December 1, 2020

Volume X, Number 336

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What Law Protects Whistleblowing About Tax Fraud or Violations of IRS Rules?

The whistleblower protection provision of the Taxpayer First Act (TFA) prohibits any “employer, officer, employee, contractor, subcontractor, or agent” of an employer from retaliating against a whistleblower. The scope of protected disclosures includes underpayment of tax or any conduct which the employee reasonably believes constitutes a violation of the internal revenue laws or any provision of Federal law relating to tax fraud.  TFA whistleblower protection is not limited to disclosures of actual tax fraud. Instead, DOL and federal court precedent construing similar whistleblower protection laws protect a whistleblower’s reasonable but mistaken belief that the conduct complained of constituted a violation of relevant law.  The whistleblower, however, must demonstrate that they had an objectively reasonable belief, which is assessed based on the knowledge available to a reasonable person in the circumstances with the employee’s training and experience.

Examples of Taxpayer First Act protected disclosures include providing information about the following violations:

  • Misclassifying employees as independent contractors;

  • Laundering money in off-shore accounts;

  • Concealing income or assets in foreign corporations or foreign or domestic trusts;

  • Shifting revenue to a foreign subsidiary to pay a lower tax rate;

  • Maintaining two sets of books;

  • Improperly claiming the Research Credit – created as an incentive for private industry to invest in research, to qualify for the credit, a business’s research activities must involve a process of experimentation using science with a goal of improving a product or process the business uses or holds for sale, lease, or license;

  • Improperly claiming the Fuel Tax credit – as a credit on off-highway business or farming use of fuel, this is not available to most business, though it’s a commonly-claimed business credit;

  • Inflating charitable donations;

  • Manipulating income that should be reported on a corporate tax return and instead applying it to a personal tax return;

  • Using withheld taxes from employee paychecks for personal use, rather than paying the withheld taxes over to the IRS;

  • Creating extraneous corporations to conceal a business’s actual owner;

  • Extensively using cash transactions to underreport income, or otherwise underreporting income; or

  • Claiming personal expenses as having been for a corporation’s business purposes.

The TFA prohibits a wide range of retaliatory acts, including discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower in the terms and conditions of employment.

A prevailing TFA whistleblower is entitled to make-whole relief, which includes:

  • reinstatement;

  • double back pay with interest;

  • uncapped “special damages,” which courts have construed as encompassing damages for emotional distress and reputational harm; and

  • attorney fees, litigation costs, and expert witness fees.

 

© 2020 Zuckerman LawNational Law Review, Volume X, Number 211
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About this Author

Jason Zuckerman, Whistleblower Litigation Attorney, Washington DC  Law Firm
Principal

Described by the National Law Journal as a “leading whistleblower attorney,” Jason Zuckerman litigates whistleblowe r retaliation, whistleblower rewards, wrongful discharge, and other employment-related claims. His practice focuses on representing senior executives and senior professionals in high-...

(202) 262-8959
Katherine Krems Zuckerman discrimination, sexual harassment, whistleblower retaliation
Attorney

Katherine Krems represents employees in discrimination, ...

(202) 262-8959
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