IRS Whistleblower Program
The IRS Whistleblower Program allows individuals to blow the whistle on federal tax fraud and to earn significant monetary awards for their efforts.
Who can earn an award from the IRS Whistleblower Program?
Anyone with “specific and credible” information concerning tax evasion or underpayment can file a claim with the IRS. To be eligible for an award, the IRS must collect a minimum of $2,000,000 from the offending company (which includes interest and penalties). If the case involves an individual taxpayer, the individual’s gross income must exceed $200,000 for the year in question. In addition, the tax issue usually must have occurred within the last three years of the filing of the incorrect tax return, or six years if the tax return understates income by at least 25%. There is an exception to these time limits where the tax return was filed with the intent to commit tax evasion.
In most instances, an IRS whistleblower will be someone with firsthand knowledge of a company’s illegal tax practices, such as an employee, accountant, or auditor, but this is not required to be an IRS whistleblower. The only individuals generally ineligible to receive an award are those who are federal employees and obtained the information through their job or if the individual is convicted of a crime related to the tax fraud in question.
How does the IRS Whistleblower Program work?
The IRS is required to award a whistleblower between 15% and 30% of the amount recovered in most cases, but this is a wide range, especially when the amount recovered is many millions of dollars. To determine the specific percentage, the IRS Whistleblower Office will look at all relevant factors, with the biggest factor usually being the value of the information provided. The Whistleblower Office will also look at the following positive factors in calculating an award:
- Acting promptly in providing the information to the IRS;
- Identifying an issue previously unknown to the IRS;
- Identifying an issue that the IRS would not have caught;
- Providing information that is clear and organized;
- The level of cooperation and assistance during the investigation;
- Ability to identify assets that could be used to pay tax liabilities; and
- Identifying connections between transactions and parties to determine tax liabilities.
The Whistleblower Office will also take into account the following negative factors, which can cut against a higher percentage:
- Contributing to the underpayment;
- Profiting, directly or indirectly, from the underpayment;
- Negatively affecting the IRS’s investigation;
- Failing to follow the IRS’s instructions during the investigation;
- Violating the terms of the IRS’s confidentiality agreement; and
- Providing false or misleading information to the IRS.
It is critically important to have an experienced IRS whistleblower attorney in order to get the highest award possible. Throughout the case, your attorney will make sure that you are maximizing the positive factors discussed above and ensure that you do not engage in any of the negative factors. When it comes time for the Whistleblower Office to calculate your reward, your attorney will prepare a memorandum for the Whistleblower Office detailing why you are entitled to the highest award possible. If you do not agree with the amount awarded by the Whistleblower Office, your attorney can appeal that decisions to the U.S. Tax Court to obtain a fair award.
How does someone report tax fraud under the IRS Whistleblower Program?
If you suspect that a company is failing to properly pay taxes, you can blow the whistle on the practice by filing a claim with the IRS Whistleblower Program. We find the following steps are helpful in evaluating and preparing an IRS whistleblower claim.
- Identify the type of fraud: You need to be able to explain how the company is cheating the IRS. Tax fraud can take on many forms including underreporting income, claiming false tax credits, hiding assets or income, transfer pricing, abusive tax shelters, and circular transactions.
- Identify the specifics: The IRS Whistleblower Program requires specifics. In other words, the whistleblower should be able to tell a story about how the alleged fraud occurred. Depending on the type of fraud, a whistleblower should be able to detail which years of tax returns are in question, how the scheme was carried out, which transfers are suspect, how much in underpayment occurred, and who at the company was involved in making the tax decisions.
- Gather documents and evidence: The IRS also wants credible evidence. This means providing evidence beyond the whistleblower’s word. In many cases, company executives will discuss the fraud in emails or memorandums. There may be also be communications with accountants or auditors warning of a particular tax practice. Any document or piece of evidence that a whistleblower might have will add credibility to his or her claim that the company is not properly paying its taxes.
