Taxation

Whistleblowers May Hit the IRS Jackpot

Cheating on income taxes is probably as old as income taxes themselves. The IRS encourages people to report tax fraud, making whistleblowers eligible for cash pay outs if the IRS is able to collect from the dead-beat taxpayers.

Blowing the Whistle

The IRS has two programs you may use to report various types of tax fraud, such as non-payment of income, payroll, corporate and other taxes; under-reporting income or revenue; using illegal tax shelters, etc.

Although the programs started in 2006-2007, it wasn't until late 2011 when they finally started showing the type of results the IRS was looking for.

Filing Reports or "Claims"

You use the same form (PDF) for each program, but which program you use depends on the amount of money involved.

Large Dollar Amounts

What the IRS calls the Whistleblower Rules apply in cases where taxpayers:

  • Owe more than $2 million in taxes, penalties and interest
  • Are individuals and have an annual gross incomes over $200,000

The IRS will pay you between 15 and 30 percent of the money it collects from the taxpayer if it uses the information you provided.

IRS Collects & Pays Millions. There's no limit or "cap" on the amount of your award in this program. The IRS determines how much you're paid depending on the value of the information you provided and other factors.

As of late 2011 (PDF), the IRS hasn't released final numbers for this program, but 431 taxpayers filed whistleblower claims on over 5,000 taxpayers. In April 2010, the IRS awarded one whistleblower $4.2 million - an accountant who reported his employer.

Right To Appeal. You can file an appeal with the US Tax Court if you don't agree with the amount the IRS awarded to you. The court may leave the award as is, or it may increase it. It all depends on the evidence and reasoning you use to show why the IRS was wrong, as well as on how the IRS explains why it was right.

Smaller Dollar Amounts

The Informant Claims Program is for claims that don't meet the $2 million/$200,000 requirements of the Whistleblower Rules. Again, whether you get an award depends on the quality of information you provide and whether it leads to collection from a taxpayer. There are differences between the two programs, though:

  • The IRS doesn't have to give you an award, even if it uses your information and collects from a taxpayer
  • Your award may be up to 15 percent of the amount recovered by the IRS
  • Your award can't be more than$10 million
  • You can't file an appeal with the Tax Court if you disagree with the IRS about your award

IRS Collects & Pays Millions. The IRS has released many more details about this program. In 2010 (PDF):

  • The IRS received over 7,500 reports or claims from informants
  • The IRS collected nearly $500 million from of taxpayers reported
  • About $19 million in awards was paid to informants

Important Details To Remember

No matter which program you use, there are several things you should keep in mind when blowing the whistle on a taxpayer:

1. No Whistleblower Protection. Unlike other federal whistleblower laws, the IRS programs don't protect you from retaliation if you blow the whistle on your employer. In other words, you may be demoted or even fired.

The laws in your state, however, may give you some whistleblower protection.

2. Your Identity May Not Be Secret. The IRS takes every possible step to keep your name confidential, but it's not always possible. For example, if the IRS needs you to testify at a hearing or some other legal proceeding against the taxpayer you reported, the taxpayer and even the general public may discover your identity.

You can report tax fraud and remain anonymous by filing a special form (PDF), but you won't be eligible for an award.

3. Crime Doesn't Pay. The IRS may reduce your award or maybe even deny it completely if you had anything to do with creating the tax problems you reported. This may happen, for example, when you report your employer and you had a hand at preparing the employer's taxes or keeping financial or other records.

4. Awards Are Taxable. You have to pay taxes on any award you get from the IRS, just like any other prize or award. The taxes can be hefty, too. For example, after the IRS deducted federal income taxes on the accountant's $4.2 million award, he actually received $3.24 million. He paid 28 percent in taxes.

In many states, you'll have to pay state income taxes on the award, too.

5. It's A Slow Process. It may take five to seven years, maybe longer, before the IRS pays an award. The IRS investigations take time, and the taxpayers often fight the IRS in court.

When it comes to reporting tax fraud, doing the "right thing" may bring you more than a sense of pride and satisfaction. It could very well lead to a big payday for you. Be careful to follow the rules when filing your report and be wary of the potential pitfalls, and your efforts may payoff.

Questions for Your Attorney

  • What can I do if I get fired for tipping off the IRS about my employer's tax fraud?
  • My ex-spouse isn't reporting some income and is taking several credits and deductions he shouldn't be taking. Should I file a report with the IRS?
  • How much will you charge me for help filing a tax fraud claim with the IRS? Do I have to pay your fees if the IRS decides not to give me an award?

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