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Feb 16, 2021 by |

San Diego and California Whistleblower Attorney: Taxation of Whistleblower Rewards

ATTORNEY NEWSLETTER

IRS And Courts Take Different Approaches

One Court Says Rewards Not Taxable

Individuals receive rewards when the government recovers from wrongdoers in actions (known as “qui tams”) brought under the federal False Claims Act (FCA), 31 U.S.C. § 3729 et seq. The San Diego whistleblower attorneys at Evans Law Firm, Inc. represent individuals who initiate such cases with credible information of fraud against the government from overbilling, false certifications, misrepresentations, illegal kickbacks, billing for work never performed, reimbursement for unapproved products and procedures, or other fraud. Insiders such as current or former employees, accountants and bookkeepers, independent contractors, sales representatives and competitors are persons most likely to obtain such information firsthand.  Although qui tam cases often take many years from filing a complaint to a resolution, rewards under the FCA and other federal and State whistleblower statutes can be a sizeable percentage of what the government agency recovers.  If you have credible information of fraud against the government call our San Diego whistleblower attorneys. today at (415) 441-8669.

Taxation of Rewards

The litigators at Evans Law Firm are not tax lawyers and we always advise clients to check with their tax advisors regarding income tax treatment of any moneys received including whistleblower rewards in qui tam cases.  While the Internal Revenue Service and various courts reach differing views on the taxation of rewards, one recent court[1] has decided that such rewards do not constitute income.  In an unpublished opinion, A Pennsylvania appellate court held that a three whistleblower’s reward in a large bank fraud federal FCA case was not taxable by the State.  After legal fees, the whistleblower received a net reward of $34,560,000.00.   In the words of the court, “It seems incongruous that, on the one hand, we would encourage individuals to ferret out government waste, and, on the other hand, we would punish them by taxing the proceeds for doing so.”  The Court’s decision is not only logical but also recognizes the importance on encouraging individuals to help fight against government waste by the fraud of corporations.  Unfortunately. the IRS and other States are not bound by the ruling.

Deductibility of Legal Fees

Despite possible inclusion of a whistleblower reward in income for the year received, the tax law does plainly allow for deduction of legal fees connected with many federal whistleblower statutes. I.R.C. section 62(a)(21) allows for the deduction of legal fees incurred in connection with federal tax whistleblower actions that result in awards from the IRS. Under I.R.C. section 62(a)(20), any action brought under the federal False Claims Act can qualify for an above-the-line deduction of legal fees. See I.R.C. § 62(e)(17).  Under 26 U.S.C. § 62(a)(21) as amended by the Bipartisan Budget Act of 2018, an SEC or Commodity Futures Trading Commission (CFTC) whistleblower receiving an award from the SEC whistleblower program or CFTC whistleblower program can also now claim the attorney’s fee as a deduction.  Other deductions may also apply and our whistleblower litigators will recommend that you consult with your tax advisor regarding these and any tax questions.

Contact Us

Whistleblower cases always start out with drafting a complaint or other document that may be required by the government agency involved.  Ingrid M. Evans and the other San Diego whistleblower attorneys at Evans Law Firm know how to fashion your information into whatever form the law requires when you have information of fraud against the government.  If you have information of fraud call Ingrid and our other attorneys today at (415) 441-8669, or by email at <a href=”mailto:info@evanslaw.com”>info@evanslaw.com</a>.  Our San Diego whistleblower litigators also handle bank fraud whistleblower cases under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), commodities and futures trading cases under the Commodities Futures Trading Commission Whistleblower Program, securities fraud cases under the Securities and Exchange Commission Whistleblower Program and FINRA Whistleblower Office and offshore tax evasion and other tax fraud cases under the Internal Revenue Service Whistleblower Office. 

[1] Evans Law Firm, Inc. was not involved in the case in any way.

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