The IRS Whistleblower Program: A Tool to Target Noncompliance

September 2, 2011Articles The Legal Intelligencer

The U.S. tax system relies on the truthful self-reporting of income by taxpayers, reinforced by IRS auditing and ever-expanding computer matching programs. In addition, significant tax revenues (together with interest and penalties) have been recovered as the result of whistleblowers who have reported instances of tax non-compliance to the IRS. Section 7623 of the Internal Revenue Code provides for monetary awards to whistleblowers who provide information to the IRS that leads to the detection and recovery of underpayments of tax.

To be eligible for an award as a whistleblower, Section 7623(b) requires that the sum of the tax, penalties, interest and additions to tax must exceed $2 million and, if the allegedly noncompliant taxpayer is an individual, the individual's gross income must exceed $200,000 for any taxable year at issue. If the thresholds contained in Section 7623(b) are not met, the IRS is authorized pursuant to Section 7623(a), but not required, to pay awards for information relating to tax violations that result in the government's recovery of tax.

A Whistleblower Office has been established in the IRS and is charged with the final determination of whether an award should be paid and the amount of the award for claims that it processes. Awards will be paid in proportion to the value of information furnished voluntarily with respect to proceeds collected, including penalties, interest and additions to tax. Section 7623(b)(1) mandates that the amount of an award will be at least 15 percent but no more than 30 percent of the collected proceeds in cases in which the IRS determines that the information submitted by the whistleblower substantially contributed to the detection and recovery of tax.

If the whistleblower planned and initiated the actions that led to the underpayment of tax or to the violation of the tax laws, the Whistleblower Office may reduce the award. If the whistleblower is convicted of criminal conduct arising from his or her role in planning and initiating the action, the Whistleblower Office is authorized to deny the claim. In a letter dated Aug. 10, 2011, representatives from a variety of whistleblower advocacy groups urged the commissioner of the IRS to modify the language in the Internal Revenue Manual, which takes a relatively expansive view of whether a whistleblower could be determined to have "planned or initiated" the actions leading to the underpayment of tax.

If a whistleblower's allegations are based principally on information resulting from judicial or administrative proceedings, government reports, hearings, audit or investigations, or the media, rather than information supplied exclusively by the whistleblower, an award of a lesser amount, subject to the discretion of the Whistleblower Office, may be provided. However, in such event, the award may not exceed 10 percent of the collected proceeds, including penalties, interest and additions to tax resulting from the action. This reduction in award percentage will not apply if the IRS determines that the whistleblower was the initial source of the information that resulted in the judicial or administrative proceedings, government reports, hearing, audit, or investigation, or the media's report on the allegations.

When the Whistleblower Office has made a final determination regarding a claim, the Whistleblower Office will send notice to the whistleblower regarding its final award determination. Final Whistleblower Office determinations regarding awards under Section 7623(b) may, within 30 days of such determination, be appealed to the U.S. Tax Court. Discretionary awards made pursuant to Section 7623(a) may not be appealed to the Tax Court.

In Notice 2008-4, the IRS issued guidance on the procedures that a whistleblower must follow in submitting a claim. In general, individuals who wish to become a whistleblower must submit the requisite information on a completed IRS Form 211 (Application for Award for Original Information). The Form 211 must include the following information:

• The whistleblower's name.

• The whistleblower's contact information.

• The whistleblower's date of birth.

• The whistleblower's taxpayer identification number or Social Security number.

• Specific and credible information concerning the persons that the whistleblower believes have failed to comply with tax laws and that will lead to the collection of unpaid taxes. This information should include the name of the person that committed the alleged violation of the tax laws, the person's address, the person's taxpayer identification number, the facts supporting the basis of the amounts claimed to be owed and available documentation to substantiate the claim.

In addition to the above, Form 211 requires the whistleblower to provide an explanation of how the information that forms the basis of the claim came to the attention of the whistleblower, including the dates on which this information was acquired and a complete description of the whistleblower's present or former relationship (if any) to the person that is the subject of the claim (e.g., family member, acquaintance, client, employee, accountant, lawyer, bookkeeper, etc.). Finally, every whistleblower claim must be accompanied by an original signed declaration that the whistleblower is filing the claim under penalty of perjury. Because of the requirement to submit information under penalty of perjury, a person serving as a representative of the claimant or an entity may not submit a whistleblower claim. Similarly, the penalty of perjury requirement precludes submissions made anonymously or under an alias.

Notice 2008-4 also contains several examples of submissions that will not be processed as valid whistleblower claims, including the following:

• Claims submitted by an individual who is an employee of the Department of the Treasury or who is acting within the scope of his or her duties as an employee of any federal, state or local government.

• Claims submitted by an individual who is required by federal law or regulation to disclose the information, or by an individual who is precluded by federal law or regulation from making the disclosure.

• Claims submitted by an individual who had access to taxpayer information arising out of a contract with the federal government that forms the basis of a claim.

• Claims that upon initial review have no merit or that lack sufficient specific and credible information.

Pursuant to Notice 2008-4, the IRS will endeavor to protect the identity of a whistleblower to the fullest extent permitted by law. However, the notice does state that under some circumstances, such as when the whistleblower is needed as a witness in a judicial proceeding, it may not be possible to pursue the investigation or examination without revealing the whistleblower's identity. If a whistleblower's identity must be revealed, the IRS will make every effort to inform the whistleblower before proceeding with such a case.

Any awards payable to a whistleblower will not be made until the proceeds that serve as the basis for any award determination are collected, which may take several years. In general, taxes, interest and penalties are not collected until there is a final determination of the tax liability, which is either memorialized in a closing agreement with the IRS or when a judicial determination becomes final. All whistleblower awards are subject to current federal tax reporting and withholding requirements and will be reported to the whistleblower on a Form 1099.

Each year, the IRS is required to conduct an annual study and report to Congress on the use of the whistleblower provisions of Code Section 7623. For the fiscal year ended June 30, 2010, the IRS reports that there were 431 whistleblower submissions that identified 5,429 allegedly noncompliant taxpayers. The number of taxpayers identified as allegedly violating the tax laws is more than double the amount of such taxpayers indentified in fiscal year 2009. In 2010, the IRS collected $464,695,459 as a result of whistleblower submissions and paid total awards of $18,746,327. All of the whistleblower awards paid in 2010 were paid under the provisions of Section 7623 in effect prior to 2006 when Section 7623 was amended to provide statutory award percentages, so that the amount of all such awards paid in 2010 were within the discretion of the IRS.

Although the U.S. tax system is largely predicated upon honest self-reporting, Congress has also recognized the benefit of a reward program designed to uncover noncompliant taxpayers. The whistleblower provisions of Code Section 7623 are intended to encourage the reporting of noncompliance. Based upon the numbers of whistleblower submissions received by the IRS, the number of potentially noncompliant taxpayers identified in these submissions and the amount of tax, interest and penalties recovered, the whistleblower program appears to be an effective component of overall tax compliance.

"Reprinted with permission from the September 2 issue of The Legal Intelligencer. (c) 2011 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved."