little noticed provision of the
Tax Relief and Health Care Actof 2006
, which becameeffec
tive on December 20, 2006,has cre
ated a rewards program forindividuals informing the IRS of large tax omissions. The IRS is gearingup for an influx of informant claims.IRS managers have reported that whistleblowers have already providedtips involving hundreds of milliondollars in tax underpayments.
The new whistleblower law applies toclaims for reward in cases in whichthe potential amount owed to theIRS for taxes, penalties, and interestsexceeds $2 million and, in cases of individuals, the taxpayer’s grossannual income must exceed$200,000. The new law provides aminimum reward of 15 percent and amaximum reward of 30 percent. Thisis a substantial increase over the pre-vious regulations that provided aminimum recovery of 1 percent anda maximum recovery of 15 percentfor whistleblowers. The law doesplace a cap of 10 percent on rewardsif the IRS determines that the whistleblower’s information was notthe original source of informationbut still contributes to the additionalcollection. The fact that an individualparticipated in the activities that cre-ated a tax omission does not precludean reward but the IRS uses involve-ment in the tax underpayment as abasis to reduce the reward.The law also provides that theIRS must make a reward payment inall cases in which it pursues a remedy against a taxpayer based upon infor-mation provided by the whistle-blower. The previous awards werediscretionary and in many cases theIRS refused to pay any award to theinformant even when the informa-tion resulted in a substantial recovery of taxes. Smaller informant items thatdo not meet the statutory minimumsof the whistleblower law will still beentitled to awards under the IRS dis-cretionary award program. Under thetraditional program the IRS limitedawards to 15 percent and most were for significantly less. It isanticipated that the IRS con-tinue to be parsimonious onlower dollar whistleblower items.
Right to Sue for an Award
The whistleblower law allows aclaimant to sue the IRS in U.S. TaxCourt if it denies a reward. In thepast, a whistleblower had no right tosue the IRS because rewards were dis-cretionary.
Whistleblowers may also seek areward for bringing public availableinformation to the attention of theIRS if it results in the recovery of additional taxes. This type of award islimited to 10 percent of the IRSrecovery. For example, aspiringinformants might review a company’sSEC filings to find apparent taxomissions and then file for a reward.Others might spot apparent tax viola-tions in the public media and seek anaward. One could contemplate a littlenoticed story in a newspaper thatcould provide a tax lead. For exam-ple, if a company was accused of bidrigging or other financial crimes where the company’s net income wasnot likely to have been properly reported, someone could inform theIRS and seek a reward. Whistleblowers who planned or initiated the taxscheme might be barred from recov-ering a reward, but there may beinstances where they receive money from the IRS depending on the levelof complicity.
Another source of potential whistle-blower material is company litigation.During the course of most commer-cial litigation, substantial economicinformation becomes part of therecord. Since the court system isopen, nothing prevents someone who witnesses testimony from reportinginformation to the IRS. This includesa judge, juror, court reporter, othercourt employee, and your opponent.Sworn testimony and related evidencein a proceeding can be freely given tothe IRS under this whistleblower pro-gram. Matters that might disclose taxunderpayment should be settled beforeadditional information regarding theconduct is made public.
Investigations by state and local regu-latory agencies might also generateinformant items to the IRS. A stateenvironmental investigator mightnote improper expensing of pollutionequipment during the course of veri-fying environmental compliance anddecide to try for an award. Likewise,a liquor inspector might note inven-tory issues while performing his/herduties. With so many state and localregulators—from building inspectorsto safety inspectors—checking busi-nesses each year, one can contemplatethat some may come to view the whistleblower program as a way tosecure an economic windfall.
IRS Whistleblower Office
On February 2, 2007, the InternalRevenue Service named Stephen A. Whitlock as director of its new Whistleblower Office, where he will beresponsible for administering the pro-gram designed to receive informationthat helps uncover tax cheating and toprovide appropriate rewards to whistle-blowers. The IRS WhistleblowerOffice, will process tips received fromindividuals who spot tax problems in
by Robert E. McKenzie, Esq.NATP Member
New IRS Whistleblower Law
IRS prepares for coming wave of informants looking for monetary rewards