IRS Amendment Finally Includes Reward for Reporting Tax Fraud

The False Claims Act pertains to a panoply of fraudulent activity against the federal government, but it does not apply to tax fraud. In December of 2006, Congress took action to rectify the situation. Tax Relief and Health Care Act amended Section 7623 of the Internal Revenue Code to provide financial incentives for individuals to report tax fraud, in much the same way that the False Claims Act promotes the disclosure of fraud against the government by its contractors.

What Amendments Did the 2006 Tax Relief and Healthcare Act Make in IRS § 7623?

The biggest change to whistleblower protection and incentives was the addition of tax fraud as reportable under Whistleblower law in addition to:

  • Larger Whistleblower Rewards
  • Ability of Whistleblower to Challenge Amount Reward
  • Creation & Maintenance of a Dedicated IRS Whistleblower Office
  • Whistleblowers Do Not Have to be U.S. Citizens for Reward Eligibility
  • IRS to Maintain Confidentiality of Whistleblower Identity

Before the new legislation, the IRS paid only 1 to 15% of any recovery.  Now, a whistleblower can expect to receive 15 to 30% of the total amount collected, including taxes, interest, and penalties.

Under the new legislation, whistleblowers unhappy with the size of their rewards are permitted to challenge the amount in federal Tax Court. In addition, the IRS is required under the legislation to maintain a whistleblower office dedicated to the management of whistleblower claims.

An IRS whistleblower no longer has to be a citizen of the United States. And finally, whistleblowers should derive some peace of mind from assurances by the IRS that it will keep confidential the whistleblower’s identity.

The new legislation is not aimed at small-fry tax dodgers, however. Rather, the law is directed solely to companies or individuals that have defrauded or underpaid the IRS by more than $2 million, and whose annual income is at least $200,000. Congress intended to encourage, with financial incentives and promises of confidentiality, the employees of such individuals and corporations—including multinational corporations—to step forward and put an end to the fraud.

As in the False Claims Act context, Congress has found a way to unite private individuals and their counsel with government lawyers and investigators to work together and “Protect What’s Right.” Whistleblower compensation is now available for those who report corporate tax evasion or elusive maneuvers for high income individuals.