In an effort to offset an estimated $450 billion annual loss due to tax evasion, the IRS Whistleblower Office awards money to whistleblowers who report tax fraud. The IRS derives its authority to award whistleblowers from Internal Revenue Code (IRC) §7623. Prior to the amendments made by Tax Relief and Health Care Act of 2006 (TRHCA),1 the statute only provided for an award decision that was discretionary, authorizing the IRS to pay such sums deemed necessary for “detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same.”2 Furthermore, pre-amendment, the statute provided no minimum award percentage, and it lacked any provision allowing a whistleblower to appeal an award in the Tax Court. However, the program was significantly expanded by the TRHCA. TRHCA introduced a second kind of whistleblower award—one which provides for mandatory payments of awards to qualified whistleblowers.
Expanding the program to provide for mandatory payments has “enabled the Whistleblower Office to experience a record setting year in proceeds collected and award amounts paid since its standup in [fiscal year] 2007.”3 According to the IRS, in fiscal year 2018, the Whistleblower Office made over $312 million in awards to whistleblowers.4 Thirty-one of these awards were IRC §7623(b) mandatory awards. These results reflect a 14.8 percent increase in the number of awards paid.5
Background
The history of the Tax Whistleblower Award Program begins over 150 years ago.6 Initially, it was proposed in terms of a “qui-tam action”—i.e., a legal action brought by an informer on behalf of the government to collect a penalty through the supplied information.7 However, the whistleblower program that was ultimately established by the Act of July 13, 18668 did not allow the whistleblower to sue in the name of the United States. The program was amended and clarified throughout the years, but still today, rather than finding qui tam actions in federal courts, whistleblower matters are treated as administrative informant procedures.
Requirements for a Whistleblower’s Claim
According to the regulations, eligibility to receive a whistleblower award requires that the whistleblower submit a claim to the IRS presenting “specific and credible information that the whistleblower believes will lead to collected proceeds from one or more persons whom the whistleblower believes have failed to comply with the internal revenue laws.”9
To claim an award, a whistleblower is required to file Form 211, Application for Award for Original Information, wherein he or she provides information such as the: (1) date of the claim; (2) whistleblower’s name, address, telephone number, date of birth, and identifications number; and (3) explanation of how the whistleblower became aware of the information on which the claim is based (including, relevant dates and a description of the relationship between the whistleblower and the person identified on Form 211)10.
The IRS may either notify the whistleblower of a claim that is deficient in some respect and provide an opportunity for the whistleblower to timely correct the deficiency, or the IRS may reject it outright.11
Whistleblower Confidentiality
The government may withhold the whistleblower’s identity under the “informant’s privilege.”12 As such, the IRS “will use its best efforts to protect the identity of whistleblowers.”13 However, in some cases the IRS may determine that the government’s best interests are served to use the whistleblower as a witness in court. If that determination is made, then the IRS “will make every effort to notify the whistleblower before revealing the whistleblower’s identity.”14
IRC §7623(a)—Discretionary Awards
Per IRC §7623(a), the IRS has discretionary authority to issue a whistleblower award from the proceeds collected as a result of the information provided. In other words, the IRS is authorized, but not required, to award a whistleblower for information resulting in tax recovery. There are two types of eligible claims under IRC §7623(a). First, a claim is eligible if it was submitted before December 20, 2006 (i.e., prior to TRHCA). Second, IRC §7623(a) applies to claims that fail to meet the IRC §7623(b)(5) dollar thresholds, which means that the proceeds at stake (including taxes, penalties and interest) exceed $2 million, and if the taxpayer is an individual then their gross income must exceed $200,000.
Notably, unless negotiations between the IRS and the whistleblower have set the amount of an award, the whistleblower has no right to appeal a denial of an award.15 However, if an amount has been negotiated, then the whistleblower is able to sue to the IRS to enforce a contract for payment.16
IRC §7623(b)—Mandatory Awards
THRCA introduced a mandatory whistleblower award. Under IRC §7623(b), an eligible whistleblower must provide information regarding both an “amount in dispute” exceeding $2 million, and a taxpayer with gross income exceeding $200,000.17 If, based on such information from the whistleblower, the IRS proceeds with an action and collects, then the whistleblower is entitled to an award based upon the amount collected.18 The amount of an award will be “at least 15 percent but not more than 30 percent of the proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action.”19
Significantly, “[t]he determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action.”20 The regulations provide a list of factors (described as “negative” and “positive”) that the WO will use to determine whether a claim gets a smaller or larger percentage.21 However, the factors are non-exclusive, and not weighted; indeed, depending on the facts of circumstances of a case, it is possible for one factor to outweigh many others. Additionally, even in a case entirely lacking “negative” factors, there is no guarantee that the award will exceed the 15% minimum. The list of negative and positive factors that may support increasing or decreasing an award, as provided in the regulations, are presented in the table below:
NEGATIVE | POSITIVE |
The whistleblower delayed informing the IRS after learning the relevant facts, particularly if the delay adversely affected the IRS’s ability to pursue an action or issue.
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The whistleblower acted promptly to inform the IRS or the taxpayer of the tax noncompliance.
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The whistleblower contributed to the underpayment of tax or tax noncompliance identified. |
The information provided identified an issue or transaction of a type previously unknown to the IRS.
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The whistleblower directly or indirectly profited from the underpayment of tax or tax noncompliance identified, but did not plan and initiate the actions that led to the underpayment of tax or actions described in IRC §7623(a)(2).
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The information provided identified taxpayer behavior that the IRS was unlikely to identify or that was particularly difficult to detect through the IRS’s exercise of reasonable diligence.
