Qui Tam

IRS Whistleblower Claims Reporting Tax Evasion and "Overlooked" Returns

By Finch McCranie, Esq.

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.

Full post as published by Whistleblower Lawyer Blog on December 12, 2010 (boomark / email).