Congress Strengthens IRS Whistleblower Statute

The Tax Relief and Health Care Act of 2006, signed into law on December 20, 2006, amended the Internal Revenue Code to provide more incentives for private citizens to blow the whistle on tax evaders. Generally, the new legislation requires the IRS to award to the whistleblower at least 15%, but not more than 30%, of the collected proceeds resulting from the information provided by the whistleblower. However, these new awards are only available for tax-cheats with more than $200,000 in gross income with a tax liability (including penalties and interest) in excess of $2,000,000.

Prior to the amendment, Internal Revenue Code § 7623 and the accompanying regulations specified that "the amount of a reward will represent what the district or service center director deems to be adequate compensation in the particular case, generally not to exceed fifteen percent of the amounts collected by reason of the information."¹ Typically, the awards determined by the IRS were minimal and difficult to collect. There was no enforcement mechanism for the whistleblower to appeal the IRS’ determination of the "adequate" award amount. Under the new law, however, the IRS has lost most of its discretion, and if the whistleblower disagrees with the IRS’ award determination, he or she can file an appeal with the United States Tax Court.

The new legislation also directs the IRS to establish a "Whistleblower Office" and issue guidance regarding how these new procedures will be implemented. The Whistleblower Office will be subject to an annual study by the Secretary of Treasury, with a report to Congress regarding its performance.

Procedurally, whistleblower actions involving Federal tax deficiencies remain separate from the False Claims Act and a qui tam lawsuit. A whistleblower under the False Claims Act first files a qui tam action in court. The Justice Department is required to begin its investigation within 60 days, during which time the case is under seal. At the end of the initial 60-day period plus any extensions, the government will make its decision as to whether to intervene or whether to decline intervention in the qui tam lawsuit. If the government declines to intervene in the case, the whistleblower and his or her attorney can pursue the case on their own, or they can drop the case at that time. If the government or the whistleblower decides to pursue the case, the whistleblower may receive between 15% to 30% of the government’s total recovery, depending upon the importance of the whistleblower’s role in prosecuting the case. Since the False Claims Act was amended in late 1986, whistleblowers have been awarded over $1 billion and the government has recovered well over $10 billion.

Under the newly amended IRS statute, the whistleblower generally would submit information relating to violations of the internal revenue laws to the office of an IRS district director, preferably to a representative of the Criminal Investigation Division. The informant should also, at that time, file a formal claim with the IRS seeking the reward. If the IRS decides not to pursue the matter, the whistleblower has no recourse. There is no private right of action against a taxpayer for taxes owed under Federal tax statutes. If the IRS decides to pursue the matter, upon its successful conclusion, the IRS Whistleblower Office would notify the informant of his or her reward. If he or she is not satisfied, the informant can appeal the amount by filing a lawsuit in the United States Tax Court. Generally, if the whistleblower supplied information that the IRS did not already have and provided assistance during the course of the investigation, the IRS is now required to award the whistleblower at least 15% of the amount collected, with authority to award up to 30% of the collected proceeds. If the whistleblower provides information that is generally available elsewhere, the Whistleblower Office may award an amount that it considers appropriate, but in no case more than 10% of the collected proceeds resulting from the action. Congress estimates that this provision will raise $32 million over five years and $182 million over ten years.

In summary, although the IRS still retains control over whether to pursue a whistleblower action, the monetary incentives available to whistleblowers to turn in tax evaders have greatly increased in value.

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