IRS Tax Fraud Whistleblower Reward Program

By Jason Zuckerman and Matthew Stock
Last updated: September 21st, 2017

IRS Whistleblower Reward Program

The IRS estimates that the United States loses $450 billion per year to tax evasion. In 2006, Congress enacted legislation providing robust incentives for whistleblowers to report tax fraud.  Under 26 USC § 7623(b), the IRS is required to issue an award to tax whistleblowers of 15 to 30% of proceeds collected from tax fraud or tax underpayments if:

• the whistleblower provides a tip that the IRS decides to take action on (a whistleblower cannot force the IRS to act on a tip);
• the amount in dispute (the tax underpayment, including interest and penalties) exceeds $2 million (if the taxpayer is an individual, his or her gross income must exceed $200,000 for at least one of the  tax years in question); and
• the IRS collects tax underpayments resulting from the action (including any related actions).

In enacting the IRS whistleblower bounty legislation, Congress provided mandatory awards to tax whistleblowers for better information.  Section 7623 suggests a focus on large-scale tax fraud in that Congress removed the previous cap of $10 million on IRS whistleblower awards. Thus, if a whistleblower meets the requirements above, the whistleblower may be able to receive substantial payouts.  

A denial of an award or reduction of up to 10% may be made in cases where the information provided to the IRS is

• brought by an individual who “planned and initiated” the actions that led to the underpayment of tax.
• based on information derived from a judicial or administrative hearing; a governmental report, hearing, audit, or investigation; or the news media.

Tax whistleblower awards are subject to appeal to the U.S. Tax Court within 30 days of an IRS determination.

If a tax whistleblower case does not meet the $2 million threshold (or cases involving individual taxpayers with gross income of less than $200,000), a whistleblower award may still pursue an award under section 7623(a). Under this section, the IRS may issue a discretionary award to a whistleblower for tips that lead to “detecting underpayments of tax, or bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same.” The awards under this program are a maximum of 15% of the proceeds collected, capped at $10 million. It should be stressed that awards under this program are discretionary, whereas awards under 7623(b) are mandatory.

IRS Whistleblower Awards

According to the Whistleblower Program Annual Report, the IRS issued 418 awards to whistleblowers totaling more than $61 million in FY 2016. This was a fairly typical year for the program in terms of the total amount of the awards issued:

• In FY2015, the IRS issued 99 awards, totaling more than $103 million;
• In FY 2014, the IRS issued 101 awards, totaling more than $52 million dollars;
• In FY 2013, the IRS issued 122 awards, totaling more than $53 million dollars; and
• In FY 2012, the IRS made 128 awards, totaling more than $125 million dollars.

Notable successes of the IRS Whistleblower Program include:

• Bradley Birkenfeld was awarded $104 million after blowing the whistle on the Swiss Bank, UBS, for helping wealthy Americans hide their assets and evade taxes.
• An unidentified whistleblower received $38 million for exposing a corporate tax avoidance scheme.
• In Whistleblower 21276-13W v. CIR, two whistleblowers were issued an award for more than $17.5 million.  Importantly, the Tax Court’s Final Order confirmed that when the IRS determines an award based on “collected proceeds,” this encompasses all dollars collected by the U.S. government, including criminal penalties, FBAR, etc.
• An unidentified accountant received $4.5 million after discovering a $20 million-plus tax liability at a Fortune 500 company. The accountant reported the liability and was subsequently ignored by the company.
• Wall Street insider nets a $2 million reward after exposing an alleged tax avoidance scheme by manufacturer Illinois Tools Works. This was the third seven-figure reward from the IRS for the anonymous whistleblower.

Number of Whistleblower Awards, Proceeds Collected, and Award Amounts Fiscal Year 2011 to June 30, 2015

	7623(a) claims	7623(b) claims	Total
Total Awards	483	17	500
Total Collected Proceeds	$843 million	$1,039 million	$1,882 million
Total Award Amount	$54 million	$261 million	$315 million

Source: GAO analysis of IRS data. | GAO-16-20

The IRS Whistleblower Office has recently released Publication 5251 – The Whistleblower Claim Process.  The new publication provides general guidance on the tax whistleblower program and clarity on the types of information whistleblowers should provide to the office.  In addition, the publication explores what happens to claims after the IRS receives them, communication with the IRS after a submission, and a process timeline for claims.

