Blog
What is the IRS Whistleblower Program? Implications for Taxpayers
What is the IRS Whistleblower Program? Implications for Taxpayers
The IRS Whistleblower Program provides monetary awards to people who blow the whistle on tax fraud. If you have evidence of tax noncompliance that leads to the IRS collecting unpaid taxes, you may be eligible for an award through this program. But what exactly is it, how does it work, and what does it mean for taxpayers?
Well, the IRS Whistleblower Program was created by Congress back in 2006 to help the IRS detect and collect additional tax revenue. The idea is to encourage people to come forward with specific, credible information about tax noncompliance that the IRS doesn’t already know about. This helps the IRS uncover tax fraud and other problems that could otherwise go undetected.
How the Program Works
Here’s a quick rundown of how the IRS Whistleblower Program works:
- You submit a claim by filing Form 211 with evidence of tax noncompliance.
- The IRS Whistleblower Office reviews your claim to see if it warrants an investigation.
- If the IRS uses your information to detect underpaid taxes, it can award you a percentage (between 15% and 30%) of the amount collected.
- Awards can be millions of dollars, but most are less than $1 million.
- You can appeal the Whistleblower Office’s award determination if you disagree with it.
So in a nutshell, you provide specific and credible information about unpaid taxes, the IRS looks into it, and if your tip leads to collecting those unpaid taxes, you get a cut. It’s meant to incentivize people to report tax cheating that could otherwise go unnoticed.
Requirements for Awards
But not all whistleblower claims end up getting awards. There are several requirements that must be met for you to qualify for a payout:
- Your information must be specific and credible. You can’t just make vague allegations – you need solid evidence of tax noncompliance.
- The target taxpayer must have underpaid their taxes. If no additional tax is owed, you won’t get an award.
- The IRS must use your information to detect the unpaid tax and start an action to collect it. You don’t get credit for information the IRS already had.
- Collecting the unpaid tax must result in receipts of at least $2 million. If less tax is collected, no award is paid.
These requirements mean the IRS Whistleblower Program is really aimed at big dollar tax cheating. Small-scale noncompliance usually won’t qualify for payouts.
Implications for Taxpayers
The IRS Whistleblower Program has several important implications for taxpayers:
- Increased IRS enforcement – The program boosts IRS compliance efforts by providing a pipeline of leads on potential tax cheating. This means more audits and investigations focused on rooting out noncompliance.
- Risk of false allegations – Critics argue the program encourages frivolous or unsubstantiated claims. Dealing with bad tips takes resources away from more productive enforcement.
- Potential for larger awards – Unlike some other whistleblower programs, the IRS payouts are based on a percentage of collected proceeds. This means larger cases of noncompliance can result in multimillion dollar awards.
- More scrutiny of high net-worth taxpayers – The program’s minimum $2 million threshold for awards tends to focus IRS attention on high net-worth individuals and large corporations where the most tax revenue is at stake.
- Taxpayer privacy concerns – Some worry the program erodes taxpayer privacy protections since whistleblowers can disclose sensitive information to the IRS. However, there are legal safeguards in place to prevent abuse.
On one hand, the program helps narrow the tax gap by uncovering unreported income and other forms of noncompliance. This bolsters tax fairness and brings in more revenue to fund government programs. But it also feeds into fears of government overreach and false accusations harming innocent taxpayers.
Notable Whistleblower Cases
Some of the biggest whistleblower cases to date include:
- A former UBS banker who blew the whistle on Swiss banking tax evasion schemes, leading to a $780 million settlement in 2009.
- A whistleblower tip that exposed tax evasion related to JPMorgan Chase mortgage securities, resulting in a $61 million award in 2016.
- An accountant who reported tax fraud by a Fortune 500 company, prompting a $120 million award in 2019.
These large payouts garner headlines, but most awards are under $1 million. Still, the potential for a big reward draws tips on major cases of noncompliance that may otherwise go undiscovered.
Claim Filing and Award Process
If you’re considering blowing the whistle to the IRS, here are some key things to know about the claim and award process:
- There’s no minimum threshold to file a claim. But awards only paid for $2 million+ in collected proceeds.
- Claims must be filed using Form 211. Mailed submissions are recommended to help protect confidentiality.
- The IRS will assess if your claim meets the requirements and has potential merit. Frivolous claims can be rejected.
- You may need to provide additional information and documents to support your allegations.
- Most claims take years to resolve given the complex nature of many tax investigations.
- If eligible, your award percentage will be between 15% and 30% of collected proceeds.
- Appeals of award determinations can be made to the Tax Court within 30 days.
The process is not fast or easy, but for substantial cases of noncompliance, it can be lucrative. In fiscal year 2022, the IRS Whistleblower Office made 237 awards totaling $237 million.
Protections for Whistleblowers
Understandably, many would-be whistleblowers worry about retaliation or other negative consequences of reporting tax misconduct. The IRS Whistleblower Program does incorporate some protections:
- Whistleblowers can file claims anonymously if represented by counsel.
- The IRS keeps whistleblowers’ identities confidential throughout the process.
- Retaliation against whistleblowers is prohibited, but enforcement depends on DOJ.
- The IRS prevents discovery of whistleblower information in other legal proceedings.
- Awards are paid out to whistleblowers’ attorneys rather than directly.
However, legal experts say more robust protections are needed to truly shield whistleblowers from professional and personal repercussions.
Criticisms of the Program
While the IRS Whistleblower Program has led to billions in collections, it also faces some common criticisms:
- Slow processing times – Claims often take 5+ years to get through the system.
- Low award rate – Only around 5-10% of claims receive payouts.
- Insufficient whistleblower protections – More safeguards needed against retaliation.
- Poor communication – Lack of transparency around claim status and decisions.
- Bureaucratic red tape – Excessive administrative burdens to submit and track claims.
IRS management has acknowledged many of these concerns and has implemented some reforms in recent years. But problems persist, discouraging whistleblowers from coming forward.
The Future of the Program
Despite its flaws, the IRS Whistleblower Program remains a key tool for identifying and prosecuting major tax fraud. Some possibilities for the future evolution of the program include:
- Expanded reward eligibility to cover smaller dollar claims that meet a lower threshold.
- Establishing set reward percentages based on factors like cooperation and information quality.
- Stronger anti-retaliation laws to protect whistleblowers from professional and personal harm.
- Increased staffing to cut down on claim processing delays.
- Enhanced data analytics to quickly assess and prioritize credible, high-quality tips.
With some reforms, the IRS Whistleblower Program could become an even more potent force against tax noncompliance while also better serving the courageous whistleblowers who put their necks on the line.
The Bottom Line
The IRS Whistleblower Program provides big incentives for people to blow the whistle on major tax frauds that otherwise may never come to light. Billions have been collected thanks to courageous whistleblowers stepping forward. But the program still suffers from bureaucracy, secrecy, and inadequate protections that undermine its mission. With some changes to address these weaknesses, the program could more effectively combat tax cheating while treating whistleblowers as the heroes they are.
So if you have rock solid evidence of large-scale tax noncompliance, the IRS Whistleblower Program offers a chance to reap a financial reward for doing the right thing. Just make sure you fully understand the process, risks, and limitations before you blow that whistle.