A whistleblower who reports taxpayer fraud is entitled to receive a reward of up to thirty percent of the amount recovered from the taxpayer. The reward is an incentive for those who have insider information about tax fraud to report the information to the Internal Revenue Service.
Whistleblowing in General
A whistleblower is an employee or other insider who reports fraud, corruption, or other wrongdoing within a company or government agency to the authorities. To encourage the disclosure of information that can lead to the prosecution of wrongdoers, whistleblowers are entitled to a reward for coming forward.
Much whistleblowing activity involving fraud against the federal government falls within the scope of the federal False Claims Act. The act allows a person with knowledge of false claims or fraud against the government to bring a lawsuit, referred to as a qui tam suit, on behalf of the government. State false claims acts apply to fraud against the state government.
Whistleblowing in the context of tax fraud is governed by Section 7623, a provision in the Internal Revenue Code which was enacted in 2006 to beef up IRS efforts to punish tax evaders. Prior to 2006, rewards were smaller and discretionary by the IRS. Unlike the False Claims Act, Section 7623 does not require a whistleblower to file a lawsuit but rather to report the fraud directly to the Internal Revenue Service. Confidentiality measures are in place to protect tax whistleblowers from retaliation by an employer.
Tax Fraud Reporting Requirements
Section 7623 applies only when there is substantial tax liability at stake. Specifically, the tax, penalties, and interest must exceed $2 million. Moreover, if the taxpayer reported is an individual, the individual’s gross income must exceed $200,000 for the year involved. Without these limitations, the Service might be inundated with reports in which the tax liability at stake would not justify the cost of investigating. However, the IRS is allowed to make discretionary awards in cases not meeting the limitations.
Whistleblower Reward
A whistleblower under Section 7623 is eligible for a reward of fifteen to thirty percent of the amount recovered from the taxpayer. If a case is settled before trial, the award is based on the settlement. Within those parameters, the percentage is subject to the discretion of the IRS. The primary consideration in setting a reward is the extent to which the whistleblower substantially contributed to the recovery or settlement. Rewards are payable from what the IRS collects from the taxpayer; if the taxpayer has no known assets, no recovery is possible and no reward is payable.
A whistleblower who is dissatisfied with the amount of a reward can appeal the issue to the United States Tax Court.
Conclusion
Whistleblowers are sometimes viewed as “tattle-tales,” disloyal employees, or opportunists. But what difference does the whistleblower’s motivation make in the long run? Income taxes and other taxes make possible the operation of the government. The U.S. tax system relies on voluntary compliance by taxpayers in reporting their income and paying their taxes. Those who commit fraud on the federal government are only shifting their share of the collective financial burden to the rest of us. Hopefully, as more tax frauds are reported by whistleblowers who step forward, other violators will tax fraud be deterred from following in their footsteps.
Sources:
26 U.S.C. §7623
Whistleblower – Informant Award, Internal Revenue Service
2008 Report to Congress on the Whistleblower Program, IRS Whistleblower Office
Nolan, Kenneth J., “WhistleBlower Law and the Pharmaceutical Industry,” InternetDrugNews.com
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