How to Report Tax Evasion in California

Tax evasion is the illegal act of intentionally underpaying or failing to report taxes owed to the government. In California, this can involve personal income tax, corporate income tax, or sales and use tax. These actions deprive state and federal governments of funds for public services. For individuals who become aware of such activities, there are formal processes to report suspected non-compliance to the appropriate authorities. This guide outlines the steps and information required to make a report.

Information to Gather Before Reporting

Before initiating a report, compiling a thorough and organized set of facts is a foundational step. A strong report is built on specific, verifiable details that allow tax agencies to understand the scope and nature of the alleged evasion. The more complete the information, the more likely it is that the agency can effectively evaluate the submission and determine whether to proceed with an investigation.

Details of the Tax Evader

The first category of information pertains to the identity of the individual or business allegedly evading taxes. For an individual, this includes their full legal name, current and past addresses, and if possible, their Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). For a business, gather the legal business name, any “doing business as” (DBA) names, the business address, and the Employer Identification Number (EIN). This identifying information is the starting point for any agency investigation.

Specifics of the Alleged Evasion

Next, document the specifics of the suspected fraudulent activity. This includes identifying the type of tax involved, such as income, payroll, or sales tax, and the specific years the evasion occurred. If possible, provide an estimate of the unreported income or the dollar amount of the tax that was evaded. Describe the scheme in detail; for example, is the person hiding cash income, falsifying expense records, or using a false Social Security number?

Supporting Documentation

Finally, collect any available documents that substantiate the claims. This can include copies of falsified records, financial statements, bank statements, ledgers, or emails that point to the fraudulent activity. While you should not send original documents, having copies ready to submit provides tangible evidence. If you are aware of the location of the taxpayer’s books and records or know which banks they use, this information is also highly valuable.

Reporting to the California Franchise Tax Board

When reporting tax evasion at the state level in California, the primary agency to contact is the Franchise Tax Board (FTB). The FTB is responsible for administering the state’s personal and corporate income tax laws. It has a specific procedure for the public to submit information regarding suspected non-compliance.

The FTB has a “Tax Evasion Referral” process that can be completed online or by mail. You can find the referral form and instructions on the FTB’s official website. Using the official process ensures you provide the information in the format the agency’s investigators can process efficiently.

Completing the referral involves methodically providing the information you have already gathered. The form will ask for the evader’s identifying details, a description of the alleged violation, and the years involved. There is also a section to describe how you obtained the information.

While you can submit a report anonymously, providing your contact information is optional but can be helpful if investigators need to ask clarifying questions. Once the referral is complete, it should be submitted with copies of any supporting documents you have collected.

Due to strict taxpayer confidentiality laws, the FTB will not provide you with any updates on the status or outcome of the investigation. You will not be contacted unless the agency requires additional information from you.

Reporting to the Internal Revenue Service

Since many instances of state tax evasion also involve federal tax obligations, reporting the activity to the Internal Revenue Service (IRS) is another important step. The IRS handles the enforcement of federal tax laws and has its own distinct process for receiving information from the public about potential tax fraud.

The primary document for submitting a tip is IRS Form 3949-A, Information Referral, which can be downloaded from the IRS website. This form is for reporting tax law violations and should not be used for other issues like identity theft or complaints against tax preparers, as the IRS has separate forms for those situations.

Filling out Form 3949-A requires the same detailed information you gathered for the state report, including the subject’s personal or business details, the alleged violation, and the tax years in question. The form also includes space for you to explain how you learned about the information.

The IRS encourages submitting the referral online, though the completed form can also be mailed to the IRS processing center in Fresno, California. As with the FTB, you have the option to remain anonymous, but providing contact details can assist the IRS if they need to follow up.

The IRS operates under strict confidentiality rules governed by federal law. The agency is prohibited from providing you with any information about the actions it takes based on your report, and you will not receive status updates or be informed of the outcome.

Potential Whistleblower Rewards

Separate from submitting a tip, both the IRS and California have formal programs that may offer a financial reward to individuals whose information leads to the collection of unpaid taxes. These whistleblower programs have specific eligibility requirements and a different application process than a standard information referral.

The IRS Whistleblower Program is administered through the IRS Whistleblower Office. To be eligible for a reward, the information you provide must lead to the collection of taxes, penalties, and interest exceeding $2 million. For cases involving individual taxpayers, their gross income must exceed $200,000 for at least one of the tax years. If these thresholds are met, the reward can range from 15% to 30% of the amount collected. To apply, you must file IRS Form 211, Application for Award for Original Information.

In California, individuals can file a claim under the California False Claims Act for high-value tax fraud. This applies to cases where the alleged fraud exceeds $200,000 and the individual or entity involved has an income or sales of over $500,000 in a relevant year. Separately, while state law authorizes the FTB to offer a reward for information that helps recover unpaid taxes, this program is currently unfunded.