Tax Fraud – IRS Whistleblower Program

Since the 1800s, the Internal Revenue Service (IRS) has maintained a Whistleblower program in various forms to reward tipsters who expose businesses and high-earning individuals who underpay their taxes or otherwise commit tax fraud.

In 2006, Congress enacted the Tax Relief and Health Care Act and amended the Internal Revenue Code to formally create the IRS Whistleblower Office to administer a new framework and handle potential incoming Whistleblower claims.  A principal motivation for enacting the law was the recognition that it is very difficult for the IRS to detect tax evasion and tax fraud due to the complexity of the schemes and the lack of resources to audit or investigate all tax returns.

The IRS Whistleblower Program provides monetary awards to Whistleblowers who report specific and credible information that substantially contributes to an IRS action resulting in the collection of taxes, penalties, interest or additional amounts from the non-compliant taxpayer.

The goal of the IRS Whistleblower Program is to encourage insiders to report people and companies who are not paying, or are underpaying, their taxes and thereby assist the IRS in collecting additional tax revenue, which will close the known tax gap (the difference between taxes owed and taxes collected).

For eligible Whistleblowers who provide information that relates to a tax law violation in which the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2 million, Congress has directed the IRS to pay monetary awards of at least 15% and as much as 30% of the amounts collected.  If the non-compliant taxpayer is an individual, the Whistleblower Award Program only applies if the individual has annual gross income of more than $200,000 for one of the years in question.

As a result of enacting the IRS Whistleblower Program, the IRS receives reports of serious tax fraud and non-compliance from Whistleblowers, many of whom provide inside knowledge of the complex financial transactions and other illegal conduct that results in tax fraud.

What Types of Fraud can be Reported Under the IRS Whistleblower Programs?

While tax avoidance by high earning individuals is always a focus, a stated priority of the IRS is corporate tax fraud, which often involves complicated strategies around a tangled web of entities and transactions designed specifically for wrongful tax avoidance.

Among the many areas of IRS enforcement, revealing tax evasion and fraud with Whistleblower information includes, among others, the following areas:

• False and material misstatements on tax filings:
  • Improper classifications of expenditures.
  • Falsely reporting lower income.
  • Improperly categorizing personal expenses as business expenses.
  • Improper classification of executive compensation.
  • Claiming false tax deductions.
  • Failure to report digital asset income.
  • Misrepresenting residency in a different state or country to avoid taxes.
• Offshore tax evasion and avoidance:
  • Concealing or underreporting income, utilizing offshore tax havens.
  • Abusive offshore transactions and financial arrangements for tax avoidance or evasion purposes (i.e., money laundering).
• Misrepresentation of financial information and financial records to evade taxes:
  • Using false, altered or fabricated documents.
• Transfer pricing fraud:
  • Unlawfully manipulating transfer pricing (pricing between divisions of a company transacting with one another for goods or services) inconsistent with market pricing to avoid taxes by shifting profits to lower-tax jurisdictions.
• Foreign tax credit fraud:
  • Improperly claiming foreign tax credits as a means of reducing tax burdens in the U.S.
• Failing to withhold federal income tax or FICA taxes from employee paychecks.
• Failing to report and pay withheld payroll taxes.
• Intentionally not reporting cash payments to employees.
• Syndicated conservation easements:
  • Improperly claiming significantly exaggerated investment valuations as charitable contribution deductions.
• Micro-captive insurance arrangements:
  • Use of captive insurance companies to deduct excessive premiums that contain implausible risks, fail to match genuine business needs, or unnecessarily duplicate existing taxpayer commercial coverages.
• Exaggerated charitable donation deductions.

Who Qualifies as an IRS Whistleblower?

Except as stated below, an eligible IRS Whistleblower is anyone who provides specific and credible information that meaningfully assists the IRS in the investigation and prosecution of companies and high-earning individuals who conduct tax avoidance schemes through wrongful conduct and commit tax fraud.

There is no requirement that IRS Whistleblowers be insiders, employees of the company, or have direct knowledge of the fraud or underpayment of taxes, but the information provided must be important and useful to the IRS investigation.

Generally, Whistleblowers provide important original and useful information that is not publicly available.  It is possible for Whistleblowers to be still eligible for an award if they provide important insights or an analysis in non-obvious ways of the publicly available information that adds to the IRS investigation in important ways.  However, reliance on public information may reduce an IRS Whistleblower’s reward amount.

