Whistleblower Regulations Finalized by IRS: Awards for Reporting Tax Fraud Are Significant

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Explore:  IRS Whistleblowers

Earlier this year, the Internal Revenue Service (IRS), in its continuing effort to prompt and motivate whistleblowers to come forward, issued final regulations clarifying certain definitions used for purposes of calculating and paying an award to a whistleblower. The IRS has the authority to pay awards to informants (whistleblowers) for information they provide that results in either the detection and ultimate collection of tax underpayments or the successful prosecution of those charged with tax evasion. We first reported about this program, in its early stages, here.

The awards are payable from the proceeds of the amounts collected and, in select cases, may range between 15 percent and 30 percent of the amounts collected. These awards are typically payable if the tax amounts in dispute exceed $2 million, and in the case of an individual, the individual's gross income must exceed $200,000. For disputes below these thresholds, the maximum award is 15 percent, up to $10 million. The awards are also discretionary and may not be disputed by the recipient in tax court.

The final regulations issued earlier this year provide that "amounts collected" and "collected proceeds" include the reduction of a prior-year overpayment credit balance used to satisfy a tax liability resulting from whistleblower information. The regulations further clarify that these terms include amounts collected prior to receipt of the whistleblower's information if such information leads to the denial of a previously filed refund claim that otherwise would have been paid. "Collected proceeds" include penalties, interest, additions to tax, and additional amounts resulting from the whistleblower information, as well as amounts collected from any settlement in response to such action.

The new regulations apply to awards paid after February 22, 2012. Claims must be submitted under penalty of perjury and submitted on Form 211 to the IRS Whistleblower Office in Washington, D.C. The statute of limitations for disclosing information under the IRS whistleblower program is three years from the due date of the tax return in question, including extensions. If the understatement of tax is in excess of 25 percent of the gross income reported in the tax return, the statute of limitations extends to six years.

According to the IRS, the information submitted and the identity of the individual providing the information will remain confidential during the initial investigation stage of the process. If testimony is needed, however, the identity of the whistleblower will likely be revealed. The entire process, from submission of complete information to the IRS until the tax proceeds are collected, can take up to several years.

According to the IRS Fiscal Year 2011 Report to the Congress, issued in the spring of 2012, the whistleblower program has yielded significant results since its enactment in 2006. Informants have come forward with evidence on alleged tax noncompliance amounting to approximately $1.4 billion, with awards paid of approximately $100.4 million, or about 7.2 percent of amounts collected.

Filing an application for an award is complicated and requires consultation with an experienced professional. If you have potentially reportable information under the IRS whistleblower program, it may be prudent to consult with a qualified tax professional. Otherwise, any award payable could be in jeopardy.

Topics:  IRS, Whistleblowers

Published In: Administrative Agency Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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