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Want to Fix the Trillion Dollar Tax Gap? How Whistleblowers Can Help

Posted  April 23, 2021

Earlier this month, Internal Revenue Service Commissioner Charles P. Rettig testified before the Senate Finance Committee, addressing the 2021 filing season and the “21st Century IRS.”  At the hearing, Committee Chairman Ron Wyden (D-OR) raised the topic of the tax gap, referring to the difference between the total taxes that are legally owed, and the total taxes that are paid by individuals and entities.  Rettig earned headlines by responding that the annual tax gap “could approach, and possibly exceed $1 trillion,” an estimate that more than doubled prior IRS estimates.

The IRS has suffered repeated budget cuts reducing its ability to enforce tax laws.  As Rettig – who oversaw many of those budget cuts – testified, over the past ten years, the IRS has suffered a 31% decline in the number of full-time employees in enforcement roles. During the same time period, the number of examining revenue agents, who handle complex enforcement cases, fell by 35%.  Without adequate personnel, compliance activities have also suffered, and Rettig admitted that the IRS was “outgunned” when facing sophisticated and complex tax avoidance schemes.

Without question, the IRS – and U.S. treasury – would benefit from additional resources for tax enforcement.  And, indeed, President Biden has called for increased funding for the IRS in general, and tax enforcement activities in particular.

How whistleblowers can help fill the tax gap

In addition, the IRS has another resource available to help close the tax gap:  whistleblowers.  The IRS recently reported that tips about tax non-payment received by the IRS Whistleblower Program have resulted in the collection of over $6 billion in unpaid taxes, and resulted in awards to whistleblowers of more than $1 billion. Whistleblowers – individuals who have come forward with information about tax fraud and evasion, information that the IRS would generally not have access to – have played an essential role in exposing large-scale tax evasion, including offshore banking schemes designed to unlawfully shelter income from U.S. taxes.

The IRS Whistleblower Program has achieved these results despite chronic under-funding and substantial delays in the processing of whistleblower awards.  IRS whistleblower claims take nearly eleven years to process, and the Office of the Whistleblower has nearly 25,000 open claims.  Given its current resources and the rate at which it is able to process claims, it takes far too long for successful whistleblowers to see any benefit from their submissions.

IRS Tax Gap Enforcement Priorities

According to Rettig, the IRS is focusing on a number of enforcement priorities to help close the tax gap.  The tax evasion schemes that underlie these enforcement priorities can be difficult to detect without information from knowledgeable insiders – the very individuals who are incentivized to come forward by the IRS Whistleblower Program.

  • High-income and high-wealth taxpayers. Rettig told the Finance Committee that IRS examiners were focused on tax returns that present complex issues including taxpayers with pass-through entities, multi-national taxpayers, large pension plans, and private foundations.
  • Cryptocurrency. The IRS has launched initiatives to address virtual currencies, asking about cryptocurrency holdings on individual tax returns and serving subpoenas for customer information on cryptocurrency exchanges (a tactic the IRS previously employed to go after offshore banking cheats).
  • Abusive tax shelters. Rettig highlighted the IRS’s efforts to crack down on promoters of abusive tax shelters, including unlawful syndicated conservation easements and abusive micro-captive insurance arrangements, as well as the use of virtual currencies and offshore transactions.

In these priority areas, as well as others, whistleblowers offer critical information to the IRS in its efforts to close the tax gap.  If you have information about tax fraud and unlawful tax avoidance, experienced whistleblower attorneys can help you understand the IRS Whistleblower Reward Program and explore your options.

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Tagged in: Abusive Tax Shelters, Importance of Whistleblowers, IRS Whistleblower Reward Program, Tax Fraud,