of Payment occurs when (1) there is an attempt to evade or defeat a payment (2) of an established owed tax, and (3) there was an affirmative or willful⁴ act of concealment of money or assets from which the tax could have been paid.⁵