Typically, a Whistleblower’s submission of information is the catalyst for initiating an IRS investigation.  However, Whistleblowers can still be rewarded by the submission of information to a pre-existing IRS investigation provided that the information is original and useful.

Eligible Whistleblowers do not need to be a U.S. citizen to receive an award under the IRS Whistleblower Program.

Anyone can be an IRS Whistleblower and file a claim, except the following:

• An employee of the Department of Treasury or someone who was an employee of the Department of Treasury when the individual obtained the information on which the claim is based.
• An employee of the federal government who obtained the information through the individual’s official duties, or who is acting within the scope of those official duties.
• An individual who is or was required or precluded by federal law or regulation to disclose the information.
• An individual who obtained or had access to the information based on a contract with the federal government.
• An individual who obtained information from an ineligible Whistleblower whose claim would have been rejected if filed by the ineligible Whistleblower.

How Does a Whistleblower Submit Information Under the IRS Whistleblower Program?

IRS Whistleblowers must submit IRS Form 211 – Application for Award for Original Information to the IRS Whistleblower Office, and ensure that it contains the following, if applicable:

• A detailed description of the alleged tax noncompliance with supporting records, ledger sheets, receipts, bank records, contracts, emails, and the location of assets.
• Identification of supporting evidence not in the Whistleblower’s possession or control, and its location.
• An explanation of how and when the Whistleblower became aware of the information that forms the basis of the claim.
• A description of any relationship between the Whistleblower and the target of the IRS claim (i.e., family member, acquaintance, client, employee, accountant, lawyer, bookkeeper, customer).
• The Whistleblower’s original signature, pursuant to a declaration under penalty of perjury, and date of signature.

Whistleblowers often provide extensive documentation to support their claims that would not have been otherwise known to the IRS.

After submission, the IRS will likely interview the Whistleblower once and then not provide any further information until the IRS has either decided not to pursue collection or reached an agreement for payment. A final determination by the IRS may take years.

What are the Whistleblower Rewards?

The IRS Whistleblower Program provides monetary awards, in some cases mandatory, when the IRS proceeds with any administrative or judicial action based on a Whistleblower’s specific and credible information regarding tax underpayments or violations of internal revenue laws the lead to “proceeds” collected of at least $2 million for tax noncompliance matters, or for individual taxpayers whose gross income exceeds $200,000 for at least one year in question.

The Bipartisan Budget Act of 2018 defines “proceeds” as penalties, interest, additions to tax, and additional amounts provided under the internal revenue laws, as well as any proceeds arising from laws for which the IRS is authorized to administer, enforce, or investigate. This includes criminal fines, civil forfeitures, and violations of reporting requirements.

Generally, the IRS will pay an award of at least 15%, but no more than 30% percent, of the “proceeds” collected and attributable to the Whistleblower’s submitted information.  The determination of the amount of an award percentage depends upon the extent to which the Whistleblower substantially contributed to the IRS action.

In instances where the Whistleblower information was a less substantial contribution and the IRS action was based principally on publicly available disclosures from a judicial or administrative hearing, from a governmental report, hearing, audit, or investigation, or from the news media, the IRS may still pay an award to the Whistleblower as it deems appropriate, but in no case more than 10% of the proceeds collected as a result of the action (including any related actions).

The award percentage is at the discretion of the IRS, which may consider the following factors in determining the amount of an award based on the facts and circumstances of each case:

• Factors that may increase the award percentage:
  • Promptly reporting the tax issue to the IRS.
  • The significance of the information provided by the Whistleblower:
    • Providing previously unknown tax information.
    • Helping to reveal difficult to detect tax evasion.
  • The extent of the assistance provided by the Whistleblower:
    • Providing organized, easy-to-understand information.
    • Working closely with the IRS during the investigation.
  • Explaining complex relationships between transactions.
  • Identifying hidden assets that can be used to pay taxes.
  • Causing taxpayer corrective action.
  • Law enforcement priority in deterring violations of a certain area of the tax laws.
  • The extent to which the Whistleblower participated in the company’s internal compliance systems.
• Factors that may reduce the award percentage:
  • Delay, especially unreasonable delay, in reporting the tax issue to the IRS.
  • Level of participation in the tax evasion scheme.
  • Profiting or benefiting from the tax evasion scheme.
  • Actions that obstructed the IRS investigation.
  • Failure to follow IRS guidelines or instruction.

By understanding these factors, Whistleblowers can better assess the potential value of their information and increase their chances of maximizing the amount of an award.

