The IRS Whistleblower Statute – Informant Awards
This post analyzes the history and current law surrounding the federal whistleblower statutes. For other posts authored by our criminal tax attorneys, visit pages devoted to criminal tax, tax fraud, and tax evasion.
The first whistleblower statute was enacted in 1778. This statute aimed to protect persons who provided information against the politically powerful during the Revolutionary War. Over 240 years have passed, and whistleblower statutes have evolved to incentivize people to reveal fraudulent actions within companies or other organizations. Whistleblower information can lead to the government recouping losses in revenue as well as criminal charges. The ultimate goal of all whistleblower statutes is to encourage the production of information while protecting the rights of the whistleblower.
The most notorious and often used statute is the False Claims Act. Whistleblower actions brought under the False Claims Act are commonly referred to as Qui Tam cases. Under the False Claims Act, persons may bring suit on behalf of the federal government for fraudulent claims against federal programs or contracts. If the government acts on the information provided, the whistleblower may receive a portion of any dollar amounts recovered. Qui Tam cases are the most well known whistleblower actions in the United States.
In 2006, Congress created a new arm to the whistleblower framework aimed at curtailing fraudulent tax activity. Under 26 U.S.C. § 7623, the secretary is provided guidance on how to distribute monetary awards for whistleblowers in cases involving the underpayment of taxes. This post will review the IRS whistleblower statute and lay out how awards are distributed to whistleblowers.
Under 26 U.S.C. § 7623(a), Congress authorized the secretary to pay out monetary rewards for persons detecting underpayments of tax or detecting and bringing to trial and punishment persons guilty of violating provisions of the Internal Revenue Code (IRC). This section enables monetary rewards for informants who assist the government in collecting unpaid taxes or bringing tax law violators into the judicial system.
Under 26 U.S.C. § 7623(b), Congress laid out the requirements for persons to obtain awwards under the IRS whistleblower statute. If the government proceeds with any administrative or judicial action, the person giving information may receive an award between 15-30% of the proceeds collected. Where a person falls in this percentile range is determined by calculating how critical the persons information was to the action. If a whistleblower provides integral information to expose a large tax scheme the award percentage will be higher than if the information involves suspicious behavior which points the IRS in the right direction. The content of the information is a central focus when determining the award percentage. If the whistleblower assists in uncovering a tax scheme worth $5,000,000 to the IRS, they may be entitled to an award from $750,000 to $1,500,000. Where the whisteblower falls on that spectrum will be based, in large part, on the veracity and substance of the information provided.
26 U.S.C. § 7623(b) covers the best-case scenario for monetary awards. Later sections of the statute lower the reward, or remove it altogether, based on a variety of scenarios. Subsection (2) cuts the whistleblower reward to no more than 10% if the information came as a result of a judicial hearing, government report, or the news media. This caveat aims to separate the whistleblower who discloses previously unknown behavior to the IRS from the whistleblower who is merely providing additional information relevant to an ongoing issue. Throughout the statute, Congress makes it clear the originality of the information and the degree of assistance should control the award structure. Congress codifies this understanding when it says the reduction paragraph will not apply if the information provided initiated the action and the whistleblower was the original source. The government is willing to pay awards, but they are reluctant to give away money for information that is not integral to the recoupment of losses or is merely piggy backing on a known issue.
26 U.S.C. § 7623 (b)(3) discusses two situations where the Whistleblower Office may deny or reduce an award under the statute. This section states the Whistleblower Office may reduce an award if the whistleblower planned or initiated the actions which led to underpayment of taxes or other criminal actions. Additionally, the Whistleblower Office will deny an award if the whistleblower is convicted of a criminal act involving the produced tax scheme. This section seeks to remove whistleblowers from the reward structure if they are part of the activity which led to the criminal or administrative action. If one of the partners at a firm turns in other partners for tax violations, and the whistleblower contributed to the tax issues, the likelihood of receiving an award plummets under the statute. If the whistleblower is later convicted of a crime arising out of the tax scheme, the statute bars any award.
The IRS has carved out two tracks under the whistleblower statute. One is for larger claims which are subject to the 15-30% discussed in this post. The other is a largely discretionary award system for smaller cases. Congress has separated the two tracks by setting a monetary threshold before a whistleblower may receive a 15-30% award. This threshold can be met in two separate ways: 1) an action against an individual taxpayer whose income exceeds $200,000 for any taxable year subject to the action or 2) an action against a company or individual where the proceeds in dispute exceed $2,000,000. Proceeds are defined as penalties, interest, additions to tax, fines, forfeitures, and violations of reporting requirements. This section aims to remove small tax cases from the larger award structure.
The smaller award program applies to any informant who does not meet the thresholds discussed above. This includes cases where a person turns over a taxpayer making $90,000 per year or a company whose additional tax/action liability does not exceed $2,000,000 for the years in question. An award under this section is capped at 15% with a maximum of $10,000,000. The Whistleblower Office has complete discretion to deny any award under this section.
The awards under the whistleblower statute (large claim) are not final. If a whistleblower believes they should receive a larger percentage based upon substantial assistance or disputes the proceeds at issue, they may file an appeal of the award to a United States Tax Court. The United States Tax Court will review the award and determine whether the government had a rational basis for their decision. This appeals process is not available under the smaller award program.
It is important to note the right of appeal is very limited. The Whistleblower Office has ultimate discretion on two major issues under the statute: 1) whether to deny an award and 2) the percentage of the award given. Many whistleblowers have attempted to sue the government for denying awards or providing awards with very low percentages contrary to the statute. The courts have consistently sided with the government on these actions. Unless the government has no rational basis for their decision, the decision will be upheld in court. Under current law, the courts will review a denial or low percentage challenge if a contract existed between the whistleblower and the government for a predetermined payment.
The statute allows for all whistleblowers to retain counsel for guidance through the process. The whistleblower will have to approach the IRS by filing a form 211, provide information under the penalty of perjury, account for the amounts at issue, and potentially appeal any adverse decision to the United States Tax Court. It is always advisable for a whistleblower to retain an attorney who understands the law and can assist in making sure the correct award is paid. There are many obstacles to obtaining monetary compensation under the IRS whistleblower statute. It is imperative the information provided to the IRS is comprehensive and covers all of the areas the IRS is likely to consider in their review. Haphazardly filing a form 211 could be the difference between a 25% award and a complete denial.
The attorneys at Odom & Davis have been handling criminal tax matters for over 35 years. If you have information which may entitle you to an award under the IRS Whistleblower statute, contact us to review the information and advise you on the best course of action.