We are excited that, in December 2006, Congress dramatically increased the “rewards” to whistleblowers under the IRS Whistleblower rewards program. Whistleblowers now can receive up to 30% of the taxes, interest, and penalties that the IRS recovers based on information furnished by a whistleblower in large tax cases.
For years, the Internal Revenue Service has been authorized to pay informants reporting tax fraud a percentage of any back due taxes collected. Usually the maximum percentage was approximately fifteen (15%) percent of the back tax recovered.
The new whistleblower reform provisions passed by Congress have changed this maximum, and now allow the Internal Revenue Service to consider not only the back tax amount, but also interest and penalties. Given the amounts of money involved, and depending on the passage of time, the fines, penalties and interest in addition to the tax could be significant.
Moreover, the law changes the amount that goes to the informant from a fifteen (15%) percent cap to a thirty (30%) percent cap of all collected proceeds which again includes penalties, interest and the back tax. The new provisions also allow an above-the-line deduction for attorney’s fees and cost paid by and on behalf of the individual in connection with any award for providing information regarding violations of the tax laws. The Internal Revenue Service must now create a Whistleblower Office within the IRS to administer the mandatory reward program.
Congress will require a yearly report to the Secretary of Treasury regarding the effectiveness of any reward program implemented by the IRS. Congress estimates that these new provisions will raise $33 million over the next five years which is but a small fraction of the under reported income in the United States each year. Nonetheless, it is an improvement over existing procedures.
In order to be eligible for an award under the new program, information regarding violations of the tax laws to the Internal Revenue Service must involve an individual whose gross income exceeds $200,000.00 for any taxable year subject to such action which involves tax, penalties and interest of over $2 million.
While the IRS has not yet promulgated any regulations or guidance to practitioners concerning how its new Whistleblower Office will function, like the old 211 Form utilized for informants in the past, the information provided to the IRS must be provided under penalty of perjury by the informant. It is presumed that the informant and counsel will contact the Criminal Investigative Division of the Internal Revenue Service to set up the initial contact. Thereafter, someone from the IRS Whistleblower Office will take over the case for subsequent investigation and determination of whether the informant is eligible for a reward.
Obviously, we hope that honest taxpayers will benefit from this new provision, but only time will tell. The IRS has not paid out much in rewards in the past in working with informants on handing out rewards. We hope we will all see a new approach by the IRS that will encourage whistleblower complaints about tax fraud.