The list is fairly inclusive of most tax fraud situations, and the “other” category provides the informant a catch-all for any further allegations of wrongdoing not covered on the list.
Most quality information referrals come with evidence supporting the allegations. The Form 3949-A allows for the informant to attach the supporting evidence.
What does the IRS do with the information?
Informant referrals are looked at closely by the IRS. However, very few informant referrals make it into the hands of IRS agents for investigation. When the IRS receives the referral, they screen it for routing to specialists throughout the IRS. For example, complicated foreign bank account referrals may go to the IRS’s Large Business and International Division. Unreported income from a small business owner may go to IRS Small Business/Self-employed units.
The IRS can do internal and external research to determine if further action is warranted. For example, an information referral may allege that a taxpayer is a small business non-filer. The informant could provide invoices from the non-filer as evidence that they are in business and their website address. The IRS could review its records to see if the taxpayer filed a return. The IRS can also review the taxpayer’s website and see if they have been in business for the non-filing years. If validated, the IRS can send the report for a non-filer investigation.
What makes a good IRS referral?
A good information referral provides evidence of wrongdoing and an audit trail that the IRS can validate. In short, it provides the auditor a clear line-of-sight to finding the tax fraud activity.
Many information referrals received by the IRS reflect very little evidence of wrongdoing. For example, a competitive business may allege that that their competitor has two sets of books and isn’t reporting all of their sales. In this case, the IRS may be interested but has some practical reservations that the audit would be fruitful because it does not have a specific audit trail to follow. The IRS may also be reluctant to pursue the referral because it may have come from a disgruntled competitor with very little evidence of wrongdoing.
However, if a referral includes specific evidence of wrongdoing—evidence of unreported lines of business that the taxpayer was hiding are good examples—the IRS may be more interested. In addition, the referral is more likely to be accepted if it includes traceable information like a vendor paid in substantial amounts of cash and evidence showing that the subsequent sales were “off the books.” Audit trails are very important.
What can we expect in the future?
The IRS always looks to use its limited audit resources effectively. The IRS likes to start audits that it believes will provide the best return on investment. Good IRS information referrals have always provided the best return on investment.
Taxpayers should always do the right thing and pay their taxes, or they may have to look over their shoulder to see if someone is turning them in to the IRS. For assistance creating a strategy to address your tax issue, visit Jackson Hewitt’s Tax Resolution Hub to see the various ways we can help you.