The History of Tax Whistleblowing
The government’s ability to pay informants rewards for tax whistleblowing spans a period that exceeds 140 years. In 1867, the Secretary of the Treasury was given the authority to pay tax whistleblowers awards “for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws.” Between 1867 and 1996, few changes were made to the program.
In 1996, Congress amended the law (26 USC § 7623(a)) to allow payments to tax whistleblowers who assisted the IRS in detecting underpayments of tax and to pay rewards from the proceeds collected rather than appropriated funds. Although the program was generally considered an effective method of identifying and collecting unpaid taxes, it was nevertheless fraught with problems and inconsistencies.
In a June 2006 audit, the Treasury Inspector General for Tax Administration found that from fiscal years 2001 through 2005, the program was responsible for recovering more than $340 million in taxes, fines, penalties and interest, with rewards of more than $27 million paid to whistleblowers. The Inspector General found these results to be impressive, given the IRS’s failure to publicize the program; in 2006, the IRS website did not contain any reference to the whistleblower program beyond providing the reporting form (Form 211, Application for Award for Original Information) for download.
In addition to the lack of publicity, the program was fraught with inconsistent and discretionary implementation and award policies and caps. The maximum percentage that could be awarded was 15% of the collected taxes and penalties, but no more than $10 million. Awards were generally not paid when the disclosures were based on public information, or when the informant participated in the tax non-compliance.
The Inspector General supported expanding the program, since examinations arising from information provided by whistleblowers were often more effective and efficient than the IRS’s primary enforcement method of selecting returns for examination.
But at the same time, the Inspector General criticized the program’s management for long delays in processing claims, and a lack of accountability in deciding them. For example, the Inspector General found that it took an average of 7½ years between the initial filing of a claim and payment of an award. It also found sloppy recordkeeping, and that many valid claims were rejected for no recorded reason.
The Tax Relief and Health Care Act of 2006 sought to address, among other things, the deficiencies cited by the Inspector General. Congress added section 7623(b), under which awards are no longer discretionary. Other substantive changes to the law included:
- Increasing the maximum award to 30% of collected proceeds; there is no limit on the dollar amount of the award;
- Setting a minimum award of 15% of collected proceeds;
- Providing appeal rights to whistleblowers up to and including an appeal to the tax court; and
- Creating the whistleblower office, which reports to the IRS Commissioner. (Previous efforts were regional and did not provide for any national recordkeeping.)
Congress also reduced the maximum reward to 10% for claims based on publicly available information, such as judicial or administrative hearings; governmental reports, hearings, audits or investigations; or news reports or other information in the news media. The IRS may reduce rewards to whistleblowers who planned or initiated the conduct that led to the underreporting or underpayment and deny them to whistleblowers convicted of a crime in connection with that conduct. The IRS is also required to warn whistleblowers that giving false information could subject them to the penalties of perjury.
The 2006 amendments, however, are applicable only to cases where the total taxes, interest and penalties exceed $2 million and, in cases involving individual taxpayers, where the taxpayer has gross income exceeding $200,000 in any taxable year subject to the claim. The IRS whistleblower program is a valuable tool to stop tax fraud and other violations of the tax laws. If you are aware of tax fraud or other violations of the tax laws, contact Michael S. Bigin or Laurence J. Hasson, who will help you compile the information you need to submit a substantial and convincing claim to the IRS Whistleblower Office.