12 Questions Every Potential Tax Whistleblower Should Be Ready to Answer

               This article describes the series of questions a whistleblower lawyer is likely to ask a potential client who brings up tax-related claims. The answers might frame what the lawyer thinks about the case and whether they wish to take the case on, and to take it on for a contingency fee where they have the risk of not receiving payment for their services if the matter is unsuccessful.
 

1. Is the matter about federal taxes, state & local taxes, or both? There are a limited number of whistleblower programs that address tax-related claims, and they each have their own considerations. If federal taxes are at issue, the only possibility is the IRS Whistleblower Program. If state and local taxes are involved, then it is necessary to know which state or locality is involved because only a few have whistleblower programs that allow tax claims. New York, Illinois, and the District of Columbia have had the most active programs under their state False Claims Acts. Indiana, Rhode Island, Delaware, Hawaii, Nevada, and New Hampshire also permit tax-related cases under their False Claims Acts. Maryland has a whistleblower program available through its department of revenue.

2. What type of taxes were avoided or underpaid? An attorney will ask what type or types of taxes are at issue because that will determine what sets of tax rules apply and will permit the attorney to evaluate the merits of potential claims.
3. What was the violation? The attorney will want to understand how the rules were violated. There are endless ways in which persons can evade or underpay their taxes. They can span the range from extremely simple to extraordinarily complex. For the attorney to evaluate the claims, they will want to understand  what was incorrect or false on the tax returns (if tax returns were even filed), how it was incorrect or false, and how it happened.
4. How recent was the violation? The attorney will think about the statutes of limitations and whether the claims are fresh or time-barred. The IRS, in particular, tends to be more interested in current or recent matters. The state False Claims Acts mostly have longer statute of limitations periods.
5. How much was avoided or underpaid? The attorney will want to understand the value of a claim, even if it can only be estimated at that point. The value is important both because the attorney will be more likely to take on substantial claims and because some of the available whistleblower programs have dollar thresholds that must be met for a whistleblower award to be likely.

6. Was the violation willful or knowing? Depending on the whistleblower program, the taxpayer’s level of intent can be essential or simply useful. The state False Claims Acts apply only if the tax violations were done with knowledge (done with actual knowledge, reckless disregard, or deliberate ignorance, and not by mere mistake). The IRS program does not require willful or knowing misconduct for a whistleblower award to be paid, but evidence of such intent can make the claim more attractive and can result in higher penalties imposed on the taxpayer.

7. What evidence supports the claim, and what is its source and quality? The attorney will want to know if the claims can be proven, and how. Matters tend to be most successful in the tax whistleblower programs when there is evidence that helps to prove the violations, and they tend to be less successful when the submissions consist of vague or speculative propositions.

8. What counter-arguments are expected? If the government pursues the claims, the prosecutors will need to rebut the taxpayer’s explanations against the claims. The attorney will want to preview those arguments and understand their flaws, and, in a whistleblower submission, the attorney will want to help prepare the government enforcers to dispose of them.

9. Has the issue been reported to or disclosed by anyone else? The attorney will want to understand if the issue was reported internally and what response was made, and if it was already raised with any government agencies. Also, the attorney will ask if there has been any public disclosure of the issue, for that might have an impact on whether a whistleblower award will be paid.

10. Has someone else already brought a claim? A prior claim might present hurdles to a whistleblower claim. Whistleblower claims are, by nature, confidential, so there might be unknown claims, but the attorney will want any known information about claims related to the same or similar conduct.

11. Was there retaliation? Most whistleblower programs provide for protections against retaliation for blowing the whistle. The attorney will want to evaluate the facts surrounding the retaliation to determine whether there might be a retaliation claim.

12. What was the whistleblower’s role in the misconduct? It is not uncommon that a potential whistleblower will have had some involvement in the actions at issue. The attorney will want to know the facts of that involvement and consider its potential impact on the claims and on the whistleblower’s possible personal exposure.

Any person considering bringing a tax whistleblower matter should consider these issues and be prepared to discuss them when retaining an attorney, for they will set the foundation for filing the claim in one of the tax whistleblower programs.

Randall M. Fox is a partner of Kirby McInerney LLP. He represents whistleblowers in tax cases before the IRS and in state programs such as under certain states’ False Claims Acts. In one of his cases, he was the attorney for the qui tam whistleblower in the largest income tax recovery under the New York False Claims Act. Before joining Kirby, he was the Bureau Chief of the New York Attorney General’s Taxpayer Protection Bureau, which received and pursued tax whistleblower claims.