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Aug 20, 2014 by |

Major Changes to Whistleblower Rules Include Narrowed List of Ineligible Whistleblowers, Changed Definition of “Collected Proceeds,” and More Opportunities for Awards for Whistleblower Information


On January 28, 2013 Senator Charles Grassley, R-Iowa, delivered correspondence to the Internal Revenue Service with suggestions on how to improve the Tax Relief and Health Care Act of 2006. The IRS admitted receiving numerous letters expressing sentiments that largely mirrored those raised by the Iowa senator. While not yet a decade old, the IRS whistleblower law has received poor public reception, and even poorer returns.

Under the existing IRS statute, Sec. 7623(a) permits the IRS to pay awards to whistleblowers “at its discretion.” This means that even if there is a multi-million dollar recovery, the IRS reserves the right to deny a payout based on such factors as the involvement in the tax fraud scheme. For example, if a certified public accountant was involved in a scheme to defraud the government of tax revenue, but later turned whistleblower, the IRS could reasonably nullify any payout to the accountant due to involvement. Sec. 7623(a) further stipulates that any whistleblower award will issue from the “collected funds,” but only after the IRS is paid first. In short, if there are no funds left over after the IRS takes its share of the recovery, then the whistleblower could potentially receive nil. Add to this dismal picture, the high statutory bar of “standing to sue,” which mandates that anyone contemplating suing as an IRS whistleblower must first clear two high hurdles: (1) proof that the tax cheat earned $200,000 per year, and (2) proof that the tax cheat failed to report at least $2,000,000.00 in unpaid taxes to the IRS. For those IRS whistleblowers fortunate enough to meet this high bar of “standing to sue,” Sec. 7623(b) provides an award from 15% to 30% of the recovery. To improve its returns, the IRS this month issued amendments to the troubled statute.

One of the major amendments to the statute was to make state and local government employees and federal, state body, or commission members eligible whistleblowers. Another change has the IRS providing awards to whistleblowers for actions if the IRS proceeds based on information that substantially contributed to that action. However, the definition of “collected proceeds” saw the biggest change. The IRS determines the amount of award to a whistleblower based on collected proceeds.

Originally, the IRS did not take into account any reductions in tax attributes such as net operating losses (NOLs). Now, the IRS may now monitor the taxpayer’s account to determine if a reduction in NOLs is a result of whistleblower action. If the IRS determines that future-year tax payments would have been made if the NOL had not been reduced, then the IRS will pay whistleblower awards on any post-determination collected proceeds. However, the IRS will not pay a whistleblower award on post-determination collected proceeds if the reduced NOL does not result in a tax payment. The IRS may only monitor the taxpayer’s account until the IRS receives collected proceeds as a result of a reduction or the taxpayer does not apply the tax attribute and it expires, unused. These new amendments are not retroactive and will apply only to whistleblower information submitted and awards that are open from August 12, 2014 and on.

Evans Law Firm, Inc. based in San Francisco, California litigates whistleblower/false claims, consumer fraud class actions, insurance and banking fraud, consumer product liability, elder abuse, and personal injury cases. The founding partner Ingrid Evans, Esq. is admitted to the bars in California, New York, and Washington, D.C. If you reside in any of these three jurisdictions, and believe you have evidence of tax fraud, or are the victim of financial fraud by an insurance company, bank or individual, please contact the Evans Law Firm, Inc. at (415) 441-8669 or for a free case evaluation.

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