IRS Informant Reward Program – Overview
In 2006, the Congress enacted a new whistleblower law that enables private individuals to report: (1) underpayments of tax; and (2) persons otherwise guilty of violating the internal revenue laws. The passage of the IRS Whistleblower Law was significant because the False Claims Act does not apply to claims made under the Internal Revenue Code.
The IRS Whistleblower Law, like the False Claims Act, rewards whistleblowers who report allegations of fraud on the government. In general, a whistleblower can receive an award of between 15% to 30% of the collected proceeds (including penalties, interest, additions to tax and additional amounts).
The IRS Whistleblower Law is, however, very different from the False Claims Act. The process and procedure for reporting fraud under the IRS Whistleblower Law are substantially different from the qui tam whistleblower provisions of the False Claims Act. For example, whistleblower reports under the IRS Whistleblower Law are not, as in False Claims Act cases, raised in a lawsuit filed in federal court and served on the Attorney General and Local United States Attorney. Instead, whistleblower reports are handled by the IRS Whistleblower Office and disputes may be appealed to the Tax Court.
There are also many substantive differences between the IRS Whistleblower Law and the False Claims Act. For example, the IRS Whistleblower Law applies, in the case of individual taxpayers, only to those individuals: (1) with a gross income above $200,000 for the relevant taxable year; and (2) when the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2 Million. The False Claim Act, by contrast, contains no such monetary thresholds.
IRS Proposes Amendments to Its Informant Reward Program
In 2006, Congress passed the Tax Relief and Health Care Act, which created the IRS Whistleblower office and made rewards to whistleblowers less discretionary than in the past. Under Internal Revenue Code 7623(a), the IRS shall pay awards to people who provide “specific and credible information” to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from a noncompliant taxpayer. The IRS wants specific information about significant tax issues. “Significant” is defined by the IRS as taxes, penalties, and interest owed in excess of $2 million. This is not the venue to report speculative concerns, air personal disputes, drop a dime on a former spouse, or to report isolated events such as a waiter failing to declare his tips as income.
There are two basic tracks currently in place for whistleblower complaints that are filed with the IRS. On the first track, whistleblowers submit information concerning amounts in dispute (back taxes, interest, and penalties) in excess of $2 million. In these cases, the IRS is looking for non-compliant taxpayers with annual gross income of more than $200,000. If the IRS successfully obtains a recovery from a non-compliant taxpayer, the IRS is required to pay the whistleblower between 15 and 30% of the recovery. Whistleblowers on this track who are not satisfied with the reward may appeal to the United States Tax Court located in Washington, D.C.
The second track applies to cases involving less than $2 million in dispute. If the IRS obtains a recovery in these cases, payment of a reward to the whistleblower is discretionary, with a maximum of 15% of the recovery up to a maximum of $10 million. Whistleblowers on this track cannot appeal to the United States Tax Court.
On January 18, 2011, the IRS published notice of proposed rulemaking that will redefine how whistleblowers may be compensated by the government. The proposed amendments allow for rewards to be paid to whistleblowers if the information they provide results in the denial of a claim for a refund that the IRS would have otherwise paid or reduces an overpayment credit balance. In other words, if the whistleblower’s tip prevents the IRS from paying an improper refund to the putative defendant, the amount of that refund will be included in the calculation of the recovery by the government. This represents a significant change from the law as it currently stands. It seeks to monetize prospective violations as opposed to recovering amounts that previously were paid. Similarly, if the whistleblower provides the IRS with information that a putative defendant tried to claim a fraudulent loss as an offset to tax liability, the resulting amount of taxes owed will be included when calculating the whistleblower’s reward.
These proposed changes, if adopted, will open the whistleblower program up to a whole new population of citizens with credible information. Claims for rewards that would have previously been denied may now be granted.
For more information on the IRS Whistleblower Program, visit:
IRS Whistleblower Paid $4.5 Million: First Award Under IRS Whistleblower Program
An accountant who reported to the IRS that his employer was underpaying its taxes was recently awarded $4.5 Million by the IRS. This represents the first award paid to a tax whistleblower under the IRS Whistleblower Program. The $4.5 Million award represented a 22% share of the taxes recovered (as discussed above, the IRS Whistleblower Program entitles the Whistleblower to receive between 15% and 30% of the amount recovered). The payment of this award is an encouraging sign for the many other whistleblowers who have been stepping forward to report under the IRS Whistleblower Program, as well as for those who are contemplating blowing the whistle.
