February 2013

The IRS has had a whistleblower program for decades, but it was not widely used and not much was paid to whistleblowers. However, the efforts to improve the program are bearing fruit.  The current program is outlined on www.irs.gov, where information is available regarding the purpose of the program, how to make a submission, and what to expect after making a submission, as well as links to relevant forms.  In addition, annual reports of results are available. In February 2013, the IRS issued its annual FY 2012 report to Congress regarding use of Section 7623. The report shows substantial increase in the information reported by whistleblowers and the IRS consideration of such information.

The IRS report summarizes their current program as follows:

“The Tax Relief and Health Care Act of 2006 (section 406) (PL 109-432) created section 7623(b) of the Code. This section set a new framework for the consideration of whistleblower submissions and established the Whistleblower Office within the IRS to administer that framework. … A whistleblower must meet several conditions to qualify for the section 7623(b) award program. To qualify for a whistleblower award, the information must:

• Relate to a tax noncompliance matter in which the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000; and

• For individual taxpayers only, relate to a taxpayer whose gross income exceeds $200,000 for at least one of the tax years in question.

If the information meets the above conditions and substantially contributes to a decision to take administrative or judicial action that results in the collection of tax, penalties, interest, additions to tax, or additional amounts, the IRS will pay an award of at least 15 percent, but not more than 30 percent, of the collected proceeds.”

There are exceptions whereby the Whistleblower Office can further decrease the award. One such circumstance is when the whistleblower was substantially involved in planning or initiating the underpayment of tax (this represents a change from prior law disallowing any payment when the whistleblower was involved in the underpayment). There is also a 10 percent cap on awards that are mainly derived from public information sources, and no award will be paid to a federal employee whose knowledge of the evasion came as a result of his or her employment duties.

The IRS doesn’t pay any award until it collects the underlying amounts and has resolved all appeals and rights of return to the taxpayer. As a result, it takes quite a while to actually get a whistleblower bounty. The IRS explained this as follows:

“The number of payments made under the section 7623(b) program is not projected to grow dramatically in FY 2013. As discussed, it typically takes a number of years to analyze, investigate and/or audit, and collect proceeds. At each stage in the tax administration process, taxpayers have rights to challenge IRS findings, including administrative and judicial appeals. The incentive for taxpayers to exercise those rights increases as the amounts in dispute gets larger, which can mean a longer timeline for whistleblower submissions alleging larger dollar noncompliance.”

Because of this delay, payments occurring in FY 2011 and FY 2012 related to whistleblower actions in 2006 and prior.

The IRS report contains the following helpful table that summarizes historical activity under the program:

Amounts Collected and Awards Paid under 7623 FY 2008-2012

(As of 9/30/2012)

 

2008

2009

2010

2011

2012
Cases Received

3,704

5,678

7,577

7,471

8,634
Awards Paid

198

110

97

97

128
Collections over $2,000,000

8

5

9

4

12
Total Amount of Awards Paid

$22,370,756

$5,851,608

$18,746,327

$8,008,430

$125,355,799
Amounts Collected

$155,985,834

$206,032,872

$464,695,459

$48,047,500

$592,498,294
Awards paid as a percentage of amounts   collected

14.3%

2.8%

4.0%

16.7%

21.2%

 

Of course, payment of a whistleblower bounty is not the end of the IRS’ interest in the funds.  Once paid, a whistleblower bounty is taxed to the receiver as ordinary income.  Furthermore, there is no guarantee that any whistleblower making a report is not subjecting him or herself to additional scrutiny from the IRS.  Perhaps of greater concern to the otherwise honest whistleblower, there is no “whistleblower protection” such as occurs in other whistleblower situations. The IRS explains:

“Unlike other laws that encourage whistleblowers to report information to the government, section 7623 does not prohibit retaliation against the whistleblower. When the whistleblower is an employee of the taxpayer, retaliation can take the form of a job-related action. In other cases, whistleblowers may face threats of physical harm or damage to economic interests. In such cases, whistleblowers reporting information under section 7623 may have recourse under state law, but federal law does not appear to provide a remedy.”

Fulcrum Inquiry is a forensic accounting firm that provides whistleblower complaint solutions to companies and non-profit organizations.