Whistleblowers & Informants

New IRS Whistleblower Law

As part of the Tax Relief and Health Care Act of 2006 (P.L. No. 109-432, Section 406, 120 Stat. 2911, 2958-60 (2006), the IRS Whistleblower Office came into being, with Stephen Whitlock serving as the initial director.  This is a centralized office for processing tips that can either investigate a reported matter itself or assign it to another IRS office.  The IRS Whistleblower office will determine what to do with an informant’s tip.

Under the new law, two types of whistleblower IRS awards are possible: (1) Mandatory-Type Claims under Section 7623(b); (2) Discretionary Type Claims (Section 7623(a)).

Section 7623 of the Internal Revenue Code now has been amended to allow for individuals to receive rewards of at least 15% but not more than 30% of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from one's "substantial contribution" to the taking of IRS action (and related actions) or from a settlement taken by the IRS.  Under the law, investigations made of individuals with gross income of over $200,000 for any taxable year or other entities (regardless of income, apparently) will qualify.  Provisions drop the award in cases where the contribution by the informant is viewed as benefiting from other disclosures, dropping the maximum recovery to 10%, unless the informant is the original source of the information provided.  No written contract is needed.  Previously, payments or rewards were discretionary, and absent a written contract, were capped at $2 million dollars.  Attorneys’ fees and costs incurred to pursue and recover a reward are specifically eligible for an above-the-line deduction.  Awards can be reduced or denied if a tipster is found to have “planned and initiated” the tax strategy that forms the basis of the claim for a reward.

In the second type of award, whistleblowers not able to meet the Section 7623(b) criteria may still seek an award.  The awards are discretionary and a maximum award of 15% up to $10 million is possible.  An adverse determination cannot be appealed, absent entry into a written contract with the United States Government. 

For more information, please see IRS Form 211.  Mr. Tufts has over 15 years of legal experience as a tax lawyer that includes assisting with potential whistleblower and informant representations in matters before the IRS.  While representation on such matters is extremely sensitive and fraught with challenges, legal representation prior to the bringing forth of such information may be critical.  We can assist potential informants in evaluating the processes by which they might bring forth information and know how to help concerned citizens come forward make an appropriate disclosure. If you have information that you believe may be of interest to the IRS and are interested in obtaining legal advice with respect to the status of the law in this area, please contact us.

Current Law:  No Relator Claim Available

Under current law (Section 3729(e) of the False Claims Act), courts lack subject matter jurisdiction to hear a relator's claims that depend entirely upon the establishment of a violation of the Internal Revenue Code. By this "tax bar" provision, "claims, records, or statements" made under the Internal Revenue Code are not actionable under the False Claims Act (which otherwise authorizes private citizens to sue on behalf of the United States to recover treble damages from those who knowingly make false claims for money or property upon the Government or who knowingly submit false statements in support of such claims or to avoid the payment of money or property to the Government). A recent case seems to confirm that this tax bar will apply even when the relator does not seek to recover federal taxes. See United States v. Sakura Global Capital Markets, Inc., BNA Daily Tax Report, No. 150, at K-5 (ISSN 1522-8800)(August 5, 2004)(FCA's tax bar deprives federal district court of subject matter jurisdiction over complaint filed by private citizen, as relator, which alleged that defendant was engaged in "yield burning" that caused municipalities to make false claims to the federal government with respect to the provision of forward supply agreements in connection with the advance refunding of federal tax-exempt municipal bonds).

If you have any questions about the new IRS whistleblower law, or wish to receive consultation on a potential whistleblower claim, please contact us.