In zombie movies, the dead rise from the graves and shuffle around the neighborhood looking to feast on human flesh. This past year, life imitated art (and I use the term “art” loosely), and the dead rose to file tax forms.
Yes, you read that correctly. This past year, 16 accountants in the Bronx and Manhattan were charged with filing numerous income tax returns of a dubious nature. These tax returns included making claims on dependents that were not actually dependent (or even related), and filing the tax forms of deceased people to get tax credits.
Fortunately, they were caught by undercover IRS agents who recorded these accountants offering a variety of illegal services.
This is truly a frustrating news story for me because it makes it harder for regular, honest, tax-paying citizens like you and I to get the tax solutions we deserve to our tax problems. For the 16 who were caught, I imagine far more have gone unnoticed and our current “redistribution of wealth” system is taking money from hard workers and funneling to people who would rather file tax returns for dead people than do real work.
One of the complaints you’ll hear me voice frequently is that the IRS has an overly complicated system of taxation. The result, as I hope I’ve made plain in past blogs (and will continue to shout from the rooftops in future blogs) is this: A complicated system makes is difficult for honest taxpayers to be accurate while at the same time it creates numerous ways through which tax cheaters can defraud the government.
One such fraudster came to light recently: Shawn Clarke stole about $115,000 from the IRS by conspiring with friends and family to fraudulently fill out tax forms. (You can read more about the fraud in detail here but I’ll quickly summarize it below).
Basically, Clarke and his friends and family claimed he was working while he was, in fact, incarcerated. They were able to do this because of the system’s complexity. Just look at how they try to describe what he did: “The inmates and family members filed 1040 EZ forms (the short form) along with the one-page 4852 form, which is a substitute for the W-2 when an employer doesn’t provide one.”
Clarke’s actions are reprehensible and I’m glad he was caught. But this shouldn’t happen at all. While there will always be opportunists who try to work the system, the IRS’ 70,000 pages of tax code makes it easy for people to commit tax fraud. And, the complexity of the system makes it difficult for IRS officers to catch criminals in the act. In fact, you’ll note by reading the article that the only way Clarke was caught was because someone found a note in his prison cell. It wasn’t an eagle-eyed tax auditor.
While tax frauds should be brought to justice for stealing from Americans, it’s ultimately the IRS, and Congress, who are to blame for bringing this on themselves. So what’s the solution? A simpler system! Create a flat tax or a national sales tax and you will eliminate many of these situations. Simplify the tax code, reduce the number of forms to fill out, make it so that we have an easy-to-calculate system and people won’t hate filing taxes nearly as much. And you’ll eliminate the loopholes for opportunists.
In a recent blog post I talked about the IRS Whistleblower office and the mysteries surrounding the program.
But today I wanted to provide a counterpoint perspective. I don’t want you to think that I’m against whistleblowing in a case where there is a tax cheat, and I do like that this system provides an incentive for taxpayers to help bring to justice those who would cheat on their taxes. I support it for the same reason I support Crimestoppers and other crime-reporting measures: While approved officials should ultimately be the ones to investigate and protect us from lawbreakers, sometimes the “person on the street” can see laws being broken that others cannot.
I also like that the IRS is theoretically incentivizing whistleblowers. (I say “theoretically” because it doesn’t sound like anyone has been paid yet).
Here’s why I really like this program more than many others: While it is not a perfect system, it is a system designed to help stop tax cheats. Frequently, we see many IRS programs initiated that seem to focus on squeezing more tax dollars out of hard-working, honest taxpayers while completely ignoring those who are working the system and getting a loophole. This program focuses on those who truly should be paying more taxes: the tax cheats!
If you are aware of a situation where someone is cheating on their taxes, you could earn a reward while doing your part for the country. You can earn between 15% and 30% of the proceeds collected by the IRS (as long as the amount owed is above $2 million). There are smaller rewards if the amount is less.
This has the potential to be a good program as long as the IRS doesn’t get bogged down in bureaucracy. And if they really want it to be successful, they should keep a running total of the amount of payouts they’ve made thanks to whisteblowers.
Years ago, it used to be very difficult for people to come forward to report illegal activities if they knew that their jobs (or even their lives) were in danger. Slowly, over the years, the government has put various programs in place to help people feel safer about reporting problems, including the Whistleblower Protection Act of 2007.
While whistleblowing is often thought to protect an employee from retaliation by an employer for whistleblowing, there is also provision for taxpayers to blow the whistle on individual or corporate tax cheats.
Before I talk about it further, let me give a balanced viewpoint: On the positive side of the argument, this is a way to bring to justice people who cheat on their taxes. I’m happy about that because, although I believe we should pay less tax, I believe we should do so fairly and ethically. On the negative side of the argument, though, this can be a retaliatory strike by disgruntled people to try and trigger an audit on those with whom they hold a grudge and I can only hope that those who act on whistleblower’s tips do so with caution and respect.
What initially prompted me to blog about this in the first place was an article I read in South Coast Today in which the reporter interviewed IRS official Stephen Whitlock who is in charge of the IRS’ whistleblower’s office. You can read the full interview here but I will summarize and make some additional comments.
What you’ll find when you read this article is that Whitlock says very little. By law, he’s not allowed to give a lot of detail, which is fine, but what he can say comes across a little offensive. When asked about the motivation that people have to blow the whistle, he attributes it to a desire among people to make sure that everyone pays their fair share of taxes. After that, he admits that there is a retaliatory motivation and a financial motivation.
What I found most interesting about the interview was this: There is supposedly hundreds of millions of dollars that the whistle is being blown on. More than one thousand whistleblowers reported people owning more than $2 million each (some more than $100 million each). And the IRS seems to be very generous with the reward money they pay out, claiming that they will pay between 15% and 30% of the collected money.
But don’t miss this: The IRS hasn’t paid out any money yet (really? In spite of having that many whistleblowers?). Their reasoning is: It takes a long time and they can’t tell anybody about it.
So, that leads me to wonder: Will they pay anything out at all? And how would we know anyway? How could anyone know if they were owed money by the IRS for this? (After all, they can’t even tell whistleblowers what the status of the investigation is). You can only get the 15% to 30% reward if the amount collected is over $2 million. If it’s under, you get a much smaller (unstated) amount and, according to the IRS, you cannot dispute the amount.
It sounds exciting to earn money for being honest… but I wonder if you’ll have a better chance of making money in the lottery.
