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Alittle noticed provision of theTax Relief and Health CareAct of 20061, which became

effective on December 20, 2006,

has created a rewards program forindividuals informing the IRS oflarge tax omissions. The IRS is gearingup for an influx of informant claims.IRS managers have reported thatwhistleblowers have already providedtips involving hundreds of milliondollars in tax underpayments.

Generous AwardsThe new whistleblower law applies toclaims for reward in cases in whichthe potential amount owed to theIRS for taxes, penalties, and interestsexceeds $2 million and, in cases ofindividuals, the taxpayers grossannual income must exceed$200,000. The new law provides aminimum reward of 15 percent and amaximum reward of 30 percent. Thisis a substantial increase over the pre-vious regulations that provided aminimum recovery of 1 percent anda maximum recovery of 15 percentfor whistleblowers. The law does

place a cap of 10 percent on rewardsif the IRS determines that thewhistleblowers information was notthe original source of informationbut still contributes to the additionalcollection. The fact that an individualparticipated in the activities that cre-ated a tax omission does not precludean reward but the IRS uses involve-ment in the tax underpayment as abasis to reduce the reward.

The law also provides that theIRS must make a reward payment in

all cases in which it pursues a remedyagainst a taxpayer based upon infor-mation provided by the whistle-blower. The previous awards werediscretionary and in many cases theIRS refused to pay any award to theinformant even when the informa-tion resulted in a substantial recoveryof taxes. Smaller informant items thatdo not meet the statutory minimumsof the whistleblower law will still be

entitled to awards under the IRS dis-cretionary award program. Under thetraditional program the IRS limitedawards to 15 percent and most

were for significantly less. It isanticipated that the IRS con-tinue to be parsimonious onlower dollar whistleblower items.

Right to Sue for an AwardThe whistleblower law allows aclaimant to sue the IRS in U.S. TaxCourt if it denies a reward. In thepast, a whistleblower had no right tosue the IRS because rewards were dis-cretionary.

Public InformationWhistleblowers may also seek areward for bringing public availableinformation to the attention of theIRS if it results in the recovery ofadditional taxes. This type of award islimited to 10 percent of the IRSrecovery. For example, aspiringinformants might review a companysSEC filings to find apparent taxomissions and then file for a reward.Others might spot apparent tax viola-

tions in the public media and seek anaward. One could contemplate a littlenoticed story in a newspaper thatcould provide a tax lead. For exam-ple, if a company was accused of bidrigging or other financial crimeswhere the companys net income wasnot likely to have been properlyreported, someone could inform theIRS and seek a reward. Whistleblowerswho planned or initiated the taxscheme might be barred from recov-ering a reward, but there may be

instances where they receive moneyfrom the IRS depending on the levelof complicity.

Litigation DisclosuresAnother source of potential whistle-blower material is company litigation.During the course of most commer-cial litigation, substantial economicinformation becomes part of therecord. Since the court system is

open, nothing prevents someone whowitnesses testimony from reportinginformation to the IRS. This includesa judge, juror, court reporter, othercourt employee, and your opponent.Sworn testimony and related evidencein a proceeding can be freely given tothe IRS under this whistleblower pro-

gram. Matters that might disclose taxunderpayment should be settled beforeadditional information regarding theconduct is made public.

Regulatory InvestigationsInvestigations by state and local regu-latory agencies might also generateinformant items to the IRS. A stateenvironmental investigator mightnote improper expensing of pollutionequipment during the course of veri-

fying environmental compliance anddecide to try for an award. Likewise,a liquor inspector might note inven-tory issues while performing his/herduties. With so many state and localregulatorsfrom building inspectorsto safety inspectorschecking busi-nesses each year, one can contemplatethat some may come to view thewhistleblower program as a way tosecure an economic windfall.

IRS Whistleblower Office

On February 2, 2007, the InternalRevenue Service named Stephen A.

Whitlock as director of its newWhistleblower Office, where he will beresponsible for administering the pro-gram designed to receive informationthat helps uncover tax cheating and toprovide appropriate rewards to whistle-blowers. The IRS WhistleblowerOffice, will process tips received fromindividuals who spot tax problems in

by Robert E. McKenzie, Esq.NATP MemberIndustryTrends

New IRS Whistleblower Law

IRS prepares for coming wave of informants looking for monetary rewards

8/14/2019 New IRS Whistle Blower

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Summer 2007 NATPTAXPRO Journal

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their workplace, while conductingday-to-day personal business, or any-

where else they may be encountered.Whitlocks office will be responsiblefor assessing and analyzing incomingtips. After determining their degree ofcredibility, his office will assign theinformation to the appropriate IRS

office for further investigation.

