How the Government Combats Tax Fraud

By Noah Rich of Baron & Budd, P.C.

Any discussion about fraud on the government would not be complete without a discussion about tax fraud. Tax fraud may involve a failure to pay federal taxes, but it also includes cheating states and localities out of revenue they rely on to operate critical programs.


According to the IRS, about $1 trillion in federal taxes go unpaid each year. To put this nearly unfathomable sum in context, consider:

The primary tool whistleblowers have to fight against federal tax fraud is the IRS Whistleblower Program. Since 2007, whistleblowers have helped the IRS collect $6.14 billion in unpaid taxes and penalties, and the IRS Whistleblower Office has awarded more than $1 billion to whistleblowers.


This epidemic of tax fraud is not unique to the federal government.


For example, in a 2005 study that helped prompt several states to pass a tax False Claims Act, the New York State Department of Taxation and Finance found that in New York, the income tax gap—or the difference between taxes paid and taxes owed—was $2.838 billion in 2002 alone.


This tax gap was even greater than the amount of income tax New York collected in 2002, meaning the state managed to collect less than half of the income tax revenue it was owed. If a similar tax gap exists today, it means that the state loses out on more than $50 billion every year.


The state False Claims Acts in Illinois, Indiana, Maryland, New York, Rhode Island, and Washington, DC all explicitly recognize that whistleblowers can help reduce this tax gap and help ensure everyone pays their fair share. The New York law, on which many others were modeled, has been extraordinarily effective.


In the last five years alone, the New York Attorney General’s Office has recovered more than $555 million in settlements and judgments in False Claims Act cases alleging major violations of New York state and local tax laws.[1]


New York has proven that a whistleblower-driven tax False Claims Act is workable and extremely effective. Imagine how much could be recovered if every state embraced whistleblowers to help them recuperate the billions of dollars lost to tax cheats each year.





[1] Email from NY OAG press office.