Some assume auditors are the main ones to find financial fraud, but not this time. Recently, three individuals filed with the IRS Whistleblower Office to help uncover a large tax evasion scheme. The money owed? $263 million from a single tax evader. And according to IRS policy, up to 30% of that goes to the qualified "whistleblowers" who voluntarily provided information to tip off the agency.
Claims paid by the IRS last year to individuals who reported crimes and fraud totaled $88.8 million. The year before, that number was $37.8 million; so perhaps it’s time for you to take a look at this program.
Do you know any tax crooks?
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IRS whistleblower program
According to a law firm that has handled several whistleblower cases, the IRS Whistleblower Office has been “one of the strongest anti-fraud award programs available" for over 15 years.
But why do we have it?
Congress required the IRS to set up the Whistleblower program to pay whistleblowers their dues: rewards for cases that result in a collection of taxes, penalties, or other amounts owed to the IRS. (Granted, you must meet certain eligibility requirements first — more on that later).
If the investigation results in a collection, 15-30% of the collected amount goes to the whistleblower.
In its most recent case, the IRS paid out $74 million to three informants, one of the highest payouts in the program's history.
So how can you file a claim?
Can I report someone to the IRS anonymously?
To file a whistleblower claim, individuals must voluntarily complete and sign Form 211, Application for Award for Original Information. The form, which requires a detailed explanation of the alleged tax noncompliance and how the whistleblower obtained the information, must be signed under oath. The filing can be confidential.
However, you cannot report anonymously.
If that makes you nervous, you may want to engage an experienced whistleblower attorney. In addition to helping you navigate the process, a qualified legal professional can help you negotiate for the highest reward possible from the IRS. (Though some whistleblowers proceed without legal representation.)
Is whistleblower income taxable?
Unfortunately, as Kiplinger has reported, settlement awards and damages can be taxable. Your gross amount — without deducting legal fees — could be taxed.
Under IRS rules, any settlement you obtain from your whistleblower process should be reported on Form 1099 as taxable income. The amount could be subject to state and local taxes as well. Check your state and local Department of Revenue website for details.
Note: You may also want to consult a lawyer and a tax professional regarding the taxable amount.
Who is an eligible whistleblower?
Certain requirements must be met for an informant to receive an award.
For instance, your filed claim must be worth over $2 million (including penalties, taxes, fees, etc.). The IRS reportedly has over 30,000 cases in the backlog. So, this rule may help the tax agency with prioritization.
Other IRS requirements for receiving a whistleblower reward include:
- The reported individual must have a gross income of over $200k (doesn’t apply if you’re whistleblowing an organization)
- You must provide support (books or records) backing your claim and explain how you obtained your information
Interestingly, you don't need to be a U.S. citizen to receive a whistleblower reward. The IRS only requires that you meet the eligibility requirements.
Note: if you’re denied a claim, you can file an appeal with the United States Tax Court.
Also, only individuals, not corporations, can be whistleblowers.
How long does an IRS whistleblower case take?
As mentioned earlier, the IRS currently has a whistleblower case backlog. Part of that alludes to the lengthy claims process, which involves examination, investigation, and collection of proceeds.
Awards can only be paid after the alleged non-compliant taxpayer has exhausted all legal appeal rights: appealing the claim in court, having the option to pay back the amount, etc. So, the entire process can take from 4-6 years to, in some cases, an incredible 10 years. However, it should be noted that the IRS has been working to improve processing times.
Data also shows that two years ago, whistleblower awards fell to $245 million, which the National Whistleblower Center reports as "almost a tenth of where the program was" just four years prior.
That's partly why (in addition to other challenges with the program) some in Congress introduced the IRS Whistleblower Program Improvement Act. If passed, the bill would among other things:
- Introduce an interest payment to the whistleblower for awards the IRS delays one or more years
- Provide transparency for denied claims
- Protect whistleblower awards from automatic federal spending cuts
- Create whistleblower anonymity in court
Proponents argue the bill would bring the IRS' Whistleblower process more in line with similar programs, like the Securities and Exchange Commission (SEC) Whistleblower program, which publishes a list of denied claims (albeit with some information redacted).
The Department of Justice (DOJ) Whistleblower program allows some anonymity if you have an attorney. Both programs, however, only require a $1 million threshold for reporting, significantly lower than the IRS' $2 million minimum.
What constitutes fraud with the IRS?
In the recent case, the evasion uncovered by whistleblowers reportedly stemmed from a 15-year offshore tax evasion scheme.
An offshore fraud scheme involves a company intentionally moving money to another country (“offshore”) to avoid paying taxes.
A few other schemes used by fraudsters include:
- Shell bank accounts, where money is bounced between bank accounts to avoid paying taxes
- Pyramiding, where a company holds onto employee taxes (doesn’t pay them) and then claims bankruptcy to start another company
- False reporting, where someone underreports their taxable income on their tax return
- Failure to pay or report payroll taxes, where a company fails to file employment tax returns or pay employee wages
IRS whistleblower hotline
If you suspect a company or individual is guilty of this action or other fraud or underpayment, your information might potentially help close the tax gap. The tax gap, i.e., the discrepancy between taxes owed and what has been paid, in the last 23 years has nearly doubled.
With that in mind, in a recent report, IRS Whistleblower Director, John Hinman, points to the value of "whistleblower information the IRS can act on," saying it "bolsters the fair and effective enforcement of our nation’s tax laws, the success of our voluntary tax system, and our efforts to reduce the tax gap.”
Also, the IRS has a whistleblower hotline as an informational resource for those interested in the IRS Whistleblower program. You can't use the hotline to submit a formal claim, but by calling the hotline (800-366-4484 or 800-877-8330 for TTY/TDD users), you can receive general information about how to properly report tax fraud.
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