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The whistleblower (or the whistleblower’s legal representative) negatively affected the IRS’s ability to pursue the action(s), for example by disclosing the existence or scope of an enforcement activity.
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The information provided thoroughly presented the factual details of tax noncompliance in a clear and organized manner, particularly if the manner of the presentation saved the IRS work and resources.
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The whistleblower (or the whistleblower’s legal representative, if any) violated instructions provided by the IRS, particularly if the violation caused the IRS to expend additional resources.
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The whistleblower (or the whistleblower’s legal representative) provided exceptional cooperation and assistance during the pendency of the action(s).
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The whistleblower (or the whistleblower’s legal representative) violated the terms of the confidentiality agreement described in Reg. §301.7623-3(c)(2)(iv).
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The information provided identified assets of the taxpayer that could be used to pay liabilities, particularly if the assets were not otherwise known to the IRS.
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The whistleblower (or the whistleblower’s legal representative) violated the terms of a contract entered into with the IRS pursuant to Reg. §301.6103(n)-2.
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The information provided identified connections between transactions, or parties to transactions, that enabled the IRS to understand tax implications that might not otherwise have been understood by the IRS.
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The whistleblower provided false or misleading information or otherwise violated the requirements of IRC §7623(b)(6)(C) or Reg. §301.7623-1(c)(3).22
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The information provided had an impact on the behavior of the taxpayer, for example by causing the taxpayer to promptly correct a previously-reported improper position.
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Non-Title 26 Proceeds
Again, whistleblower awards are paid from the proceeds collected as a result of the information provided. For years, the IRS and many courts maintained that “collected proceeds” were only those amounts collected under the provisions of Title 26—i.e., the Internal Revenue Code. Significantly, this meant that FBAR penalties were not included in award calculations, since FBAR reporting falls under Title 31 of the U.S. Code (Bank Secrecy Act).
Briefly, FBAR refers to the FinCEN Form 114, Report of Foreign Bank Accounts and Financial Accounts, on which U.S. taxpayers must annually disclose their foreign financial accounts exceeding $10,000. Statutory civil penalties for failure to file the FBAR range from $10,000 per account, annually, for non-willful violations, and up to the greater of $100,000 or 50% of the account balances, annually, for willful violations. If the IRS finds willfulness, criminal penalties may apply, including a $500,000 fine and/or 10 years imprisonment. Although the IRS does not normally have authority to administer penalties outside of the IRC, Title 31 delegates to the IRS the authority to enforce FBAR reporting and assess FBAR penalties.23
Finally, whistleblowers may expect that FBAR penalties will be included in whistleblower award calculations. In 2016, the U.S. Tax Court ruled that “the phrase ‘collected proceeds’ is sweeping in scope and is not limited to amounts assessed and collected under title 26.”24 Then in 2018, while the IRS’s appeal was pending, Congress amended IRC §7623 such that the term “proceeds” includes proceeds arising from laws that the IRS is authorized to administer, enforce, or investigate, including: (1) criminal fines; (2) civil forfeitures; and (3) violations of reporting requirements.25
Conclusion
According the IRS’s Whistleblower Program Fiscal Year 2018 Annual Report to Congress, 2018 was “record setting in the proceeds collected and amount of awards paid, and the Whistleblower Office will continue to focus IRS resources on claims that lead to significant returns to the government.”26 While the process can be complex and daunting, the potential of receiving an award of up to 30 percent of the amount collected by the IRS should strongly incentivize those with information to consider consulting a tax professional for guidance.
Sources:
- Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, §406(a)(1)(D) (2006) (enacting §7623(b) on Dec. 20, 2006).
- IRC §7623(a).
- IRS Whistleblower Program Fiscal Year 2018 Annual Report to the Congress, at 3.
- IRS Whistleblower Program Fiscal Year 2018 Annual Report to the Congress, at 9.
- IRS Whistleblower Program Fiscal Year 2018 Annual Report to the Congress, at 3.
- Cong. Globe, 37th Cong., 2d Sess. 1286 (1862) (proposed amendment of Rep. Samuel T. Worcester (R-Mass.)).
- Qui Tam Action, Black’s Law Dictionary.
- 14 Stat. 145 (1866).
- Reg. §301.7623-1(c)(1).
- Reg. §301.7623-1(c)(2).
- Reg. §301.7623-1(c)(4).
- Reg. §301.7623-1(e).
- Id.
- Id.
- See DaCosta v. United States, 82 Fed. Cl. 549 (2008)
- See Merrick v. United States, 846 F.2d 725 (Fed. Cir. 1988).
- “[T]he term amount in dispute means the greater of the maximum total of tax, penalties, interest, additions to tax, and additional amounts that resulted from the action(s) with which the IRS proceeded based on the information provided, or the maximum total of such amounts that were stated in formal positions taken by the IRS in the action(s). The IRS will compute the amount in dispute, for purposes of award determinations described in §301.7623-3(c)(6), when there has been a final determination of tax as defined in §301.7623-4(d)(2).” Reg. §301.7623–2(e)(2)(i).
- IRC §7623(b).
- IRC §7623(b)(1). Under the regulations, “collected proceeds . . . include: tax, penalties, interest, additions to tax, and additional amounts collected because of the information provided; amounts collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.” Reg. §301.7623–2(d)(1).
- IRC §7623(b)(1).
- Reg. §301.7623-4(b)(1) and (2); IRM 25.2.2.5.4.1 (01-12-18).
- Id.
- 31 U.S.C. §5318(a).
- Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4, 135 (Aug. 3, 2016).
- IRC §7623(c), added by Pub. L. No. 115-123, §41108(c).
- IRS Whistleblower Program Fiscal Year 2018 Annual Report to the Congress, at 8.