Accounting and Tax Services
Dec 20

IRS Announces Procedure for Whistleblowers to Report Tax Law Violations

From the American Health Lawyers Association (www.healthlawyers.org):

Section 7623(b) of the Internal Revenue Code provides for an award of up to 15-30% (of taxes, penalties, and interest recovered) for whistleblowers who are the original source of tips to the IRS that lead to recovery of taxes (and up to 10% for whistleblowers relying on publicly available information in the media, government reports, etc.). Both taxable and tax-exempt organizations can be the subject of a whistleblower report under Section 7623(b), and it is not limited to income taxes but could include excise taxes on excess benefit transactions. Moreover, these award levels rival the pay day that whistleblowers can achieve in qui tam cases alleging billing fraud, kickbacks, and other non-tax misdeeds. For tax law claims, however, all cases are prosecuted by the government, which may mean a higher average return on investment for plaintiff’s firms representing whistleblowers. Plaintiff’s firms are indeed taking notice, with many of them now actively marketing their services to assist tax whistleblowers. For their part, thanks to the increased transparency being brought to bear in the nonprofit sector through expanded Form 990 disclosure, state community benefit reporting and financial statement reserving standards such as FASB Financial Interpretation No. 48 related to uncertain income tax positions (FIN 48), potential whistleblowers have a wealth of information to draw upon in formulating possible claims of tax law violations.

The IRS has issued Notice 2008-4, which outlines how informants can report violations of the tax law and possibly claim a significant award. All of these awards are self-funding, so there is no outer limit on the total claims on which the IRS pays the full 30% award. According to the IRS news release accompanying Notice 2008-4, because Congress increased the maximum award to 30% in cases over $2 million, several informants have provided tips on alleged tax law violations in the tens and hundreds of millions of dollars. As noted in the news release, at Congress’ direction, the IRS also created a Whistleblower Office in December 2006 to handle these tips. The IRS now reports that its Whistleblower Office has received approximately 80 claims, half of them submitted within the last two and one-half months.

To make a claim, whistleblowers must file Form 211, Application for Award for Original Information, which asks for an estimate of the tax owed, a description of the pertinent facts (including supporting documentation or a description of documentation “known to the claimant”), and an explanation of how the whistleblower obtained the information. Although initial reports may be anonymous and done through counsel, the whistleblower must be identified to claim the award. The IRS typically requires whistleblowers to make a decision on whether to claim an award typically required within 30 days after the IRS receives the tip. All claims also must be submitted under a penalties of perjury declaration. The IRS will not readily disclose the identity of the whistleblower, though it may become known if there is litigation over the alleged tax law violations or the amount of any award for the information.

The amount of any award is determined by the IRS’ Whistleblower Office considering the value of the information provided and the tax proceeds collected. To qualify for an award, the whistleblower’s information must be “specific and credible” and his/her efforts must have substantially contributed to the collection of the tax. Whistleblowers dissatisfied with the amount of the award may appeal to the courts, which could lead to further publicity of the underlying tax law violations. All awards are subject to tax reporting and withholding requirements.

Gerald M. Griffith, Esquire, of Jones Day (Chicago, IL) prepared this alert for AHLA.

About Reed Tinsley, CPA

As a top advisor to physicians, I help increase practice profits by delivering hands-on, expert medical accounting/tax support, practice counsel, and revenue-building strategies. Read more →