New IRS whistleblower rules focus on informant rewards.
October, 2008
The IRS wants employers to duck and cover, and individuals to take off their rose-colored glasses. Under the new IRS Whistleblower Rules, the IRS is required in certain situations to pay a whistleblower reward of up to 30% of the collected sums. This means that individuals have a much greater incentive to report tax problems. It also means that businesses and individuals have to be more concerned about tax problems that could be disclosed to the IRS. Disgruntled former employees, former spouses and former business partners are the most likely sources of such reports.
In December 2006, legislation amended the informant law to add a mandatory reward for whistleblowers. In the past, all informant awards were discretionary. Under the new program, an informant is eligible for a mandatory reward if the total collected amounts in dispute exceed $2 million. If the case deals with an individual, his or her annual gross income must be more than $200,000. (The former law continues to provide for a discretionary reward program for lesser amounts.) There is no cap placed on the mandatory reward, but the whistleblower is not entitled to the entire reward if they participated in the noncompliance. If the whistleblower is found criminally liable, they are not entitled to the reward at all, and if the noncompliance was disclosed in a judicial proceeding, or public process such as a governmental report or through the news media, then the reward is capped at 10%, unless the whistleblower is the one who initially made the public report.
The IRS opened a central office in February 2007 to address reward administration. As things stand now, the central office processes qualifying tips from individuals who spot tax problems, and refers examination of the cases to the local operating offices of the IRS. The program has been in place long enough for the IRS to begin discussions regarding whether it is working to bring in sufficient funds to merit the cost of the program. Even in the short time since the program began, the IRS reports that knowledgeable insiders have turned over a new magnitude of reports, including a $1 and $2 billion submission.
The central office wants detailed and substantive reports. For example if the report is a twist on a listed abusive tax transaction, the IRS is looking for a report that says, "here's the twist, here's the promoter and here's a list of 40 investors."
Although the IRS has provided additional financial incentives, making a whistleblower report can be difficult and wrenching. The person making the report should be aware of the potential for social, emotional and financial consequences. Keeping these considerations in mind, the new law increases rewards, and makes it easier for a whistleblower to obtain a reward. If you, or your company, are concerned someone might file a whistleblower report against you, or you are considering whether to file a whistleblower report, contact the tax group at Bullivant Houser Bailey for help.