Several recent developments have underlined the growing importance of the IRS's tax whistleblower program about which businesses and their tax departments should be aware. The IRS Whistleblower Office investigates submissions by individuals who alert the IRS to potential violations of the tax law and pays them awards based on the amount of tax collected as a result of their information. The current whistleblower program appears to be growing much more rapidly than prior IRS initiatives. Businesses should understand the implications of these developments.

Background

In 2006, Congress significantly expanded the program's scope with the goal of encouraging more whistleblowers to report tax violations. The IRS now must pay whistleblowers an award equal to between 15 percent and 30 percent of any tax recovered as a result of information from a whistleblower if the amount at issue exceeds $2 million. The whistleblower need not report criminal conduct to receive an award; any information leading to the discovery of a tax underpayment of which the IRS was not already aware could result in an award for the whistleblower. 

Recent Developments

At a February 3, 2012 seminar, the director of the IRS Whistleblower Office reported that in 2011 alone, the IRS received almost 3,500 submissions from — and paid approximately 115 awards to — whistleblowers. While there has not yet been a substantial, widely publicized whistleblower award payment by the IRS, the large and rapidly growing number of submissions received suggest that it is only a matter of time. Caterpillar, Inc., for example, has been sued by a former tax department employee, who alleges he was wrongfully demoted after complaining to superiors that the company had underreported U.S. taxes by about $2 billion because of what he alleged was the improper attribution of $5.6 billion in revenues to Caterpillar's Swiss subsidiary.

Whistleblowers also may be protected under various laws from retaliation for reporting underpayments to the IRS or internally to management. Under the whistleblower provisions, the IRS is required to protect the whistleblowers' anonymity. In a December 2011 decision, the Tax Court extended that anonymity protection to actions whistleblowers file in Tax Court to enforce their awards. The Tax Court has also proposed changes to its rules to address whistleblower requests for anonymity. Lawyers for whistleblowers regard these as significant developments, encouraging whistleblowers to come forward.

Finally, in regulations it proposed last year, the IRS expanded whistleblower awards to include, among other things, situations in which the IRS does not make a refund that otherwise would have been paid had the whistleblower not come forward. Despite a number of unanswered questions in the proposed regulations raised by commentators, the IRS adopted the proposed regulations as final without change last week.

Compliance Implications

As the number of whistleblower submissions and awards continue to grow and the program gains additional publicity, large corporate taxpayers in particular will want to be certain they strongly encourage internal reporting of any suspected tax compliance issues and otherwise foster a culture of compliance within their organizations. In addition, whistleblower complaints of retaliation can arise from misunderstandings by tax personnel based on incomplete understanding of legal requirements and relevant facts. Ultimately, appropriate communication within the organization, internal reporting, and compliance are the best means of preventing whistleblower claims.

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