When Congress enacted the Tax Relief and Health Care Act of 2006, significant modifications were made to an anemic Internal Revenue Service Tax Reward program which has been in place for many years. The new IRS Whistleblower Rewards program is now codified at 26 U.S.C. § 7623(b) and provides significant encouragement for whistleblowers to come forward when they have knowledge of under-reported income and/or the evasion of tax obligations. The new statutory provisions, which were enacted into law in December of 2006, are clearly designed to mirror the success of the Federal False Claims Act in helping the government to detect schemes designed to under-report income and evade payment of federal income taxes.
For many years, the IRS has had a rewards program but it has failed to produce significant results. Indeed, over the last seven years, the total amounts collected by the IRS have been less than one (1%) percent of the total amounts collected under the Federal False Claims Act. The average reward paid to an informant by the IRS according to their own statistics has been approximately $25,000.00. This, in part, has been due to the fact that the most an informant could receive under the old “Form 211" program was a discretionary payment up to fifteen (15%) percent of any back taxes collected by the IRS. This has now dramatically changed.
Under the new IRS whistleblower provisions found at 26 U.S.C. § 7623, an informant is now eligible to receive up to a thirty (30%) percent reward of any back taxes collected. Additionally, and this is an extremely significant improvement and enhancement over the previous IRS rewards program, the informant is not only entitled to receive up to thirty (30%) percent of the back taxes collected, but also thirty (30%) percent of the collected penalties and interest due on the back taxes. While the new provisions still provide that the IRS retains the discretion to determine whether such rewards should be paid between fifteen and thirty percent (15% - 30%), Congress allows a whistleblower to appeal that discretionary decision to the Tax Court if the informant believes that the government’s award determination is insufficient based on the value of the information provided and the amount of taxes collected. It is also noteworthy that fifteen (15%) percent is the statutory minimum for original source information.
There are some restrictions on the new whistleblower provisions which limit the potential rewards to the more significant tax cases. For example, the new whistleblower provisions do not apply to an individual taxpayer’s liability unless the individual’s gross income exceeded $200,000.00 for any taxable year and the tax penalties and interest in dispute exceed $2 million. Nonetheless, for cases where informants possess information in cases where income has been under-reported and tax obligations are in excess of $2 million, the new whistleblower provisions enacted by Congress clearly encourage whistleblowers to come forward.
The way the new program will work is still quite literally a process in development. Congress directed the Internal Revenue Service to establish a Whistleblower Office to review information received from whistleblowers. Whistleblowers literally can be any member of the public. The new law is also not restricted to “original sources of information.” This is arguably an improvement over the Federal False Claims Act. In the traditional qui tam whistleblower context, an informant only receives a reward if he or she possesses information which is not known to the government and which is uniquely original, that is information that is not only not known to government but also not otherwise publicly available. Such insider information is no longer a pre-requisite, however, under the new IRS whistleblower program. Even where non-original information is possessed by the informant, if the information nonetheless leads to the collection of back taxes, the Internal Revenue Service may still award the non-original source informant up to ten (10%) percent of the collected taxes including penalties, interest on the tax amount owed. If, however, the informant is an original source of information, as set forth herein, the new provisions provide that the informant shall receive a reward “at least fifteen (15%) percent but not more than thirty (30%) percent of the collected proceeds including penalties, interest and tax.” Congress directed that the determination of the amount of such an award by the Whistleblower Office “shall depend upon the extent to which the individual substantially contributed to such action.” Presumably, if the informant brings to the attention of the Internal Revenue Service information about which the government possessed no knowledge, in such a case, there could be no contention that the individual did not “substantially contribute to such action.”
In the typical whistleblower case involving government program fraud, not only is a False Claims Act case present, but there may also be inherent in such the “qui tam” case significant tax implications. As an example, if someone has defrauded the government with respect to the submission of false claims for receipt of payments not otherwise due, in many such cases, the individuals involved may also have attempted to avoid payment of income taxes. A classic example would be where kickbacks are paid in order to procure government contracts.
When kickbacks are paid on a federal contract, there is more than likely a violation of federal law. The Anti-Kickback Act of 1986, 41 U.S.C. §§ 51-58 prohibits the payment or acceptance of kickbacks in connection with contracts with government agencies. While the payment of kickbacks would constitute a potential violation of the False Claims Act, typically, such illicit payments would presumably not make their way onto tax returns. They might be deducted as proper business expenses or they might not be claimed as income by the individuals involved. In short, in many false claim cases, there might be not only exposure for the defendants for a “traditional” Federal False Claims Whistleblower lawsuit vis a vis the government contract itself, but also a claim with the new IRS Whistleblower Office for the recovery of the back taxes owed.
When the Federal False Claims Act was amended by Congress in 1986 to include new provisions to encourage whistleblowers to come forward, it too was a relatively unused and ineffective at combating fraud, waste and abuse. In the mid 80's, virtually no monies had been collected by whistleblowers. This began to change as the number of whistleblowers increased as was hoped when the False Claims Act was amended. And the results since the Amendments in 1986 have been dramatic. According to Justice Department statistics, in the fiscal year which ended in 2006, over $3 billion was collected as a result of false claims lawsuits being filed based on information received from whistleblowers. While the IRS is still behind the rest of the federal government in dealing with tax cheats, the new IRS Rewards program promises to be a very interesting development in the ongoing government-wide effort to combat fraud schemes of all types particularly those involving attempts to evade the payment of taxes.
On February 2, 2007, the Internal Revenue Service issued a Press Release announcing that its first Director of the new Whistleblower Office had been named that day. This office will be responsible for assessing and analyzing information received from whistleblowers. After determining their degree of credibility, the IRS Whistleblower Office will assign the information to the appropriate IRS office for further investigation. While the details of the new rewards program are still being developed, the encouraging news is that changes are being made by the IRS to encourage more tax whistleblower cases. This is a positive development and good news for all law-abiding taxpayers who are themselves the victims of schemes to avoid the payment of taxes.