- Hire an experienced IRS whistleblower attorney: The IRS Whistleblower Program is unique and it’s important to hire a lawyer that understands how it works. An attorney who has handled successful IRS whistleblower claims in the past can help you put together a compelling package that will get the IRS’s attention and maximize your award. Prior to filing a claim, your attorney will also likely reach out to the right people at the IRS Whistleblower Office to let them know to pay particular attention to your claim.
- Submit your claim to the IRS: The next step is to file an IRS Form 211. This sounds simple, but in reality, you need to attach a thorough and organized explanation along with supporting documentation detailing the fraud in order to grab the IRS’s attention. If you fail to do so, your claim will likely be tossed aside even if it would otherwise be a good case. This is why it is critical to have an experienced IRS whistleblower attorney who will make sure that your claim is properly prepared and submitted.
- Assist in the IRS Investigation: After submitting the IRS Form 211, the IRS may request additional information from you. It is important that you do everything that you can to assist the IRS as the level of your assistance could impact 1) whether the IRS pursues your case, and 2) the amount of the award you will receive once your case has been settled.
- Collect your award: The IRS’s investigation can take several years or more to complete. Once the IRS has collected its share from the offending company, the IRS Whistleblower Office will begin to determine the percentage of the award that you should receive. As discussed in a previous section above, your attorney should provide the IRS with a detailed memorandum explaining why you are entitled to the highest percentage possible. If the IRS Whistleblower Office determines that the whistleblower’s information substantially contributed to the case, the whistleblower will be paid between 15% and 30% of the amount recovered by the government. Many IRS whistleblower awards are significant due to the $2,000,000 eligibility minimum. In 2012, for example, a whistleblower who filed a claim against Swiss bank UBS was awarded $104 million for his efforts. One exception is if the whistleblower planned and initiated the actions that led to the underpayment of taxes. In such a case, the IRS can reduce the award below 15%.
Our Experience working with the IRS Whistleblower Program
Our firm has handled several high-profile IRS whistleblower cases, including a nearly $25 million dollar settlement from a publicly traded company which underpaid taxes. Our client, who was an independent auditor, blew the whistle on the company’s illegal practice and was awarded $5.3 million for his efforts. This case was a good example of how the IRS depends on auditors and accountants to hold unscrupulous businesses accountable. Without our client’s courage to step forward, the underpayment would have likely gone unnoticed.
If you think you may have personal knowledge of a company committing tax fraud by evading or underpaying taxes, contact our office now and speak with an experienced IRS whistleblower attorney. There is no cost or obligation, and the call is completely confidential.
Recent Developments in the IRS Whistleblower Program
The IRS Whistleblower Office made 169 awards to whistleblowers in 2020 which totaled more than $86 million. While this may seem high, this is actually the third year in a row that the number of awards has decreased. In 2018, the IRS awarded $312 million to whistleblowers, and in 2019, the IRS awarded $120 million.
The decrease in awards can be attributed, in part, to the lack of support in funding by Congress and the Department of Treasury. The IRS Whistleblower Office is relatively small (about 40 full-time employees) and takes a long time to process each claim. Currently, there are nearly 24,000 open claims and it can take the IRS more than 10 years to pay a claim. This means that billions of dollars in underpaid taxes are likely sitting in limbo. The hope is that Congress will place more emphasis on the IRS Whistleblower Office in the coming years and give it the funding and support that it deserves.
Despite the backlog of claims, there has been some good news for tax whistleblowers. In 2019, the Taxpayer First Act was signed into law which includes an anti-retaliation provision for tax whistleblowers. Prior to this, federal law offered little protection to tax whistleblowers. Those who have been retaliated against, however, must file a complaint with the Secretary of Labor within 180 days of the violation.
The Taxpayer First Act also allows for improved communication between the IRS and the whistleblower. In the past, the IRS would often only disclose to a whistleblower whether the claim was still open. Now, the Whistleblower Office is supposed to inform the whistleblower whether the claim has been referred to audit and whether the taxpayer has made a payment on the issues raised in the claim. This is a big win for tax whistleblowers, because the increase in communication should give whistleblowers a better idea about whether a claim will be successful and how long the IRS’s investigation might take. We suspect that the increase in protection and communication will likely lead to more whistleblowers stepping forward to alert the government to tax fraud.