Under 26 U.S.C. § 7623, also known as IRC § 7623, the IRS Whistleblower Office is authorized to pay whistleblowers awards for information that the IRS uses to recover back taxes, penalties, interest, and other money owed under federal internal revenue laws. Our attorneys have experience at every step of the IRS Whistleblower Awards process, from making anonymous disclosures to challenging the IRS and the amount of the award given to our clients in Federal Tax Court.
How The IRS Whistleblower Awards Program Works
While the IRS’s ability to pay awards to whistleblowers has existed for ages, the modern program took form in 2006 with the passage of the Tax Relief and Health Care Act of 2006. Section 406 of the Act established the IRS Whistleblower Office and created IRC § 7623(b), which is at the heart of today’s IRS Whistleblower Program.
Under IRC § 7623(b), if the IRS uses information provided by a whistleblower and recovers at least $2,000,000, the IRS will pay an award of 15 to 30% of the proceeds collected by the IRS as an award. While this sounds simple, there are many requirements and caveats. First, if the taxpayer that is the subject of a disclosure to the Whistleblower Office is an individual, that individual must have a gross income of more than $200,000 for any taxable year at issue. Smaller awards are available as an exception to the rule, and we’ll discuss those more below.
Second, if the whistleblower’s disclosure is based on information that the whistleblower gained from a judicial or administrative hearing, from a governmental report, hearing, audit, or investigation, or from the news media, the award is capped at a maximum of 10% of the proceeds collected.
The amount of the award, either the maximum 10% or the larger 15 to 30% award, can be adjusted as the Whistleblower Office sees fit based upon the significance of the information provided by the whistleblower and the role of the individual whistleblower and their legal representative in aiding the IRS.
Further, if the whistleblower planned and initiated the actions that led to the underpayment of tax, the Whistleblower Office may further reduce the award. And, if the whistleblower is convicted of criminal conduct arising from their role in the tax fraud scheme, the Whistleblower Office may refuse to provide any award at all.
Similarity To The False Claims Act
The IRS Whistleblower Program is loosely based on the federal False Claims Act, 31 U.S.C. §§ 3729 to 3733. You can read about our False Claims Act Whistleblower Practice Here. However, the laws differ in three important ways.
First, it’s possible to file anonymously under the IRS Whistleblower Program if you use an attorney. But, your anonymity is not guaranteed by the IRS, and in rare circumstances, a whistleblower’s identity must be made known, but it is the stated policy of the IRS to protect the identity of whistleblowers to the fullest extent permitted by the law.
Second, the legal standards applied are much more lenient under the IRS Whistleblower Program. Under the False Claims Act, a whistleblower must demonstrate with great specificity that the bad actor knowingly committed fraud against a government program. In contrast, an IRS whistleblower does not need to prove any specific intent to defraud the government – a mere unintentional underpayment or overstatement of deduction or credit is enough to generate liability and qualify for an award.
Lastly, the procedures are vastly different. Under the False Claims Act, the whistleblower files a lawsuit in federal court on behalf of the federal government. Under the IRS Whistleblower Program, the whistleblower does not initiate any litigation.
The IRS Whistleblower Process
Instead of filing a lawsuit, as a whistleblower would under the False Claims Act, IRS whistleblowers follow the procedures laid out in Internal Revenue Manual Part 25.2, Information and Whistleblower Awards.
The IRS whistleblower process starts with filing an IRS Form 211, Application for Award for Original Information. The IRS must acknowledge receipt of the disclosure within 30 days of the filing. The IRS will then process the disclosure as identified by the guidelines set forth at IRM 18.104.22.168.1.3(3):
- Acknowledgment letters should be sent to whistleblowers within 30 days of receipt of Form 211.
- Initial evaluation and classification should be completed within 90 days. This is a cumulative period encompassing case building and review by all necessary operating division classification functions.
- SME or their designee(s), as applicable to case type, should complete review within 90 days of receipt.
- The Division Counsel offices should provide a determination on any material identified by an operating division as potentially tainted within 45 days of receipt.
- ICE Indicators should be updated within 30 days of receipt of a complete Form 11369 and required attachments.
- Review of Form 11369 should be completed within 30 days of receipt of a complete Form 11369 package.
- The Whistleblower Office should notify whistleblowers of an award decision within 90 days of the Whistleblower Office’s determination that proceeds collected from an action have been fully collected.
To qualify for an award under IRC § 7623(b), the collected proceeds must exceed $2 million.
The IRS defines “proceeds” to include “penalties, interest, additions to tax, and additional amounts provided under the internal revenue laws and any proceeds arising from laws for which the Internal Revenue Service is authorized to administer, enforce, or investigate. This includes criminal fines, civil forfeitures, and violations of reporting requirements.” The IRS defines “proceeds collected” as “proceeds collected because of the information provided; proceeds collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.”
In addition to the $2m requirement, the IRS may limit or refuse to pay an award to certain individuals including employees of the Department of Treasury and individuals who are required to disclose or are precluded by federal law from disclosing the relevant tax and financial information.
If an award is denied or is smaller than appears appropriate under federal law, a whistleblower can appeal the award to the Tax Court.
If a whistleblower makes a disclosure that does not meet the size requirements of IRC § 7623(b), the whistleblower may still be eligible for a smaller award under IRC § 7623(a). The award is discretionary and capped at a maximum of 15% of the collected proceeds. Unlike claims under IRC § 7623(b), there is no ability to appeal the denial of an award or the amount of the award under IRC § 7623(a).
Protecting Whistleblowers From Retaliation
On July 1, 2019, a new law called the Taxpayer First Act, went into effect. This new law provides powerful protections for employees who report or oppose federal tax fraud, and it provides a shield for whistleblowers who report tax fraud under the IRS Whistleblower Awards Program. You can read more about this law and our Whistleblower Protection Practice here.