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What is an IRS Tax Fraud Whistleblower Reward?

San Francisco IRS Whistleblower Lawyers

If you are unsure what an IRS (Internal Revenue Service)/tax fraud whistleblower reward is and how it is different from a false claims act case, the San Francisco IRS whistleblower lawyers at Evans Law Firm, Inc. can answer your questions.

The federal False Claims Act (“FCA”) specifically excludes tax fraud, stating: “This section does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.” (13 U.S.C. § 3729(d).) However, the Tax Relief and Health Care Act of 2006 established compensation for whistleblowers who report tax fraud. (Pub.L. No. 109-432 (Dec. 20, 2006) 120 Stat. 2922.) Previously, the IRS was authorized to pay rewards to informants. The new law provides an interest in collected proceeds and sets forth limitations on payments to whistleblowers. There are two major differences between the tax fraud law and the FCA. First, the IRS must pay a reward regardless of whether the informant is an original source of information. In addition, the tax fraud law does not provide for a private citizen to prosecute a claim if the federal government fails to do so.

Overview of Whistleblower Payments

The IRS whistleblower law provides that whistleblowers may receive a reward of 15 percent to 30 percent of the amount the IRS collects as a result of information about tax fraud provided to the IRS. (13 U.S.C. § 7623(b)(2)(A).) The amount the whistleblower’s reward is based on includes any interest, penalties, or other additional amounts collected by the IRS. (Internal Revenue Manual § 25.2.2.7.) The percentage of the reward is based upon the extent of the whistleblower’s contribution. (26 U.S.C. § 7623(b)(2)(A).) The whistleblower is paid after the IRS closes the case, completes its investigation into the tax fraud or underpayments, and collects all amounts owed in the case. (Internal Revenue Manual § 25.2.1.6.) If a whistleblower is not an original source and the recovery was based primarily on disclosures from other sources, the whistleblower can receive an award of up to ten percent. (26 U.S.C. § 7623(b)(2)(B).) To qualify for a reward, the whistleblower must provide information about tax fraud or tax underpayments that exceed $2 million (including interest and penalties) by an individual taxpayer whose annual income exceeds $200,000. (26 U.S.C. § 7623(b)(5).) If a whistleblower planned or initiated the actions that led to the underpayment, the whistleblower’s award can be reduced or denied entirely. (26 U.S.C. § 7623(a)(3)

Process for Submitting a Whistleblower Complaint

To submit a whistleblower complaint, individuals must complete IRS form 211, “Application for Award for Original Information,” and send the completed form to the Whistleblower Office of the IRS – the attorneys at our San Francisco IRS whistleblower law firm can help with this process. (Internal Revenue Manual § 25.2.2.3.) Form 211 must include information explaining why the claimant believes it will lead to the collection of unpaid taxes, including any available documentation and substantiation. (Ibid.) The claim must be submitted under penalty of perjury. (Ibid.) If a claimant is represented by an attorney, they must submit a form 2848, “Power of Attorney.” (Ibid.) Additionally, it appears that the Treasury Inspector General for Tax Administration has established a hotline for individuals to call to report tax fraud. There is also an online form that can be used to submit a complaint. (See http://www.treasury.gov/tigta/contact_report.shtml.) Once a claim is received by the IRS Whistleblower Office, it conducts a review of the claim. (Internal Revenue Manual § 25.2.2.4.) If any additional information is needed, the IRS Whisleblower office will follow-up with the whistleblower to see if additional information can be provided. (Ibid.) Supplemental information is not considered as a new claim unless it prompts the IRS to take an administrative or judicial action that would not have been taken on the basis of the earlier supplied information. (Internal Revenue Manual 25.2.2.9) Once the IRS establishes that an individual is a whistleblower under section 7623, the individual is deemed to be a confidential informant and their identity will be protected in accordance with Internal Revenue Code section 6103(h)(4).

Factors Used to Determine Amount of Reward

The Whistleblower Office evaluates the information provided by the whistleblower to determine the percentage of the award. If a whistleblower is an original source, awards are either 15%, 18%, 22%, 26%, or 30%. (Internal Revenue Manual § 25.2.2.9.2.5.) If a whistleblower is not an original source and the recovery by the IRS is based primarily on information from other sources, and the IRS determines that some award is merited, awards are either, 1 percent to 4 percent, 7%, or 10%. (Internal Revenue Manual § 25.2.2.9.2.9.) The percentage of the award is based on a list of established factors. (Internal Revenue Manual § 25.2.2.9.2.10-11.)

