Under the tax law, a whistleblower is entitled to a claim on the amount of tax that is collected by the IRS from a tax evader who is exposed from the information disclosed by such whistleblower. The practice of rewarding tax whistleblowers is not new; it dates as far back as 1867. The practice encourages the public to reveal information about tax cheats to the IRS. This volunteer disclosure program has enabled the IRS to crack down on a lot of tax cheats and recover large sums of money from past due taxes. It has also led to an increase in tax compliance, especially for large public taxpayers (like large corporations). Furthermore, various laws protect the whistleblower, such as the Federal False Claims Act.
2006 Whistleblower Amendments
The incentive to “whistle-blow” was significantly raised through amendments to the Tax Whistleblower Act, which were made in 2006. Under the amendments, any informant that supplies tips to the IRS in regards to the exposure of tax cheats is now entitled to a 15% to 30% reward of the funds collected by the IRS from the information provided. Funds collected include taxes due, penalties, and interest. Before these amendments, the IRS had the discretion on whom and how much compensation they gave to a whistleblower. However, with this ruling, the whistleblowers’ reward is guaranteed. The new rules for whistleblower are included in the Internal Revenue Code – Section 7623 (Whistleblower Rules). Under these rules, a whistleblower is entitled to 15-20% of the collected amount if the sum collected (including penalties and interest) exceeds $2 million. If the “whistle-blowing” involves an individual taxpayer as opposed to an organization, the individual must be earning over $200,000.00 to qualify for the guaranteed 15-20% reward rule. If a whistleblower meets these threshold requirements, he or she is legally entitled to appeal on the amount given in Tax Court. When it comes to the whistleblowers who disclose information on a tax cheat whose collected amount is lower than the limits mentioned above, they may receive an award of up to 15% with a maximum of $10 million. However, such a reward is at the discretion of the IRS and cannot be appealed in Tax Court.
The new rules under the 2006 amendments have led to an increase in the amount of information being received by the IRS from whistleblowers. The IRS has even opened a Whistleblower Office that handles obtaining and recording information from such whistleblowers. You can provide information anonymously as well, though this means that you would be forfeiting the reward. The office receives information from whistleblowers and provides answers to whistle-blowing-related issues.
Withholding on Rewards
In 2011, the IRS announced that it would be withholding tax for the whistleblowers’ reward. Since the whistleblower compensation is considered income that is to be reported like any other, the IRS ironically takes back a part of the funds rewarded when the whistleblower pays taxes on the income. There have been arguments about this new decision, as the reward is not a wage or regular income that requires withholding. However, there is no legal limitation that keeps the IRS from doing this and therefore, such arguments and objections may not bear much fruit.