IRS Whistleblower Rewards Statue Frequently Asked Questions:
What is a Whistleblower?
A Whistleblower is a person who has knowledge regarding violations of federal tax laws and provides that information to the IRS. Such a person is covered by the IRS Whistleblower Rewards Statue.
What is the History of the IRS Whistleblower Rewards Statue?
The Tax Relief and Health Care Act of 2006 is relatively new, having been passed in December of 2006. The law was enacted because previously the IRS had too much discretionary power to deny rewards to whistleblowers whose information regarding tax violations led to substantial recoveries of tax revenues. The purpose of the law is to encourage people to report tax fraud, something that costs the federal government millions of dollars every year.
Under What Circumstances can a Whistleblower be Rewarded for Reporting Tax Fraud?
Under the updated IRS Whistleblower Rewards Statue, a Whistleblower will be rewarded if they bring information about tax law violations to the attention of the IRS and that information results in the actual collection of monies by the IRS. In order for a Whistleblower to receive a reward, the IRS investigation must result in either an administrative or judicial action that results in the recovery of tax revenues.
How Much Money Can an Individual Be Awarded Under the IRS Whistleblower Reform Act?
If the IRS initiates either an administrative or judicial action based on information provided by a Whistleblower, and the action results in the recovery of tax revenue, the whistleblower is eligible to receive between 15% and 30% of the recover, including penalties, interest, additions to tax and additional amounts. The final determination is dependent upon the Whistleblowerâ€™s actual contribution to the tax fraud case. Under certain circumstances, the IRS does have the power to award lesser amounts. Such circumstances could occur when the Whistleblower was not the original source of information in a tax fraud investigation.
What Acts are Covered by the IRS Whistleblower Rewards Statue?
The main thrust of the IRS Whistleblower Rewards Statue is to root out abusive tax shelters used to avoid paying taxes. Such shelters are often complicated and difficult for outside tax investigators to find. The abusive tax shelters targeted by the IRS Whistleblower Rewards Statue include:
1. Offshore tax haven abuses, such as:
- Undisclosed third party transactions;
- Shifting or siphoning pre-tax income off shore;
- Fake billing/process reported in offshore jurisdiction (i.e. creation of a paper trail to make it appear as though an entity does business offshore in order to avoid paying US taxes);
- Lending money to a parent company by offshore subsidiaries;
- Relocating intellectual property offshore and then charging a US division royalty payments;
- The use of Special Purpose Entities (i.e. structuring of financial instruments that enable profits to either be moved overseas or into another accounting category where they will not be taxed).
2. Abusive tax shelters that utilize:
- Certain tax exempt bond transactions
- Yield burning
- Transactions involving the distributions of encumbered property in which losses claimed for capital outlays have actually been recovered.
- Debt straddles
- Inflated Partnership Basis Transactions
- Sec. 351 Contingent Liability
- Sec. 302 Basis Shifting Transactions
- Inflated Basis CARDS Transactions
- National Principle Contracts
- Partnership Straddle Tax Shelter
- Lease In/Lease Out or LILO Transactions
- Abuses Associated with S Corp ESOPs
- Accounting for Lease Strips and Other Leasing Transactions
- Abusive Foreign Tax Credit Transactions
- S. Corp Tax Shelter Involving Shifting Income to a Tax Exempt Organization.
- Intercompany Financing through Partnerships
- Loss Claimed and Income to be Reported from Sale In/Lease Out (SILO)
What are the Penalties for IRS Tax Fraud?
Someone guilty of tax fraud is liable for the taxes due, as well as fines and penalties and interest on the unpaid taxes.
What is the Timeframe for Filing an IRS Whistleblower Claim?
Basically, the statute of limitations on tax fraud governs the timeframe in which a whistleblower claim can be made. These limits are:
- No proceeding for the collection of any tax can take place after three years.
- The statute of limitations extends to six years if the taxpayer omits additional gross income in excess of 25% of the amount of gross income stated on the tax return filed with the IRS.
- The statute of limitations does not apply if a false or fraudulent return has been filed with the IRS in an attempt to evade taxes.
Can an Individual File an IRS Whistleblower Claim if Someone Else has Already Brought Such a Claim Against an Individual or Company
Generally, the first to file a Whistleblower Claim is the only person entitled to a reward, unless the IRS moves forward on an action based on new information provided by the second Whistleblower. For that reason, it is important to file a Whistleblower Claim with the IRS as soon as feasibly possible.
If an Individual Has Already Reported Tax Fraud to the IRS, Can They Still File a Whistleblower Claim?
If an individual has already reported tax fraud to the IRS, that person can still file a Whistleblower Claim. However, the IRS Whistleblower Rewards Statue applies only to reports made after the law was passed on December 13, 2006. The IRS can grant a Whistleblower Reward based on reports made prior to that date, however the old Whistleblower Statute will apply. Under those rules, a Whistleblower can receive a reward up to $2 Million. However, those awards can range between 0% and 15% of the total monies recovered, and the IRS has more discretion when determining rewards under the old law.
Who Will Know the Identity of a Whistleblower?
During an investigation, only the IRS will know the identity of a Whistleblower. That identity will be kept secret even after the investigation if finished. However, if the investigation leads to a civil complaint or criminal indictment that results in a trial, a Whistleblowerâ€™s identity might be revealed. However, it usually takes quite a few years before a tax investigation reaches this point. If no such action results from the investigation, usually no one ever finds out the identity of a Whistleblower.
Can an Employer Fire or Take Other Punitive Action Against an Employee Who Becomes a Whistleblower?
Right now, the IRS Whistleblower Rewards Statue does not offer these types of protection provisions. However, other laws that do offer Whistleblower protection provisions, such as the Sarbanes-Oxley Act of 2002 or other state and federal laws, could apply to individual cases.