“We don’t pay taxes. Only the little people pay taxes.” That infamous quote from Leona Helmsley sums up the (mostly unspoken) opinions of many taxpayers. Unfortunately for them, there are people in their lives with the knowledge that they have engaged in tax evasion. These people can make a call to the IRS and become a whistleblower. That decision can be lucrative for the whistleblower and expensive for the taxpayer.
Whistleblowers and Tax Authorities
The 2006 Tax Relief and Health Care Act created the IRS whistleblower office. The office administers the program, assesses claims, and manages claimants’ awards. Assuming the IRS acts on the tip and recovers taxes, penalties and interest, a percentage of the recovery is paid to the whistleblower.
The IRS is not alone in this regard. Most states have similar statutes and actively encourage people to come forward when they become aware of substantial noncompliance with the tax laws. When the claims can be supported and recoveries made, the tax authorities share part of the recovery with the whistleblower. To learn more, a simple web search will identify a state’s criteria for a claim and its process to file it.
IRS Eligibility and Claims Process
While in theory any tip leading to a recovery is welcome, the IRS simply does not have the time and manpower to chase down the volume of tips it receives. To be considered by the IRS, the tax loss to the government needs to be at least $2 million, and in the case of an individual, the gross income of the target needs to be at least $200,000. This is known as a §7623(b) claim, which refers to the Internal Revenue Code section that authorizes it. There is a similar process for other claims known as §7623(a) claims, where the reward is limited to 15%.
Any violation of the tax laws can be the subject of a claim. The process calls for detailed disclosure requirements which then enables the government to validate a claim. As one would expect, the IRS has a form for the claimant to fill out, Form 211. The whistleblower will need to provide significant details and related information about the claim as well as his/her association with the target and non-compliance. The required information includes the following:
- Description of the alleged non-compliance and explanation of the issues.
- Information in support of the allegations; this can include the identification of relevant records and their location.
- Identification of books, records and other information that is not in the whistleblower’s control.
- Explanation of how the whistleblower became aware of the alleged conduct and the underlying information.
- Details of the whistleblower’s current or former relationship to the person or entity alleged to have committed the offense.
Should you just want to alert the IRS to an issue, and not claim an award, you can file Form 3949-A. Unlike the above process, this can be done anonymously. Abusive tax promoters or preparers also can be reported without reward on Forms 14242 or 14157 or 14157 A, depending on the issue. Finally, if a complaint relates to a tax-exempt organization, that can be filed on Form 13909.
Certain individuals cannot file a claim for an award. They include:
- An employee of the Department of the Treasury, or a prior employee who obtained the knowledge while employed by the Department.
- Someone who obtained the knowledge through their official duties as an employee of the Federal government.
- Someone who is required to disclose the issues under Federal law or regulations, or who was precluded from disclosure under Federal law or regulations.
- Someone who obtained the information through their access as a contractor with the Federal government.
- Someone who obtained the information from an ineligible whistleblower.
While the IRS would like to believe people come forward out of a sense of fairness or even patriotism, it understands that money talks. The whistleblower’s award for a §7623(b) claim is a minimum of 15% and not more than 30% of the collected proceeds (tax, penalty and interest). Note that the proceeds can also include other recoveries including criminal fines, civil forfeitures, and violations of reporting requirements such as FBAR penalties. The IRS considers positive and negative factors in determining the award percentage. These factors are enumerated in the Treasury regulations §301.7623-4.
The IRS Whistleblower Office’s 2021 annual report identified that between 2007 and 2021 the IRS paid out $1.05 Billion in awards to more than 2,500 whistleblowers. The government recovered $6.4 Billion over that same time period. The report also identified 10 areas under which most claims were filed.
- Unreported Income
- Allegations of Fraud
- False Dependent Exemptions
- Employee v. Subcontractor
- Failure to File
- Underreported Wages
- Capital Gains
- Unreported Cash Wages
- Unreported Rental Income
- False Deductions
Processing of the Claim and Award
All claims are put through a multi-layered process where they are evaluated and forwarded for investigation, if appropriate. The entire process can take up to 3 years before a denial or acceptance letter is issued.
The common reasons a claim is rejected include:
- Lack of a specific or credible tax issue
- Missing information
- Near-term expiration or expired relevant statutes of limitations
The possibility of a denial can be mitigated by providing everything you know about the matter, including how you came into the knowledge and sufficient information for the IRS to assess the nature of the alleged violations or omissions.
Notably, you cannot anonymously submit a reward application. The IRS will make efforts to protect against disclosure of your identity; however, that is not an absolute guarantee, such as when the whistleblower serves as a witness or appeals a claim. Finally, there are anti-retaliation provisions under both Federal and State law that are available to protect whistleblowers.
The IRS Whistleblower Office will notify the claimant once the matter has been referred for audit or exam and when payments have been received. In addition, the office will respond to inquiries from the whistleblower on the status of the claim as well as its determination of an award.
Unfortunately, this is not a quick process. As noted above, the preliminary evaluation can take up to three years. Even in situations where the IRS decides to pursue a claim, the target has rights of appeal. Then the IRS still has a 10-year collection statute that would need to be exhausted, meaning it could take more than 10 years before a whistleblower receives any recovery on a successful claim.
The decision to bring a claim needs to be carefully considered and there are always unanticipated ramifications. Retaining competent legal and financial advisors who can vet the issues and develop the required information is a vital step. Withum’s Financial Advisory Teams will work with counsel in these matters to bring forensic expertise to the potential claims and assist in the development of facts necessary for the submission. Our Tax Controversy Services Team is focused on working with clients and counsel to help bring all claims to a successful resolution.