January 2, 2018

The Tax Relief Act of 2006 Increased Incentives For Whistleblowers

Editor’s note: Thanks to the False Claims Act, IRS-related fraud is being reported and exposed more than ever due to the brave efforts of whistleblowers – who then get rewarded for their actions. This older blog post is from our Qui Tam archives and is worth viewing and reading again.

Just over four years ago, Congress passed the Extension of Tax Relief Act of 2006, which contained a whistleblower reform provision. These amendments authorized the IRS to create a Whistleblower Office to process tips received from individuals who spot tax problems in their workplace, while conducting day-to-day personal business, or anywhere else they may be encountered.

As a result, the IRS is now currently authorized to pay such sums as deemed necessary for detecting underpayments of tax, and detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving of the same.

As expected, the Tax Relief Act of 2006 significantly increased incentives for whistleblowers since Section 406 now provides for a recovery of at least 15%, but not more than 30%, of the collected proceeds. However, if the action is based upon the results from a judicial or administrative hearing, from a government report, hearing, audit, or investigation, or from the news media, the whistleblowers recovery is limited to no more than 10% of the collected proceeds unless the whistleblower is an original source. Unlike the definition of original source in the FCA, Section 406 simply states that the reduction based upon public disclosure will not apply if the information was originally provided by the whistleblower.

A whistleblowers share will also be reduced if the whistleblower planned and initiated the violations. Furthermore, if the whistleblower is convicted of criminal conduct arising from planning and initiating of the violations, he is not entitled to any share of the recovery. A whistleblower has 30 days from the determination to appeal an award determined by the Tax Court .

Critics of the tax whistleblower statute feel it infringes on the rights of taxpayers by allowing informants to allege wrongdoing with little or no evidence and they suggest that the statute raises serious privacy concerns. The most significant of these concerns is that private citizens will profit by disclosing taxpayer information and recklessly expose the information to persons not authorized by statute to receive such information. Under existing law, informants and qui tam plaintiffs must turn their information over to the government agencies that are authorized to receive tax-related information. Furthermore, any privacy concerns should probably be balanced against public policies that encourage private persons to expose tax-related fraud.

Below are examples of tax fraud schemes showing the type of activities whistleblowers can file a claim under the IRS whistleblower law:

Backdating/postdating earnings or losses to move income into a different tax year.

Altering grant and/or exercise dates on stock options.

Questionable tax shelter schemes and false deductions.

Parent corporation manipulation of subsidiary relationships to conceal profits or create improper losses.

Under-reporting revenue or over-claiming losses

Foreign companies that fail to pay U.S. taxes for domestic operations.

U.S. companies and wealthy individual citizens who conceal earnings made from transactions on foreign stock and commodity exchanges, and from other foreign transactions

Non-filing of a federal tax return

If you are aware of tax fraud by a corporation or wealthy individual tax payer, you may be able to recover significant rewards through the IRS whistleblower laws.  The attorneys at Berg and Androphy are trial lawyers prosecuting IRS Tax fraud cases resulting in the recovery of hundreds of millions for the government and whistleblowers.”

Are you or someone you know considering the pursuit of a whistleblower action due to knowledge of illegal activities? B&A can help. Take a look at our Qui Tam Toolkit and learn all about Qui Tam legal proceedings and more here.