Form 211A whistleblower should submithis/her information to the IRS withForm 211,Application for Award forOriginal Information. If the taxomission is substantial, it would bealso be wise to contact the IRSWhistleblower office in advance andnegotiate the terms of the award. Ifthe whistleblower was in any wayinvolved in the tax omission, itwould wise to consult an experi-enced tax attorney prior to any IRScontact. A good example of thiswould be an ex-wife who plans toreport her ex-husband after filing ajoint return. The informant mightend up with significant personal taxproblems of her own.

Value of Informant Informationfor Tax EnforcementIn June 2006, the U.S. Treasury

issued a report that found that exami-nations initiated based on informantsdata is more effective and efficient inidentifying taxes than returns selectedusing the IRS primary method forselecting returns for examination.Normally the IRS uses mathematicalscreening programs to select manyreturns for audits.

Tax GapThere are billions of dollars in unre-ported taxes in the United States.

Last year, the IRS issued a revisedreport on the Tax Gap estimatingthat there was about $345 billion inunreported and underpayed taxes.Though the net misreporting per-centage varies by category of income,the rates reflect that compliance ishighest where there is third-partyreporting or withholding. Simplystated, compliance is highest wherethere is third-party reporting.

For example, one percentof all wage, salary, and tipincome is misreported, con-tributing an estimated $10billion to the tax gap. Incontrast, nonfarm sole pro-prietor income, which isreported on a Schedule C

and is subject to little third-party reporting or withhold-ing, has a net misreportingpercentage of 57 percent,contributing about $68 bil-lion to the tax gap.

The tax gap can bedivided into three compo-nents: nonfiling, underre-porting, and underpayment.

NonfilingNonfiling occurs when taxpayers

who are required to file a return donot do so on time. Underreportingof tax occurs when taxpayers eitherunderstate their income or overstatetheir deductions, exemptions, andcredits on timely filed returns.Underpayment occurs when taxpay-ers file their return but fail to remitthe amount due by the paymentdue date.

Underreporting

Of these three components, under-reporting of income tax, employ-ment taxes, and other taxesrepresents about 80 percentof thetax gap. The single largest sub-com-ponent of underreporting involvesindividuals understating theirincomes, taking improper deduc-tions, overstating business expenses,and erroneously claiming credits.Individual underreporting representsabout half of the total tax gap. Indi-vidual income tax also accounts for

about half of all tax liabilities.

UnderpaymentUnderpayment occurs when a tax-payer files a return without payingthe balance of tax due. It also canoccur when the taxpayer fails to paytaxes assessed as a result of an IRSaudit. Each year over $30 billion ofassessed taxes go uncollected as aresult of taxpayer underpayments.

The Coming Waveof Informants

Given the immensity of the tax gap,one must anticipate that the IRS willcome to increasingly rely on the newWhistleblower Office to find taxunderreporting. There are alreadywebsites established by law firmsseeking to profit from the comingwaive of whistleblowers. Many adver-tise their services on a contingent feebasis. Given the high level of taxcheating in this country, there areopportunities for rewards.

Audits of businesses are long,

complex processes and will prove tobe a drain on company resources.Even an inaccurate informant itemmight cause the IRS to open an auditthat may ultimately discover anothermistake on company tax returns. Thecompany may never discover the sourceof the original whistleblower informa-tion because whistleblowers identitiesmust be kept secret by the IRS.

1 26 U.S.C. 7623

Reprinted from Mertens Law of Federal IncomeTax Highlights with permission. Copyright2007 Thomson/West.

Tax Lawyer Robert Ernest McKenzie has lec-tured extensively on the subject of taxation. Hehas presented courses before thousands of CPA's,attorneys and Enrolled Agents nationwide. Mr.

McKenzie is the author ofRepresentationBefore the Collection Division of the IRS andcoauthor ofRepresenting the Audited TaxpayerBefore the IRS andRepresentation Before theU.S. Tax Court. For more information, checkout www.mckenzielaw.com.

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