Taxation & Estate Planning

Can You Really Trust Your Accountant? - IRS Informants, Whistleblowers and Bounties

By Darrin Mish

A recent New York Times article about the tax woes of "Girls Gone Wild" founder Joe Francis has brought heightened attention to the IRS whistleblower program. Francis, who has already spent time in a federal prison for his alleged tax evasion is claiming that his accountant set him up. He claims his accountant advised him to claim fraudulent expenses and then "blew the whistle" on him for being a tax cheat in an attempt to be paid a reward by the IRS. The plausibility of Mr. Francis' claim is slim not merely for the obvious reasons posed by most tax cheats attempting to redirect blame, but on more substantive ones based in the law. Mr. Francis' claims the accountant filed the returns in question and then turned him in to the IRS. Not only does the Whistleblower Program disallow a party that "planned and initiated" the act of noncompliance to be compensated, but if true the accountant would face the same criminal charges as Mr. Francis and risk losing his professional licenses.

The Whistleblower Law applies to cases in which the amount of taxes in dispute exceeds $2 million. If the taxpayer is an individual, the individual's gross income must exceed $200,000 for any taxable year at issue in the claim. If these "thresholds" are not met the IRS is not required to pay for the information they received. These cases can take several years from start to finish and a informant's "reward" is paid only if the IRS is successful in actually collecting any tax liability owed. Additionally whistleblowers must file Form 211 revealing their identity and the extent of their knowledge about the situation. The IRS claims it will protect the identity of whistleblowers to the extent permitted by law, but if the informant's testimony is required to gain a conviction the informant's identity will be revealed. Due to the nature of information required to even qualify as a whistleblower (it must be very specific and can't be ambiguous), testimony is nearly always required.

As always you should seek reputable, competent professional advice when faced with an IRS problem, but the average taxpayer shouldn't lose any sleep over whether or not their accountant is going to give them bad advice and then "turn them in." The most likely scenario involving a professional "ratting out" a tax cheat would involve a situation in which the cheater insisted the professional break the law and the professional was fired for refusing to do so. Honest, law abiding citizens should not fear aggressive but legal advice from their accountant. Very few people are investigated for criminal charges by the IRS for being a little aggressive on their deductions. The IRS simply disallows the deduction, adjusts the taxpayer's return accordingly and mails a tax bill. Most criminal investigations involve underreporting income. Take a lesson from Mr. Francis' circumstances however, and don't take any frivolous or fraudulent deductions like fictitious or embellished business expenses.

Full post as published by IRS Problem Solver Blog on August 25, 2008 (boomark / email).