Tax Fraud

The IRS estimated that its annual tax receipts in 2007 were $345 billion dollars below what they should have been because of under-reporting by corporations and individuals. With underpayments of that magnitude—resulting from innocent and negligent underpayment as well as from fraudulent activities—the investigatory and enforcement resources of the federal government are insufficient to make substantial progress towards recouping its losses. The most efficient and cost-effective means the federal government has to uncover nonpayment of taxes is not auditors at the IRS, but private individuals who have personal knowledge and evidence of underpayment and fraud. Whistleblowers who uncover tax fraud and underpayment are entitled to substantial awards when they assist the government in recovering its losses.

The False Claims Act, which governs a wide array of whistleblower suits, explicitly excludes actions by whistleblowers in cases of tax fraud. However, the IRS has created a separate whistleblower program with provisions modeled after those of the FCA. A dedicated IRS Whistleblower Office established under the Tax Relief and Health Care Act of 2006 administers the program. Prior to the passage of this act, whistleblowers who reported tax fraud to the IRS did so at great personal and professional risk, and were paid relatively modest awards, if any.

Since the nineteenth century, individuals have been eligible for monetary awards for reporting underpayments through the IRS Informant Program. However, the IRS was not obligated to pay whistleblowers anything and those awards that were paid were small, which resulted in the IRS Informant Program being little used and ineffective as a fraud-fighting tool.

Because of the proven effectiveness of other whistleblower programs, such as that established under the False Claims Act, Congress passed the Tax Relief and Health Care Act in 2006 to establish a new IRS whistleblower program, the IRS Reward Program, modeled after the more successful ones. The Act stipulates an award of 15% to 30% of “the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from [an] action” initiated by a whistleblower, or from any related settlement. The percentage of the whistleblower’s share is determined based on the value of the information provided in obtaining a judgment or settlement. This means that highly valuable information of major fraud could potentially result in a massive award of hundreds of millions of dollars. Even in smaller cases of fraud, the IRS must now pay a whistleblower no less than 15%, guaranteeing that those who put themselves at risk by uncovering tax fraud will be guaranteed a substantial reward.

In order to qualify for the IRS whistleblower award, the amount in dispute—including penalties, interest, and additional amounts—must exceed $2 million. If an individual has underpaid (rather than a company), he or she must have an annual income of more than $200,000 during at least one year in question in order for a whistleblower to qualify under the IRS Reward Program.

In some situations a whistleblower may receive less than the regular 15% minimum award. An award of up to 10% may be awarded if the whistleblower is not the original source of the information provided (for example, if the reported information was obtained from an audit, investigation, or from the news media). This category will not apply, however, if the publicly available information originated with the whistleblower. The IRS Whistleblower Office may also reduce an award if the whistleblower planned or participated in the underpayment in question. And if a whistleblower is convicted of criminal charges arising from that underpayment, the IRS will provide no award at all. Finally, if a whistleblower is unsatisfied with an award determination by the IRS, he or she may appeal the decision to the Tax Court.

The IRS strives to keep the identity—and even the existence—of a whistleblower secret and is usually able to do so. While the Tax Relief and Health Care Act does not explicitly provide comprehensive protections from retaliation by employers, as do the FCA and some other whistleblower statutes, the release of a whistleblower’s identity is typically unnecessary and his or her identity will remain protected. The only exception is when a whistleblower’s direct testimony will be required because other evidence is unavailable. In the rare cases where it must reveal a whistleblower’s identity, the IRS will attempt to provide adequate warning beforehand.

The IRS has a large backlog of cases and may not quickly pursue a case when little evidence has been provided. Mere allegations of fraud or nonpayment will usually not be enough to prompt an investigation. When it reviews a claim, the government will expect substantial evidence of the fraud or nonpayment, such as financial data and records, transaction documents, or financial analyses relevant to the claim. Moreover, information that is well organized, clearly laying out the exact nature of the fraud or underpayment, will likely result in a larger whistleblower award than a minimal amount of poorly organized information. It is important as a potential whistleblower to first contact an experienced qui tam attorney who can guide you through the initial stages of gathering information and presenting the evidence to the IRS.

The information provided above is a very general summary of tax fraud whistleblower law at the time this text was prepared. Because this analysis is subject to change depending upon recent cases and legal developments, you should not rely on this summary as legal advice. As with any important legal question, you should always consult a lawyer licensed to practice in your jurisdiction. Our lawyers are licensed to practice in all state and federal courts in Georgia.