Report a Tax Scam: You May Be Eligible for a Whistleblower Award

The IRS is tasked with the duty to help taxpayers understand and meet their tax responsibilities and to enforce the law with integrity and fairness.

Although this is mandated to the IRS, you can help too.

Tax fraud activity and illegal claims made on tax returns cost the Department of the Treasury millions in resources and erroneous refunds. The IRS tries their best to ebb the tide of unlawful claims, but many of the checks and balances in place do not detect such activity until after the money has been mistakenly sent out.

On the front lines, taxpayers may be aware of illegal or questionable tax activity of someone they know, a business, or a tax preparer. Reporting that activity is not only the ethical decision, but could also yield a monetary whistle-blower award.

The IRS has a form available, 3949-AInformation Referral, that is used to report suspected illegitimate activity.

The form asks for the suspected taxpayer's name or the name of the business, and any contact information available. Boxes can be checked to indicate violation of tax law under categories such as false exemptions or deductions, multiple filings, false or altered documents, or unreported income.

One popular preparer scheme that the IRS has seen a rise in is the preparation of two sets of tax returns. Keeping double-books, as it were. A deceptive preparer will ready a tax return based on the information given by their client, and then prepare two returns. The legitimate return is given to the taxpayer as their copy, and everything on it is correct. A second return is sent to the IRS that claims a larger amount of refund then what the taxpayer is entitled to.

When the refund is sent back to the preparer's account, the taxpayer is given the correct refund and the preparer keeps the difference. If the IRS later audits the return, the taxpayer assumes the IRS is incorrect because their return shows accurate information.

The 3949-A form also has a section to write in comments and to indicate if you believe the taxpayer to be dangerous. This is especially helpful if the IRS considers assigning a Revenue Officer or Criminal Investigator to pay a visit.

If you do not wish to use the form, the IRS says you may send a letter that includes the following information, if available:

* Name and address of the person you are reporting

* The taxpayer identification number (social security number for an individual or employer identification number for a business)

* A brief description of the alleged violation, including how you became aware of or obtained the information

* The years involved

* The estimated dollar amount of any unreported income

Although you are not required to identify yourself, it is beneficial to the investigation if you do. Your identity can be kept confidential if that is your preference.

The IRS Whistleblower Office pays money to people who turn in individuals who fail to pay their fair share. If an IRS investigation results in a positive conviction aided by the information provided by the whistleblower, a monetary recognition of up to 30 percent of the money collected could be awarded.

See the IRS Informant Award page for more information.

The IRS also has a tax shelter hotline established to report information about potentially improper tax shelter activity, as well as an email address to report unscrupulous tax preparers, CPAs, Attorneys or Enrolled Agents. See the IRS web page on reporting tax scams for more information.

More from this Contributor:

Think you've found a way to avoid taxes? Think again

An Overview of IRS Penalty and Interest Charges

Beware of Federal Refund Tax Scams