Positive Factors:

  • Prompt action by the whistleblower to inform the Government or taxpayer of noncompliance;
  • The whistleblower presents information unknown or likely to be undetected by the Government;
  • Detailed and organized presentation of information which reduces IRS workload;
  • Exceptional cooperation and assistance during investigation, audit, or trial;
  • Identification of assets which could be used to pay the liabilities or assets not known to the IRS;
  • Identification of transactions or participants in transactions that have tax implications that would not have been revealed otherwise; and
  • Impact of the whistleblowers reporting on the behavior of the noncompliant taxpayer.

Negative Factors:

  • Delays in reporting which adversely impact the IRS’ ability to detect and pursue noncompliance;
  • The whistleblower participating in noncompliance or profiting from noncompliance;
  • Putting the tax case at risk, such as disclosing IRS enforcement actions to the noncompliant tax payer; and
  • Violation of specific instructions from the IRS regarding whistleblower actions which are permissible or not.

If a whistleblower is determined to be a planner or initiator of the conduct that led to the underpayment of tax, the award will be reduced according to the following scale: (1) Significant planners and initiators – reduce by 66% to 100%; (2) Moderate planners or initiators – reduce by 33% to 66%; and (3) Minimal planners and initiators – reduce by 0 to 33%. (Internal Revenue Manual § 25.2.2.9.2.13.) No amount is paid if the informant is convicted of criminal conduct arising from their role in the underpayment. (Ibid.) Factors for Reduction Based on Whistleblower’s Involvement:

  • Whether the whistleblower acting alone or with others;
  • Whether the whistleblower’s actions were undertaken legitimately or if he engaged in identifiable or intentional misconduct;
  • The extent the whistleblower knew or should have known that their conduct would lead to tax underpayment;
  • Whether the whistleblower attempted to conceal the underpayment; and
  • The whistleblower’s role in soliciting other participants to the underpayment.(Internal Revenue Manual § 25.2.2.9.2.13.)

Appealing an Award

Once the Whistleblower Office has made a final determination for a claim, the whistleblower will be notified of the amount of the award by certified mail. The whistleblower then has 30 calendar days from the date of the determination to appeal the amount of the award to the United States Tax Court. (26 U.S.C. § 7623(b)(4).) 26 USC § 7623. Any whistleblower who believes their award is unjust is encouraged to contact our law firm and speak with one of our San Francisco IRS whistleblower lawyers.

Expenses of detection of underpayments and fraud, etc.

(a) In general. The Secretary, under regulations prescribed by the Secretary, is authorized to pay such sums as he deems necessary for– (1) detecting underpayments of tax, or (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same, in cases where such expenses are not otherwise provided for by law. Any amount payable under the preceding sentence shall be paid from the proceeds of amounts collected by reason of the information provided, and any amount so collected shall be available for such payments.

(b) Awards to whistleblowers.

(1) In general. If the Secretary proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary’s attention by an individual, such individual shall, subject to paragraph (2), receive as an award at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action. The determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action.

(2) Award in case of less substantial contribution. (A) In general. In the event the action described in paragraph (1) is one which the Whistleblower Office determines to be based principally on disclosures of specific allegations (other than information provided by the individual described in paragraph (1)) resulting from a judicial or administrative hearing, from a governmental report, hearing, audit, or investigation, or from the news media, the Whistleblower Office may award such sums as it considers appropriate, but in no case more than 10 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action, taking into account the significance of the individual’s information and the role of such individual and any legal representative of such individual in contributing to such action. (B) Nonapplication of paragraph where individual is original source of information. Subparagraph (A) shall not apply if the information resulting in the initiation of the action described in paragraph (1) was originally provided by the individual described in paragraph (1).

(3) Reduction in or denial of award. If the Whistleblower Office determines that the claim for an award under paragraph (1) or (2) is brought by an individual who planned and initiated the actions that led to the underpayment of tax or actions described in subsection (a)(2), then the Whistleblower Office may appropriately reduce such award. If such individual is convicted of criminal conduct arising from the role described in the preceding sentence, the Whistleblower Office shall deny any award.

(4) Appeal of award determination. Any determination regarding an award under paragraph (1), (2), or (3) may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).

Application of this subsection

This subsection shall apply with respect to any action– (A) against any taxpayer, but in the case of any individual, only if such individual’s gross income exceeds $ 200,000 for any taxable year subject to such action, and (B) if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $ 2,000,000. 6) Additional rules. (A) No contract necessary. No contract with the Internal Revenue Service is necessary for any individual to receive an award under this subsection. (B) Representation. Any individual described in paragraph (1) or (2) may be represented by counsel. (C) Submission of information. No award may be made under this subsection based on information submitted to the Secretary unless such information is submitted under penalty of perjury.

For more information concerning IRS whistleblower awards or false claims cases, please contact Evans Law Firm, Inc. for a free consultation with an experienced lawyer.

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