Eligibility for Tax Whistleblower Reward

Under the new tax whistleblower statute, the IRS is required to issue a reward to tax whistleblowers of 15 to 30% of proceeds from tax fraud or tax underpayments if:

• the whistleblower provides specific and credible information that the IRS decides to take action on (a whistleblower cannot force the IRS to act on a tip);
• the information relates to tax underpayments of over $2 million (or if the subject of the claim is an individual, his or her gross income must exceed $200,000 for at least one of the  tax years in question); and
• the IRS collects tax underpayments resulting from the action (including any related actions).

In the publication, the IRS outlines the types of “specific and credible” information that whistleblowers should provide when submitting a tip. This includes:

• A description of the amounts due, including a written narrative explaining the issue(s);
• Information to support the narrative;
• A description of the documents or supporting evidence not in the whistleblower’s possession or control; and
• An explanation of how the whistleblower obtained the information and if there is any relationship to the subject of the claim.

It is important for tax whistleblowers to provide the best information available as it may support the increase of a reward percentage (among other factors).

Submitting a Whistleblower Tip to the IRS

Once a whistleblower submits a tip, the Whistleblower Office will determine if it has merit, and then forward the tip to the appropriate operating division for further development.  The publication notes this initial review generally takes 30-90 days and the Subject Matter Experts (SME) examination will take an additional 90 days.  During the SME’s examination, the whistleblower may be contacted to make sure that the IRS fully understands the information submitted by the whistleblower.

Thereafter, if the IRS does not pursue the claim, the agency will send the whistleblower a claim denial letter.  Alternatively, if the IRS decides to pursue the claim, whistleblowers will only be notified that their claim is “open”.  The IRS is unable to provide whistleblower with more detail because Section 6103 of the Internal Revenue Code “requires the IRS to keep taxpayer returns and return information confidential.”  As such, the IRS takes the position that communications between tax whistleblowers and the IRS should be very limited. However, a recent memo from the IRS’s Whistleblower Office allows the IRS to enter into a contract (a “6103(n) contract”) with whistleblowers in order to share otherwise confidential taxpayer information. Prior to entering into a section 6103(n) contract with a whistleblower, the IRS must:

1. Interview the whistleblower to consider a contract, as well as to clarify any submitted information and the knowledge of the whistleblower prior to entering a contract. The IRS will be more inclined to enter into a contract with a whistleblower when:
   • The issues involve transactions not recorded on the books and records of the taxpayer;
   • The whistleblower has substantial industry expertise, particularly when there are complex transactions or emerging compliance issues; and
   • The issues involve substantial factual development where the whistleblower’s knowledge could be beneficial.
2. Evaluate whether the whistleblower tip is one in which ongoing interaction with the whistleblower would benefit tax administration and promote the effective resolution of the issues.

It is important to note that there is another exception to Section 6103 for whistleblowers’ administrative or judicial proceedings pertaining to the tax administration.  As detailed in the publication, the start of whistleblowers’ administrative proceeding occurs when a payment is made to the IRS and the agency issues a Preliminary Award Recommendation Letter.  This administrative proceeding may occur any time from between 2 to 14 years after a submission.  According to the 2015 IRS Whistleblower Program’s Annual Report, the average claim under the new tax whistleblower statute took 6 years.

Finally, a recent a Tax Court Order suggests that the IRS cannot hide behind Section 6103 when it comes to responding to discovery requests by the whistleblower.

Information About IRS Whistleblower Program

IRS Whistleblower Program Paid More than $103M to Whistleblowers in FY2015

Can tax whistleblowers remain anonymous?

IRS Whistleblower Office Issues New Guidance on IRS Whistleblower Reward Process

IRS Whistleblower Office Calls on Congress to Protect Whistleblowers

Audit Reveals IRS Whistleblower Program Needs Improvements

IRS Whistleblower Lawyers

The whistleblower lawyers at Zuckerman Law have experience representing whistleblowers before the IRS and one of our attorneys is also a Certified Public Accountant and Certified Fraud Examiner.  To discuss potential representation in a tax fraud whistleblower case, click here or call us at 202-262-8959.