A Whistleblower may receive additional award money if the Whistleblower’s initial information leads to continued investigations or legal actions resulting in additional tax collection.  This occurs potentially when the Whistleblower’s information triggers a broader investigation that uncovers subsequent tax evasion or fraud.

Whistleblower awards are paid after the IRS collects all proceeds owed, and all the statutory periods for a taxpayer to file a claim for a refund have expired.  The complete Whistleblower process of reporting someone to the IRS, from submission of information to the IRS until the collection of proceeds, may take years.

The Whistleblower Office will communicate the final claim determination in writing to the claimant Whistleblower.

Is There a Time Limit to Report Under the IRS Whistleblower Program?

Yes, claims are subject to statute of limitations.

Generally, the underpayment of taxes must be reported by the Whistleblower within three (3) years of the filing of the incorrect tax return, or six (6) years if the tax filings at issue understate income by 25% or more.

However, if it can be shown that the taxpayer intended to commit tax fraud, then the time to report the tax evasion is extended indefinitely.

Can an IRS Whistleblower Report Anonymously?

Submitting a Whistleblower claim is a relatively straightforward process, that can be done with or without the help of a Whistleblower attorney.

A tip submission to the IRS may be delivered confidentially on behalf of the Whistleblower through an attorney, who can act as an intermediary between the Whistleblower, the IRS, and courts. However, if the IRS Whistleblower chooses to file without an attorney, they are not eligible to file anonymously and must disclose their identity to the IRS.

Once a submission is received, it is covered by the existing IRS Privacy Policy, which requires the Agency to safeguard a Whistleblower’s identity and maintain strict confidentiality to the fullest extent of the law throughout the process.

Additionally, the IRS will seek to ensure that the targeted taxpayer does not learn that the investigation was triggered by a Whistleblower.  However, depending on the procedural nature of the IRS’s pursuit of the case (i.e., case litigation), the Whistleblower’s identity may be disclosed, possibly before obtaining any reward following an investigation, proceeding, or settlement.

If an IRS Whistleblower Reports Wrongdoing, Is There Any Protection Against Retaliation?

The IRS Whistleblower law does not contain anti-retaliation provisions.  However, under the Taxpayer First Act (TFA) of 2019, employers and their officers, employees, contractors, subcontractors, and agents, may not discharge, demote, suspend, threaten, harass or in any other manner retaliate (blacklist, demote, deny overtime or promotion, discipline, deny benefits, fail to hire or rehire, intimidate, reassignment affecting promotion prospects, or reduce pay or hours) against a Whistleblower, if they:

• Provided information or assisted in an investigation regarding underpayment of tax or any conduct which the Whistleblower reasonably believes violated internal revenue laws or any provision of federal law relating to tax fraud.  The information or assistance must be provided to one of the entities listed in the statute, which include, among others, the Internal Revenue Service (IRS), Department of Justice, Congress, and supervisors or other employer personnel with authority to discover, investigate, or address misconduct.
• Testified, participated in, or otherwise assisted in any administrative or judicial action taken by the IRS relating to an alleged underpayment of tax, any violation of the internal revenue laws, or a violation of any provision of Federal law relating to tax fraud.

A retaliation claim must be filed with the Occupational Safety and Health Administration (OSHA) no later than 180 days after the date on which the violation occurs.  OSHA will then investigate the claim, and if it determines that there is a reasonable cause to believe that a violation occurred, OSHA can order relief.  If there is no final decision by the Secretary of Labor within 180 days of the OSHA filing, the Whistleblower may pursue their claims in the appropriate Federal District Court and seek double back pay (with interest), reinstatement, reasonable attorneys’ fees, and reimbursement for certain costs in connection with the litigation.  Individuals (not just employers) may be held liable for retaliation against the Whistleblower.

Legal remedies may also exist under state laws depending on the location of the Whistleblower.

Helpful IRS Whistleblower Program News and Articles

• IRS Whistleblower Office Annual Reports
• Protecting Tax Whistleblowers: The Anti-Retaliation Protections of the Taxpayers First Act
• IRS Whistleblower Program — Awards And More Good News
• IRS announces launch of new enforcement campaign; highlights importance of whistleblowers and proper disclosure statements
• IRS Whistleblower Office celebrates National Whistleblower Day; over $7 billion in collected proceeds thanks to whistleblowers
• Can the IRS Tap the Full Potential of Its Whistleblower Program?