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Proposed Expansion of the IRS Whistleblower Program

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Under Internal Revenue Code Section 7623(a), the IRS shall pay awards to people who provide “specific and credible information” to the IRS if the information results in the collection of taxes, penalties, interest, or other amounts from a noncompliant taxpayer. Guaranteed awards, however, are limited to individuals who provide information about significant tax issues. “Significant” is defined by the IRS as taxes, penalties, and interest owed in excess of $2 million. Thus, to meet the $2 million threshold—including back taxes, interest and penalties—the noncompliant taxpayer should have an annual gross income of more than $200,000. If the IRS successfully obtains a recovery from such a taxpayer, the IRS is required to pay the whistleblower between 15 and 30 percent of the recovery. If the whistleblower is not satisfied with the reward, he or she may appeal to the U.S. Tax Court. In cases involving less than $2 million, payment of an award to the whistleblower is discretionary, with a maximum of 15 percent of the recovery and no right of appeal.

The process of becoming an IRS whistleblower is both easier and more complicated than the process established under the False Claims Act. For example, an IRS whistleblower and counsel file a single form containing all the information that a whistleblower wishes to share as the basis of the potential investigation. The IRS makes a decision about whether to investigate the claim based solely on the information contained in that form. As a result, the content and format of the initial submission are crucial to a successful recovery. Once the form is submitted, the whistleblower does not have access to the status of the government’s case, nor does the whistleblower take part in the investigation of the case as is the practice under the False Claims Act. Although the government will confirm receipt of the submission, it will not provide further information regarding the investigation. Only time will answer the question of whether an award will be paid to the whistleblower. And an award cannot be paid until the noncompliant taxpayer’s appellate rights have expired or been exhausted. That can take years.

These constraints have led to significant concern about the efficacy of the program. In fact, the IRS received approximately 460 informant submissions in fiscal year 2009. These submissions resulted in the identification of 1,941 taxpayers who were accused of avoiding more than $2 million each in taxes, penalties, and interest. Despite what appeared to be an abundance of credible information, to date the IRS has failed to pay a single award to the individuals who were the source of that information.

Congressional supporters of the whistleblower program, including Senator Charles Grassley, are trying to bolster the program. In January, amendments to the law were proposed that would increase the utility and efficacy of the program. Among the proposals is a provision that would allow awards to be paid to whistleblowers if the information they provide results in the denial of a claim for a refund that the IRS would have otherwise paid or reduces an overpayment credit balance. Awards would also be paid for information that a taxpayer tried to claim a fraudulent loss as an offset to tax liability. Thus, the amendments incorporate prospective violations into the tax loss calculation and, thereby, increase the potential awards to whistleblowers.

Commentators have urged Congress to pass these amendments and to further incentivize informants to provide information to the IRS. As government budgets decrease, whistleblower programs may become an even more important part of fraud detection. In the absence of a robust program with real incentives, the whistleblower program will wither on the vine. It appears that lawmakers are addressing these concerns. And, if they do, whistleblowers may have a host of new opportunities.

Michelle Merola is a partner in the Business Litigation Practice at Hodgson Russ LLP. You can reach her at mmerola@hodgsonruss.com.

Topics: Tax Fraud

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