IRS Wants Your Help
By Gregory Bryant, Esq., CPA
Modeled after the successful False Claims Act, the IRS whistleblower program provides rewards to individuals who report to the IRS detailed information about a significant “tax noncompliance matter” by their employers or others. Whistleblowers who are identified by the IRS as providing a “substantial contribution” can make a commission of no less than 15% and up to 30% of the amount “collected” by the IRS as a result of the whistleblower’s contribution. For example, if the IRS collects $10,000,000 of otherwise unpaid taxes as a result of a whistleblower’s information, the whistleblower will receive between $1,500,000 and $3,000,000 from the IRS. The average large case (§7623(b) claim – see below) is between 22% and 24%.
The program is administered by the IRS Whistleblower Office. The Tax Relief and Health Care Act, a law passed by Congress in 2006, created the expanded IRS whistleblower program and specifies certain provisions for the program:
• Whistleblowers may receive a reward of 15 percent to 30 percent of the amount the IRS collects because of information about tax fraud provided to the IRS.
• To qualify, the whistleblowers must provide information about tax fraud or tax underpayments that exceeds $2 million (counting tax, penalties and interest).
• The annual income of an individual tax cheat must exceed $200,000.
• If a reward from the IRS fails to recognize the whistleblower’s contribution, the whistleblower may appeal the reward amount to the U.S. Tax Court.
• If the whistleblower initiated or planned the tax fraud, the IRS may reduce or deny a reward. A whistleblower reward also may be reduced if the whistleblower’s allegations have been previously disclosed.
Section 7623(b) Awards
There are large claims and small claims. We are focusing on the large claims, which come under § 7623(b).
The IRS requires an informant to fulfill several requirements in order to qualify for an award under § 7623(b). The IRS mandates that for an informant to be eligible for an award, he or she must provide information that “relate[s] to a tax noncompliance matter in which the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000” and “relate[s] to a taxpayer, and for individual taxpayers only, one whose gross income exceeds $200,000 for at least one of the tax years in question.”
This information must also “substantially contribute to an administrative or judicial action that results in the collection of tax, penalties, interest, additions to tax, or additional amounts.” An claimant is not eligible for an award unless the information he or she provides results in IRS administrative or judicial action. Upon meeting these requirements, the IRS will pay the informant fifteen to thirty percent of proceeds collected as a result of the administrative, judicial actions, or other related actions.
There are specific requirements to qualify for an award, these include the following:
• The claim must meet the criteria, explained above.
• Claimant must complete Form 211, Application for Award for Original Information. This form has specific requirements, but for the most part is very straight forward.
• Claimant must include a cogent, technical, complete explanation of the issue(s) and how the claimant has first-hand knowledge. Having first-hand knowledge is vital. The IRS has rejected more than ½ of all claims (§§ 7623(a) and (b)), over 26,000 claims, for being “speculative”.
• Claimant needs a path to get the Whistleblower Office to move on the claim. This is key. The majority of valid, valuable claims that are not rejected for being “speculative, go untouched because the Whistleblower’s Office takes no action, or takes action after the statute of limitations expires. The Whistleblower Office is not required to take action.
• Claimant must “substantially contribute” to the result. IRS has been known to take credit where credit is not due.
With so many trap doors, it is important to have experienced legal counsel if you have claim. Legal counsel not only ensures that your claim will be valid and meet the criteria, it also mitigates the risk it will be rejected for being “speculative” and that it will sit in a pile and go unattended.
Legal counsel also ensures the claimant’s anonymity. Cases are sealed, and claimants can be protected. Legal counsel ensures this. Additionally, legal counsel can help claimants from making unnecessary, and costly mistakes. The IRS, for example, has reported that the percent awarded declines for cases based on information disclosed in public sources or if the whistleblower participated in part or all of the tax noncompliance or underpayment.
Background to Whistleblower Office
Section 406 of the Tax Relief and Health Care Act of 2006 and § 7623(b) of the Internal Revenue Code formally amended the IRS Whistleblower program. Under the amendments passed in 2006, a new set of rules and frameworks were established to evaluate informant submissions and to improve the efficiency of the program generally. The amended law also required the creation of the Whistleblower Office within 12 months.
The Whistleblower Office lies within the IRS and is charged with administering the new framework and handling potential incoming whistleblower claims. Today the program is under the direction of Lee Martin, the Director of the IRS Whistleblower Office. Under Director Martin, we have seen more action and greater efficiency from the Whistleblower Office, but prior to his direction, the program floundered.
While the Whistleblower Office has the power to assign investigations to other offices within the IRS, it mainly works jointly with other branches within the IRS to investigate claims. The changes to the program through the 2006 amendments were meant to encourage insiders to “blow the whistle on people who are not paying their taxes,” in order to close the tax gap and assist the IRS in collecting additional tax revenue. As part of the amendments, Congress created an office within the IRS to handle claims under the IRS Whistleblower program. Part of that act requires the Secretary of the Treasury to conduct annual studies explaining the way in which § 7623 is used and the results under the program. According to this data, the IRS was able to recover almost $1.2 billion through the program between 2006 and 2010.This increase in collection is credited to the changes in the program from the 2006 amendments. Fiscal year 2011 marked the first payments from the 2006 Amendments and “most of the awards paid during [fiscal year] 2014 resulted from claims under the prior law.”
Taxation of payments to claimants
As under the False Claims Act, payments made to a whistleblower under the Whistleblower Program are taxed as ordinary income and not as capital gains. The IRS’s position was challenged by a relator in a case called Alderson, v. United States, and, in 2001, the circuit court upheld the IRS’ stance. As of 2013, this remains the only circuit court decision on tax treatment of these payments.
By Gregory T Bryant, Esq/CPA