Tax revenue is critical. It’s even more important during a global pandemic when governments worldwide are facing shortfalls due to COVID-19 economic effects.
So it’s no surprise that tax officials are taking closer looks at possible tax scofflaws. And in many instances, they’re getting help from their citizenry.
Recent cases in point come from across the pond. Irish tax officials are getting record numbers of so-called good citizen reports of tax evaders. The United Kingdom’s HM Revenue & Customs has boosted payments to those tipping it off about tax dodgers.
Part of the reason for Ireland’s impressive increase in tax evasion reports is that it makes it easy. The process is electronic, via a website or mobile device.
It’s not that simple here in the United States. But as in Great Britain, U.S. tax whistleblowers can get paid — and in some cases, handsomely — for their tax cheat reports.
Snitching on U.S. tax cheats: The first step, obviously, is turning in tax evaders. That’s done by filing Form 3949-A, Information Referral.
This form can’t be submitted electronically. You must fill it out and then mail it via the U.S. Postal Service to the IRS. It’s handled by the IRS office in Fresno, California (full address is at the end of the instructions on page 2 of the Form 3949-A.)
But at least it’s fillable, so you can put the info in on your computer and then print it to mail.
Form 3949-A is used to report both suspected individual or business tax noncompliance. This include such things as claims of false exemptions or deductions; kickbacks; false or altered documents; failure to pay tax; unreported income; failure to withhold and tax-related public and political corruption. Good to know that last one, especially in an election year.
There’s also an apparent nod to Al Capone, the agency’s most famous tax criminal, in the notation that you can use Form 3949-A to report organized crime activities.
Confidentially all around: Once you turn in a suspected tax evader, that’s it. Tax code privacy laws mean that you won’t get any status or progress update on your tax miscreant report.
But those same privacy rules also work in your favor.
The IRS doesn’t require you include your information in reporting tax evasion. But, says the agency, such contact information could be helpful if tax officials need additional information to resolve the alleged tax noncompliance.
And if you’re hesitant to provide your personal data for fear of retaliation, the IRS says not to worry. The person you pointed out as a tax cheat won’t know you snitched.
“We will keep your identity confidential when you file a tax fraud report,” promises the tax agency.
Whistleblower rewards: If you’re reporting a tax cheat just out of a sense of civic and tax pride, you’re done.
If, however, you want to receive any potential reward for your information that leads to Uncle Sam recovering unpaid taxes, you must provide your information.
And that, of course, means you must file another IRS form.
Form 211, Application for Award for Original Information, is the official document that will allow you to collect any whistleblower payout.
This filing doesn’t go to the IRS, but to the agency’s separate Whistleblower Office in Ogden, Utah. As with your report of tax evasion, the full address to apply for a reward is at the end of the instructions on page 2 of the Form 211.
Reward types, amounts: How much will you get if the IRS is able to collect on previously unpaid taxes that were improperly and/or illegally unpaid? It depends on how much is recovered
Internal Revenue Code Section 7623 authorizes the payment of awards from the proceeds of amounts the government collects as a result of the whistleblower-provided information.
Such whistleblower remuneration opportunities were enhanced as part of the Taxpayer First Act that became law on July 1, 2019.
“Congress recently made improvements in the IRS whistleblower program that provide protections for whistleblowers from retaliation and expanded communication between the IRS and whistleblowers. Good news all around for tax whistleblowers and strong encouragement for whistleblowers to come forward,” said Stephen M. Kohn, a Washington, D.C. attorney who represents whistleblowers, following the IRS reform law’s enactment.
There generally are two levels of whistleblower awards, based on the amounts involved.
Where the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000.
In cases where the $2 million/$200,000 dollar thresholds are not met, the awards are less. Specifically, the maximum award here is 15 percent, up to a maximum of $10 million.
Time, money and other reporting considerations: Reporting tax cheats sounds like a great move, right? In many cases, yes.
But there are a few things to thing about before you fill out this week’s day-early Tax Form Tuesday documents.
First, make sure you had solid information, not just suspicions or speculation. The IRS already is stretched thin due to budget cuts and loss of personnel. It doesn’t have time or resources to investigate vague insinuations of tax fraud.
Along those same lines, if your tax evasion amount is minimal, that the kind of attention it’s likely to get from the IRS. Minimal. Again, the time and effort to investigate comes into play. Plus, if you’re getting a portion, a percentage of a few hundred dollars for you is not realistically really worth your hassle either.
Even though the IRS pledges to keep your tip anonymous, that could change if a case goes to court. You could be called on to testify. This could be particularly problematic if it involves family or a job that you had hoped to keep. Even the pre-legal action investigation of your tip, such as an audit, could make things uncomfortable.
Also, any whistleblower awards are discretionary. That means the IRS’ office must determine that the recovery of the money was substantially due to the information provided by the informant.
Finally, prepare to wait. It could take years for the IRS to complete a tax evasion investigation. And if it doesn’t end in a conviction or, more importantly, actual collection of the evaded taxes, there is no award.
Still, if your prime motivation is to help ensure that every taxpayer pay his/her full, legitimate tax amount and you have good evidence that’s not happening, then by all means let the IRS know.