New IRS Whistleblower Rules on Reporting Taxpayer Fraud

Qui tam actions provide incentives for individuals to expose deceptions intended to defraud the federal government, from military contract fraud and Medicare fraud to misuse of federal stimulus funds. Similar laws are designed to punish fraud against state government agencies in New Jersey, Pennsylvania and most other states. A person who has inside knowledge and discloses previously unknown information that leads to legal action to punish fraudulent dealings with the government is eligible for considerable financial rewards.

One type of whistleblower action that is available to all citizens is authorized by the Internal Revenue Service. A person who is aware that a corporation or wealthy individual has cheated on federal taxes by hiding income, exaggerating deductions or using other deception to avoid tax liability is eligible for an IRS whistleblower reward of as much as 30 percent of the amount collected in back taxes, interest and penalties.

The federal tax whistleblower program, codified at 26 USC 7623(a), has historical roots going back to the late 1860s. Initially, the Secretary of the Treasury had discretion to pay rewards “for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same.” After several updates, the law was changed again in 2006 to remove discretionary limits while also creating an IRS Whistleblower Office to implement the law.

Earlier this year, the IRS responded to criticism of the process by announcing new rules relating to the disclosure of tax return information of alleged tax cheats to whistleblowers and the qui tam attorneys who represent them. But some commentators have criticized the rules for failing to take full advantage of the insights of whistleblowers and the legal expertise of lawyers who help them expose tax fraud.

The IRS Tax Whistleblower Process

An individual who has specific and credible information that could lead to an IRS audit and tax judgment should consult with an experienced tax whistleblower attorney. One important aspect of qui tam claims is that an employee is protected against retaliation by a company for disclosing knowledge of illegal activity, and a lawyer can provide advice about acting with utmost discretion while documenting fraudulent activity.

The IRS will only take on cases that will lead to administrative or judicial action, and an attorney’s ability to present the information is a vital asset. An IRS Whistleblower Office analyst will review the case to decide if legal action is warranted.

The process can take years to complete, and a whistleblower will not receive an award until the IRS has collected the tax liability. However, the rewards can be substantial for the tax informant: if the amount in dispute is over $2 million, the reward will range from 15 to 30 percent with no maximum amount. In the event that a whistleblower disputes the award, he or she can file an appeal in U.S. Tax Court.

Whistleblower cases against individuals generally involve taxpayers with gross income of $200,000 or more. However, the IRS will undertake whistleblower actions against lower-income individuals. Such awards are discretionary and the whistleblower has no right of appeal.

A Qui Tam Lawyer Can Explain a Whistleblower’s Rights and Obligations

Whistleblowers who alert authorities on fraudulent filings by taxpayers can help reduce the estimated $350 billion discrepancy between overall taxpayer obligations and collections. Recent news stories have provided numerous examples of corporations that pay little to nothing in taxes, and some companies reportedly see their tax departments as profit centers due to their ability to manipulate the federal tax code.

Our complex federal tax policy has led to a maze of loopholes and incentives, and potential informants should seek advice from an attorney who understands the IRS whistleblower law. The steady hand and practiced eye of a lawyer who regularly represents clients in qui tam litigation can help a client reap rewards while aiding in our country’s deep deficit struggles.

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