The IRS Whistleblower Program
The IRS whistleblower program is nothing new. More than a century ago, Congress authorized the federal government to pay whistleblowers for information regarding violations of the federal tax laws. However, prior to 2007, awards were discretionary, often limited to $10 million, and generally not subject to judicial review under the doctrine of sovereign immunity.
In late 2006, Congress passed the Tax Relief and Health Care Act of 2006 (the “TRHCA”). Although the TRHCA left intact the IRS’ authority to make discretionary awards, the TRHCA also significantly amended the tax whistleblower statute – Section 7623 of the Internal Revenue Code (the “Code”) – to require mandatory awards of between 15% to 30% of the collected proceeds if certain requirements are met. Moreover, these mandatory awards are not capped, and are subject to judicial review in the United States Tax Court.
Section 7623 of the Code was amended to provide additional incentives for tax whistleblowers to come forward with information regarding tax cheats, and the amendments, for the most part, have had their desired effect. Since 2007, the federal government has paid more than $800 million to tax whistleblowers based on collections of over $5 billion. In 2012, the federal government paid its largest ever award of $104 million to a tax whistleblower who provided information regarding United States taxpayers and their underreporting of income related to foreign bank accounts in Switzerland.
Section 7623 of the Code contemplates two types of awards: Section 7623(a) discretionary awards and Section 7623(b) mandatory awards. Generally, an award is mandatory if the tax whistleblower’s claim satisfies two requirements. First, the amount of taxes, penalties, interest, and other amounts must exceed $2 million. Second, if the target is an individual, the target’s gross income must exceed $200,000 for any tax year that is a part of the whistleblower’s claim. If neither of these requirements are met, the award is discretionary and generally capped by the IRS at $10 million.
However, the IRS WO will not grant a Section 7623 award (discretionary or mandatory) unless the IRS acts on the information. Stated differently, the IRS must use the information to initiate an administrative or judicial action against the target as a result of the whistleblower’s submission. In addition, if the IRS does act on the information, the IRS WO will not pay an award unless the target pays the additional taxes, penalties, interest, and other amounts to the IRS based on the administrative or judicial action.
In certain instances, a mandatory award may be reduced below the 15% threshold. For example, if the tax whistleblower obtained the information through public sources (e.g., the media), the amount of the award may not exceed 10% of the collected proceeds. An exception to the rule applies if the tax whistleblower was the original source of the information (e.g., he or she provided the media with the information). In addition, a mandatory award may be reduced or denied entirely if the IRS determines the claim was brought by the whistleblower who materially participated in the violations of the federal tax laws.
To qualify for an award under Section 7623 of the Code, a tax whistleblower need only prepare and submit an IRS Form 211, Application for Award for Original Information (“Form 211”), to the IRS Whistleblower Office (“WO”). Though deceptively simple at a mere one page in length, the submission of the Form 211 does not guarantee the IRS will pay an award for a whistleblower’s information. Rather, over 60% of tax whistleblower claims are rejected within 4 months of the submission due to the information being characterized by the IRS WO as not specific or credible or “too speculative.”
Because Section 7623 awards are granted only if the IRS initiates an investigation based on the claim, the prudent tax whistleblower will prepare the Form 211 with this goal in mind. Thus, to increase the likelihood of an award, the whistleblower should submit specific, detailed, and credible information regarding the target’s identity and the alleged violations of the federal tax laws. In addition, if the whistleblower has evidence to support the claim – such as emails, bank statements, or other documents – the whistleblower should submit this information with the Form 211.
There is an additional reason the tax whistleblower should come forward with all information at this stage. Specifically, the tax whistleblower’s award, if any, will be determined later based on the whistleblower’s contribution to the investigation. In turn, the whistleblower’s contribution is measured at least in part by the organization and quality of the information provided to the IRS WO on the Form 211. Thus, the whistleblower can substantially increase his or her chances for a higher award by submitting all of the information known to the whistleblower at the time of the submission. Notably, the IRS WO warns tax whistleblowers that withholding available information may result in the IRS WO not considering such information for purposes of making any subsequent award determination.
Generally, a tax whistleblower may receive a Section 7623 award for submission of information regarding any violation of the Internal Revenue Code. Thus, if the whistleblower has information regarding the target’s omission of income or inflation of deductions, such information could trigger a Section 7623 award.
