The IRS has had a reward program for whistleblowers and informants dating back to 1867, but before 2006 the program lacked standardized procedures and managerial oversight. Under prior Sec. 7623, the IRS had discretionary authority to provide whistleblower rewards, which were generally 1%, 10%, or 15% of the taxes, fines, and penalties up to a maximum award of $10 million (and only up to $2 million before 2004).1
In 2006, Sec. 7623 was amended to provide increased rewards to whistleblowers who provide information to the IRS.2 The original Sec. 7623 became Sec. 7623(a), and the IRS continues to have discretionary authority to pay a reward that it deems necessary for the whistleblower’s assistance in detecting an underpayment. The rewards will be paid out of the proceeds the IRS collects from the violating taxpayer. A new subsection (Sec. 7623(b)) was added, codifying the reward percentages. The rewards under Sec. 7623(b) are at least 15% but no more than 30% of the collected proceeds (including tax, penalties, interest, additions to tax, and additional amounts).
In order to be eligible for an award under Sec. 7623(b), the tax, interest, penalties, additions to tax, and additional amounts in dispute must exceed $2 million for any tax year if the violator is a corporation; if the violator is an individual, his or her gross income must exceed $200,000 for the year in question.3 The rewards will be reduced to 10% if the information supplied is less substantial (i.e., the IRS principally took action based on other information such as news media, audit, government reports, etc.).4 If the tax deficiency or income threshold under Sec. 7623(b) is not met, the IRS will process the submitted claim under Sec. 7623(a), where the rewards are not codified and are therefore more subjective. The IRS reserves the right to determine a percentage it “deems necessary.” However, it is not required to pay any rewards under Sec. 7623(a); the IRS is required to pay a reward under Sec. 7623(b), assuming the above requirements have been satisfied.
New Whistleblower Office
Prior to 2007, the IRS’s Informants’ Rewards Program was in need of overhaul. The old program lacked standardized procedures and managerial oversight, which resulted in lengthy reward claims processing or erroneous dismissal of valid claims. On average, it took 7½ years before the whistleblower would get a reward once a claim was submitted.5 In February 2007, the IRS named its first director of the newly created Whistleblower Office.6
The main purpose of the Whistleblower Office is to centrally manage and process tips received from individuals who identify potential problems at their workplace. The office will assess and analyze the validity and credibility of incoming claims and will assign the appropriate IRS office to investigate the matter further or forward the case to other IRS divisions. Prior to the amendment, the IRS did not have a separate office for this purpose. Since the creation of the Whistleblower Office, the number of claims submitted has increased enormously.7 As a result of the increased rewards and centralization of the whistleblower claims management process, the number of processed claims and the amount of rewards will likely continue to increase.
How Claims Are Filed
Whistleblowers submitting claims under Sec. 7623(a) or (b) must complete IRS Form 211, Application for Award for Original Information, in order to qualify for the whistleblower reward. If they submit claims without completing the form, they will not be eligible for the reward. (Claims can also be submitted on Form 3949A, Information Referral, if the whistleblower wants to report tax fraud but is not seeking a reward.) A completed Form 211 must be signed under penalties of perjury and should include the following information:
- The claimant’s name, address, date of birth, Social Security number, and contact information;
- Specific and credible information concerning the person(s) that failed to comply with the laws and that will lead to the collection of the unpaid deficiency and documentation to substantiate the claim; and
- An explanation of how the claimant obtained the information and a description of his or her relationship to each person who is the subject of the claim.8
Claims submitted under the following circumstances will not be processed:
- The whistleblower is a Treasury employee or is acting within the scope of his or her duties as an employee of any federal, state, or local government;
- The individual is required by federal law or regulation to disclose the information or is precluded by federal law or regulation from making the disclosure;
- The individual obtained or was furnished the information while acting in his or her official capacity as a member of a state body or commission having access to such materials as federal returns, copies, or abstracts;
- The individual had access to taxpayer information arising out of a contract with the federal government that forms the basis of the claim;
- The claim is found to have no merit or lacks sufficient specific and credible information;
- The claim was submitted anonymously or under an alias;
- The claim was filed by a person other than an individual (e.g., a corporation or partnership); or
- The alleged noncompliant taxpayer is an individual whose gross income is below $200,000 (in that case the submission can only be processed under Sec. 7623(a)).9
After the Claim Is Submitted to the IRS
Claims are handled by the Whistleblower Office in Washington, DC. That office has sole discretion to ask for any additional details from the claimant. The office processes claims by either investigating them separately or modifying the annual audit plan (for large corporations subject to annual audit) in order to investigate the claims. The process from the time the claim is submitted to the IRS to the time the investigation is completed may take several years.10 The IRS will not release the award until there has been a final determination and collection of tax liability (including tax, interest, penalty, additions to tax, and additional amounts). Whistleblowers can speed up the process by accepting payment for what the IRS has already collected and agreeing to waive their right to unsettled subsequent collections.
Do Claims Create Contractual Obligations?
Under Sec. 7623(b)(6)(A), a contract is not necessary in order to receive an award. The mere submission of a claim on Form 211 does not create an agency relationship between the whistleblower and the IRS. Claims filed under Sec. 7623(a) are rewarded at the discretionary authority of the IRS commissioner. In Cambridge,11 the Court of Federal Claims affirmed that a contractual right does not exist when a whistleblower files a claim.
Treatment of Awards and Appeal Rights
Any award received by the whistleblower will be taxable income to the recipient when it is received and is subject to withholding taxes. In addition, once the Whistleblower Office makes a final determination regarding a claim award determination, the claimant may appeal the award within 30 days in Tax Court (for Sec. 7623(b) claims only). Previously the whistleblower had no recourse against the IRS if the IRS did not provide a reward. Claims awarded under Sec. 7623(a) may not be appealed.12
While it is too early to tell how many of the whistleblower claims submitted under the new rules will result in rewards, the new program and the IRS’s efforts to publicize it have already generated many new claims. Given the significant awards that are now available under the program, the number of claims is likely to increase, making it important for practitioners to be familiar with the program and its rules.
Stan Tylka is an assistant tax manager with Walgreen Co. in Deerfield, IL. For more information about this article, please contact Mr. Tylka at email@example.com.
1 IRS Publication 733, Rewards for Information Provided by Individuals to the Internal Revenue Service (rev. October 2004).
2 Tax Relief and Health Care Act of 2006, P.L. 109-432, §406.
3 Secs. 7623(b)(5)(A) and (B).
4 Sec. 7623(b)(2)(A).
5 Treasury Inspector General for Tax Administration, The Informants’ Re wards Program Needs More Centralized Management Oversight (June 2006), Ref. No. 2006-30-092.
7 IRS Whistleblower Office, Annual Report to Congress on the Use of Section 7623, at 2 (September 2009), reporting that from the first three months of FY 2008 to the end of that fiscal year, the number of claims that appeared to meet the criteria of Sec. 7623(b) increased from 46 to 1,246.
8 Notice 2008-4, 2008-2 I.R.B. 253.
11 Cambridge, No. 07-142T (Fed. Cl. 5/29/07).
12 Sec. 7623(b)(4).