Thursday, November 15, 2012

IRS Whistle Blower Program & The Necessity of Legal Cousel!

We oringally posted Attention All Whistle Blowers, The IRS Needs $$$! on Tuesday, October 9, 2012; where we discussed New Section 7623(b).

Under it, awards to whistleblowers are no longer discretionary. Now, the whistleblower“shall” receive 15 to 30 percent of the collected proceeds. That’s shall, not may. Procedural safeguards were added too. The 2006 law added whistleblower appeal rights.

In this post we explore how the IRS Whistle Blower Program works and the necessity of Experianced Counsel to guide you through the program and make sure that YOU GET PAID!

Previously, it was entirely up to the IRS whether to pay a reward and that discretion was rarely exercised. Not surprisingly, the IRS collected very little money under this program. Congress made IRS whistle-blower awards mandatory and provided for awards of from 15 to 30 percent of the government’s recovery depending upon the significance of the information given by the whistle-blower.

The law applies to any underpayment of taxes, whether or not fraud is involved. Whistle-blowers receive a percentage of the money actually recovered, including penalties and interest. Unlike the False Claims Act, the whistle-blower does not act as a private prosecutor filing, and sometimes litigating, a law suit on behalf of the U.S. Instead the whistle-blower discloses the information he or she possesses to the IRS and the IRS decides whether or not to pursue the allegations.

Because the law targets large tax cheats, the 15- to 30-percent reward applies only where the government recovers over $2 million. In the case of individuals, the taxpayer must have had an income in excess of $200,000 ($300,000 in the case of a jointly filed return) in the taxable year in question. For smaller amounts the IRS still has the authority to pay a reward to the whistle-blower but it is not required to do so.

Like the False Claims Act, the IRS program has the potential to become the government’s most effective tool in combating tax fraud. Unfortunately, as of the end of 2011, the latest year reported, the IRS had only 18 people assigned to review thousands of tips. This means that the government only has sufficient resources to pursue those cases involving the greatest amounts of money and those that are based upon the most compelling evidence.

This is where counsel comes in. The IRS requires that the whistle-blower provide “documentation to substantiate the claim.”

While the IRS will need to know the company’s, or individual’s, income and expenses to compute its actual tax liability, a whistle-blower might not have that information. But the whistle-blower may possess evidence of money paid for items that could not legitimately be expensed by the business or that the company has hidden money in offshore accounts to avoid paying taxes on it.

It is often the case that a layperson will not know the significance of all the information in the taxpayer’s possession or lacks the ability to effectively present the information to the government. So while the assistance of a lawyer is not legally required, in many cases it is indispensible.

Moreover, the IRS wants to know how the whistle-blower came into possession of the information concerning the underpayment as well the whistle-blower’s relationship to the person or entity that is alleged to owe taxes. Such information can raise treacherous legal issues which should be addressed by counsel.

For instance, the IRS advises potential claimants that “under no circumstances do we expect or condone illegal actions taken to secure documents or supporting evidence.” It does the government no good to obtain information later suppressed in court on the grounds that it was seized unlawfully by a whistle-blower acting as a government agent. Nor does it do the whistle-blower any good to face state criminal charges for stealing documents belonging to another.

Obtaining the information the IRS needs to pursue an investigation while at the same time doing so in a manner that does not jeopardize the government’s case requires both knowledge of the law and often a good deal of planning and judgment.

Less recognized, but equally important, is counsel’s role in advising a potential whistle-blower whether to file a report to the IRS in the first place.

Unlike the False Claims Act and the whistle-blower program created by Dodd-Frank for the SEC, IRS whistle-blowers have no protection against retaliation that could cost the whistle-blower his or her job or reputation. As it is, relators — the technical term for those who file qui tam actions under the False Claims Act — sometimes discover that the amount of money ultimately collected was insufficient to compensate them for the years of stress and loss of income resulting from being black-balled from the industry that had provided them their livelihood. But at least under these other programs whistle-blowers can file a separate lawsuit against their employers if they lose their jobs or positions as a result of complaining to the government — not so with the IRS.

Confidentiality is another issue. Although the IRS pledges to maintain the confidentiality of whistle-blowers, it cannot guarantee confidentiality. This is because IRS assessments are often appealed administratively and through the tax courts. During the course of that litigation, the IRS may be ordered to disclose the source of its information.

Finally, the combination of limited resources, complexity of issues and taxpayer appeals, make it likely that whistle-blowers will have to wait years before learning whether they will receive any award for their information. In many cases the answer they receive is that no reward will be forthcoming.

If you are the Subject of a Whistle Blower or you want to make a Claim for an Award as a Whistle Blower, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at or or Toll Free at 888-8TaxAid (888 882-9243).


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