However, other information may qualify too. Under the Bipartisan Budget Act of 2018 (“BBA”), Congress amended Section 7623 awards to include information related to violations of laws in which the IRS is authorized to administer, enforce, or investigate, including criminal fines and civil forfeitures and violations of reporting requirements. Thus, this amendment clarifies that a whistleblower may receive a monetary award for submission of information regarding the target’s failure to file FBARs.
The IRS WO reviews the information on the Form 211 to determine whether such information is sufficient to warrant further action by the IRS. If this is the case, the IRS WO will submit the information to the appropriate IRS division for additional investigation. However, the IRS division retains ultimate authority on whether or not any further action, such as the initiation of an audit, should commence.
Similar to any other audit, the target may challenge proposed assessments of tax, penalties, interest, and other amounts administratively or judicially. Thus, the investigation and assessment process can take considerable time and in most cases several years. Moreover, if the IRS successfully makes an assessment, the IRS WO will not pay an award to the whistleblower unless and until the target pays such amounts to the IRS. If the target lacks the liquidity or assets to pay the IRS immediately, the whistleblower may be required to wait additional years to receive his or her award.
Historically, Section 6103 of the Code prevented the IRS from disclosing confidential taxpayer information to the whistleblower regarding the status of the IRS’ investigation and the target’s payments to the IRS. But in 2019, Congress passed the Taxpayer First Act (the “TFA”), which amended Section 6103 of the Code to require the IRS WO to keep the whistleblower better informed. Under the TFA, the IRS is required to notify the whistleblower when: (1) the claim has been referred by the IRS WO to an IRS division for audit or examination; (2) the target has made a tax payment; and (3) the whistleblower makes a request for an update on the status and stage of the whistleblower’s claim.
As a general matter, tax whistleblowers wish to maintain their anonymity after submission of a Form 211 to the IRS WO. The IRS’ stated policy is that it “will protect the identity of the whistleblower to the fullest extent permitted by the law.” In this same regard, IRS personnel are instructed not to inform the target that an audit or examination has been initiated due to a whistleblower claim. In certain instances, however, the IRS may be required to disclose the identity of the whistleblower. For example, if the tax whistleblower is a key witness to the target’s violations of the federal tax laws, the IRS may feel compelled to identify the whistleblower as a witness during the judicial proceedings against the target.
Significantly, the TFA amended Section 7623 of the Code to provide anti-retaliation provisions to protect employee whistleblowers who submit claims against their employers. Specifically, new Section 7623(d) of the Code now permits an employee to file a complaint with the United States Secretary of Labor or a federal district court if an employer takes retaliatory measures against the employee. If successful, the employee may be entitled to compensatory damages including reinstatement, back pay and lost benefits, and certain special damages including the employee’s attorney fees and legal costs.
As an initial matter, tax whistleblowers should be cognizant that the IRS WO will issue an IRS Form 1099 to the whistleblower in the event a Section 7623 award is paid. In other federal whistleblower contexts, the IRS has successfully argued that government-paid whistleblower awards should be subject to ordinary income tax rates and not reduced capital gains tax rates. Although federal courts have generally held in favor of the IRS on this issue, tax whistleblowers should bear in mind that under the right set of facts and circumstances, it may be reasonable to contend their specific award qualifies for capital gain treatment.
In any event, Congress has provided some welcome statutory relief for tax whistleblowers who receive awards under Section 7623(b) of the Code. Although a tax whistleblower’s attorney fees and legal costs would generally be characterized as miscellaneous itemized deductions, which are not currently deductible, Congress amended Section 62 of the Code to permit such expenses to qualify as above-the-line-deductions.
Since late 2006, Congress has passed significant legislation designed to induce tax whistleblowers to come forward with information regarding violations of the federal tax laws. Although the monetary awards can be significant, tax whistleblowers should carefully weigh the risks of the submission to the IRS WO with the potential for a monetary award. In certain cases, it may be helpful for the tax whistleblower to hire a knowledgeable tax attorney, who can advise the whistleblower of such risks and carefully craft the Form 211 to better increase the chances of a monetary award. If you would like to discuss your potential tax whistleblower claim, you can contact Matthew Roberts at firstname.lastname@example.org.
Need assistance in managing the audit process? Freeman Law’s team of attorneys and dual-credentialed attorney-CPAs regularly represents taxpayers before the IRS and Texas Comptroller. Our team also provides tax return-related representations and helps taxpayers navigate state tax laws. Our Firm offers value-driven services and provides practical solutions to complex issues. Schedule a consultation or call (214) 984-3410 to discuss our tax representation services.