Treasury Department Inspector General Calls for Audit of IRS’ Handling of Whistleblower Claims
In its 2011 Annual Audit Plan, the Treasury Department’s Inspector General for Tax Administration recently stated that one objective of the Inspector General’s Audit was:
At the suggestion of the Congress, determine whether the IRS has taken effective corrective actions to address previously identified weaknesses in processing claims from whistleblowers. Specifically, determine if the Whistleblower Office’s new procedures are contrary to Congress’ intent and will deter whistleblowers.
The announcement of this Audit Objective is an encouraging sign that Congress’ repeated calls for more effective procedures in handling whistleblower claims have had an impact within the IRS. This follows on the heels of the recent amendments to the IRS Whistleblower Program discussed above.
IRS Statistics on Underpayments of Federal Taxes
The IRS periodically releases estimates of the tax gap – the difference between taxes owed and taxes paid in a timely manner. The latest IRS estimates show a tax gap of about $350 billion for tax year 2001. The tax gap consists of three components – non-filing (taxes not paid by those with a filing requirement who fail to file), underreporting (taxes underpaid by those who file but underreport what they owe), and underpayment (taxes not paid by those who fail to remit reported amounts owed when due). IRS reports the tax gap for separate tax sources, including individual income taxes, corporate income taxes, employment taxes, and estate taxes.
At a meeting held in June 2010, the IRS Tax Gap Subgroup, for example, concluded that the non-filing gap for estate taxes in tax year 2004 (at the midpoint of a confidence interval) was $2.5 billion, or about 9.2 percent of tax liability. The estimate is similar in magnitude to estimates for earlier years using a different methodology.
The latest estimate of the underreporting gap was $1.9 billion in 2004, (with a confidence interval ranging from $0.7 billion to $3.0 billion). Based on the statistical confidence intervals, IRS staff concluded that the results were not significantly different from the estimates previously released for tax year 2001.
These results demonstrate a tremendous level of underreporting and underpayment of federal taxes. The IRS Whistleblower Program was designed to assist in the collection of such underreporting and underpayment of taxes by incentivizing whistleblowers to assist the government in the collection of the underpayment of taxes.
FALSE CLAIMS ACT WHISTLEBLOWER NEWS
U.S. Supreme Court Rules that FOIA Requests Trigger Public Disclosure Bar
On May 16, 2011, the United States Supreme Court ruled, in Schindler Elevator v. United States ex rel. Kirk , Case No. 10-188, that a federal agency’s written response to a Freedom of Information Act (FOIA) request for records constitutes a “report” within the meaning of the False Claims Act’s public disclosure bar. The public disclosure bar of the FCA generally forecloses private parties from bringing qui tam suits to recover falsely or fraudulently obtained federal payments where those suits are “based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media.” 31 U.S.C. § 3730(e)(4)(A).
The Court looked to the dictionary definition for “report”, because the FCA does not define the term. Dictionaries define “report” as, for example, something that gives information. According to the Court, using this broad definition is consistent with the drafting history of the public disclosure bar, which the Court stated was intended to discourage “opportunistic” litigation.
The Court did not decide whether the Relator’s allegations were “based upon … allegations or transactions” disclosed in the reports at issue. Additionally, it bears noting that the FCA’s public disclosure bar was amended in 2010, and that the Supreme Court’s decision addressed the pre-amendment version of the public disclosure bar.
To read a copy of the Supreme Court’s Opinion, visit www.supremecourt.gov/opinions/10pdf/10-188.pdf
SEC Adopts Final Regulations For Whistleblower Program
With great anticipation, the SEC adopted its final regulations governing the new whistleblower program under the Dodd-Frank financial reform legislation. Most significantly, the SEC did away with a proposed requirement that whistleblowers first report wrongdoing internally before reporting to the SEC, despite strong opposition from corporate lobbyists. The SEC did provide enhanced remedies for whistleblowers that decide to first report internally by reaffirming that such whistleblowers will still be eligible for an award, and by giving the whistleblower 120 days to report to the SEC if the company fails to do so. The employee would receive whistleblower status from the date of internal reporting so as to maintain their place in line in case of successive reporting of the same conduct. The SEC also provided that cooperation with a company’s internal compliance program would be a factor in determining whether to increase a whistleblower’s award.
The SEC broadened the type of information that may qualify for an award by making a whistleblower eligible for an award if the information provided reopens a closed investigation or opens a new line of inquiry in an existing investigation. The SEC clarified those individuals who would not be eligible to participate in an award, including:
The SEC also announced that it has completed initial staffing of the Office of the Whistleblower and that the Investor protection Fund from which awards will be paid, is fully funded.
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