The Tax Relief and Health Care Act of 2006 established the Whistleblower Office of the Internal Revenue Service ("IRS"). According to the IRS, the Whistleblower Office is responsible for assessing and analyzing incoming tips to maintain the integrity of the U.S. federal income tax system.1 Moreover, the Whistleblower Office pays monetary awards to eligible individuals whose information is used by the IRS.2 That is, taxpayers can personally benefit by providing to the IRS credible evidence of tax underpayments or violations of the internal revenue laws.
Overview of the Whistleblower Office
John Hinman serves as the new director of the Whistleblower Office. In a recent article released by the IRS, he provided a general overview of the Whistleblower Office as follows:
Our nation's tax system is built on the principle of voluntary compliance. When this principle is observed, taxpayers file tax returns and pay their taxes timely and accurately without the need for compliance activity by the IRS. Voluntary compliance is aided by the knowledge that non-compliance with tax laws will be addressed through examinations, collection activities, criminal investigations and other tax enforcement work. The IRS uses increasingly sophisticated data analytics and other methods to detect non-compliance with tax laws, but we can't find it all by ourselves. We need help from whistleblowers – people with firsthand knowledge of non-compliance who are willing to share what they know with us so we can investigate it when warranted.
The IRS Whistleblower Office was established by the Tax Relief and Health Care Act of 2006. Each year, the IRS receives thousands of award claims from individuals who identify taxpayers who may not be abiding by our nation's tax laws. My office ensures that award claims are reviewed by the appropriate IRS business unit, determines whether an award should be paid and the percentage of any award, and ensures that approved awards are paid.
Since the inception of the Whistleblower Office in 2007, the IRS has paid more than $1.05 billion in over 2,500 awards to whistleblowers. The information provided by these individuals led to the successful collection of over $6.39 billion from non-compliant taxpayers. The awards paid to whistleblowers generally range between 15 to 30 percent of the proceeds collected and attributable to their information.3
Section 7623 of the Internal Revenue Code, entitled Expenses of detection of underpayments and fraud, etc., outlines the framework by which the IRS offers awards for actionable whistleblower information. Awards are processed as either a Section 7623(a) award or a Section 7623(b) award. Those provisions provide, in part:
(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 proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action (determined without regard to whether such proceeds are available to the Secretary). 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.4
Section 7623(b) incorporates various other rules and criteria with respect to whistleblower claims, such as requiring that the information: (1) relate to a tax noncompliance matter in which the tax, penalties, interest, additions to tax, and additional proceeds in dispute exceed $2,000,000; and (2) relate to a taxpayer, and for individual taxpayers only, one whose gross income exceeds $200,000 for at least one of the tax years in question.5 To the extent a claim does not meet the criteria for Section 7623(b), the IRS may still provide a discretionary award under Section 7623(a).
Filing a Whistleblower Claim
Individual taxpayers may submit a whistleblower claim to the IRS if they are eligible. The following individuals are ineligible to file a claim:
- An individual who is an employee of the Department of Treasury or was an employee of the Department of Treasury when the individual obtained the information on which the claim is based;
- An individual who obtained the information through the individual's official duties as an employee of the Federal Government, or who is acting within the scope of those official duties as an employee of the Federal Government;
- An individual who is or was required by Federal law or regulation to disclose the information or who is or was precluded by Federal law or regulation from disclosing the information;
- An individual who obtained or had access to the information based on a contract with the federal government; or
- An individual who filed a claim for award based on information obtained from an ineligible whistleblower for the purpose of avoiding the rejection of the claim that would have resulted if the claim was filed by the ineligible whistleblower.6
If an individual is eligible, he/she may submit Form 211 along with supporting documentation to the IRS Whistleblower Office. In the words of Director Hinman, the claim should be specific, timely, and credible. Accordingly, any IRS whistleblower claim should provide: (a) sufficient, relevant information and supporting documentation; (b) timely information for the IRS to properly act; and (3) information based on firsthand knowledge and/or reliable, documented sources.
IRS whistleblower claims, in the IRS's view, are opportunities for individuals to help the IRS in detecting noncompliance with our nation's voluntary federal tax system. Individual taxpayers may personally benefit from such claims by upwards of 30 percent of what the IRS ultimately collects based on the actionable information. However, individuals should be aware that even successful claims may take years to process (up to 10 years) to allow the underlying taxpayer to exhaust appeal rights, claims for refund, etc. Finally, taxpayers should be aware that the IRS takes certain measures to protect the identity of whistleblowers and that whistleblowers are protected from employer retaliation.
1. Whistleblower Office At-a-Glance, IRS, available at: https://www.irs.gov/about-irs/whistleblower-office-at-a-glance.
2. Whistleblower Office, IRS, available at: https://www.irs.gov/compliance/whistleblower-office.
3. John Hinman, Director of the IRS Whistleblower Office, discusses how whistleblower information contributes to identifying noncompliance and reducing the tax gap, IRS, available at: https://www.irs.gov/about-irs/the-irs-whistleblower-office.
4. I.R.C. § 7623(a), (b)(1).
5. See I.R.C. § 7623(b)(5).
6. Whistleblower Office, IRS, available at: https://www.irs.gov/compliance/whistleblower-office.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.