This is the final installment in our series of primers on the key legal regimes incentivizing and protecting whistleblowers who report fraud: the False Claims Act (FCA), the Securities Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Internal Revenue Service (IRS) whistleblower programs. Both the FCA and IRS whistleblower program have been in place since the mid-1800s, but have recently experienced a resurgence after undergoing significant amendments. The SEC and CFTC whistleblower programs, on the other hand, were recently created through the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
On balance, the FCA and three core whistleblower programs provide avenues through which individuals can report fraud occurring across a wide swath of industries. Owing largely to increased public awareness, the number of whistleblower-initiated cases and tips submitted to the whistleblower programs have reached unprecedented heights in recent years. It has therefore become imperative for attorneys, potential whistleblowers, and potential defendants to become familiar with the applicable laws, their backgrounds, causes of action, available damages, and protections against retaliation. This four-part series combined perspectives from whistleblower and defense counsel to provide measured insight into each of the four main whistleblower regimes. In this fourth part, we discuss the IRS whistleblower program.
Background and Legislative History
Dating back to 1867, the Internal Revenue Act has provided the Secretary of the Treasury with the authority to pay amounts deemed necessary “for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same.” See, “History of the Whistleblower/Informant Program,” Internal Revenue Service. But, the program’s real resurgence came with the enactment of Tax Relief and Health Care Act in 2006. Most notably, the addition of Internal Revenue Code (IRC) Section 7623(b) made whistleblower awards mandatory where the proceeds collected exceed $2 million or, if the taxpayer is an individual, the individual’s gross income exceeds $200,000. Prior to the 2006 amendments, issuance of awards under the whistleblower program was wholly discretionary and capped at 15% of collected taxes and penalties.
Since the implementation of these changes, the IRS whistleblower program has expanded. The whistleblower program has collected $6.14 billion from noncompliant taxpayers and paid over $1 billion dollars in awards to whistleblowers since 2007. See, Fiscal Year 2020 Annual Report, IRS whistleblower office, at 5. In Fiscal Year 2020 alone, the whistleblower office collected $472,080,014 and made 169 awards to whistleblowers totaling $86,619,032 (before sequestration).
This growth should continue in light of additional changes made to the whistleblower program in 2018 and 2019. Section 41108 of the Bipartisan Budget Act of 2018 amended IRC Section 7623, including the addition of a new subsection (c) that expanded the definition of “proceeds” under program to include, among other things, criminal fines, civil forfeitures, and violations of reporting requirements. See, Whistleblower Program: Fiscal Year 2019 Annual Report to Congress, Internal Revenue Service, at 6. And Section 1405(a) of the Taxpayer First Act of 2019 amended IRC Section 7623 and Section 6103 by requiring the IRS to notify whistleblowers when a claim has been referred for examination, notify whistleblowers when a payment has been made by the taxpayer identified by the whistleblower, and provide whistleblowers with updates on the status and stage of whistleblower claims. See, “Whistleblower Reforms Under the Taxpayer First Act,” Internal Revenue Service. The Taxpayer First Act also added protections for whistleblowers against retaliation, which are discussed more fully below.
Becoming an IRS Whistleblower and Obtaining Whistleblower Awards
An IRS whistleblower may be any individual who provides specific and credible information that results in the collection of taxes, penalties, interest, or other amounts from a noncompliant taxpayer. See, Whistleblower-Informant Award, Internal Revenue Service.
The IRS program sets forth a detailed procedure for submitting whistleblower information. Individuals must submit a Form 211 “Application for Award for Original Information” under penalty of perjury. See, How Do You File a Whistleblower Award Claim Under Section 7623 (a) or (b), Internal Revenue Service. A whistleblower may not participate as a named party in an enforcement action resulting from their information, nor may they bring an independent action if the IRS decides not to pursue an action. However, the whistleblower may be eligible for an award if the IRS does successfully pursue a judicial or administrative action based upon the information submitted. As stated above, where the collected proceeds exceed $2 million or, if the taxpayer is an individual and their gross income exceeds $200,000, the IRS is required to pay an award to the whistleblower, provided other statutory qualifications are met. The range of such an award is typically between 15 percent and 30 percent of the amount collected.
In addition to the mandatory awards issued under IRC Section 7623(b), the IRS may still issue awards at its discretion pursuant to IRC Section 7623(a). But Section 7623(a) awards can only amount to 15% of the amount collected, up to $10 million. Section 7623(a) awards are generally issued where the amount in dispute does not meet the $2 million threshold or the case involves an individual taxpayer with gross income of less than $200,000.
Determination of the percentage of proceeds awarded a whistleblower under IRC Sections 7623(a) and (b) is governed by Treasury Regulations Section 301.7623-4. The whistleblower office assesses several positive and negative factors in deciding where on the 15% to 30% continuum an eligible whistleblower should fall. Positive factors include how quickly the whistleblower went to the IRS with their information; the originality, specificity, and thoroughness of the information provided; the assistance and cooperation provided; the whistleblower’s identification of collectable assets; and the impact of the information on the behavior of the taxpayer. Negative factors include delay on the part of the whistleblower in reporting the tax fraud; the whistleblower’s participation in or profiting from the tax noncompliance; and the whistleblower’s lack of cooperation with or hindrance of the IRS’s investigation.
Protections Against Retaliation
As with the FCA and other whistleblower programs, the IRS specifically prohibits retaliation against whistleblowers, albeit only since the recent passage of the Taxpayer First Act in 2019.
Employers and their officers, employees, contractors, subcontractors and agents are prohibited from retaliating against whistleblowers who report information regarding potential tax fraud internally or to the appropriate government authorities. Potential retaliatory actions include an employer’s decision to “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment.”
A tax whistleblower who suffers such retaliation must file their complaint with the Occupational Safety and Health Administration (OSHA) no later than 180 days after the violation occurred. If the Secretary of Labor has not issued a final decision within 180 days of the filing of the complaint, and there is no showing that such delay is due to the bad faith of the claimant, then the employee may file suit in federal court. If successful before OSHA or the court, the employee is entitled to all relief necessary to make them whole, including reinstatement with the same seniority status that they would have had, but for the reprisal; 200% of the amount of back pay, with interest; 100% of all lost benefits, with interest; and any special damages sustained as a result of the reprisal, including litigation costs, expert witness fees, and reasonable attorney fees.
The IRS whistleblower program continues to grow in the wake of its rejuvenation just a little over a decade ago. Additional legislation passed in 2018 and 2019 bolstered the potential “proceeds” eligible for attribution to a whistleblower’s award, increased operational efficiency within the Program, and provided retaliation protections. These developments, along with the program’s increased public profile, should lead to an increase in the number of whistleblowers that will step forward and put the program on par with the whistleblowing regimes under the FCA, SEC and CFTC.
Zachary Arbitman a senior associate and trial attorney at Youman & Caputo, where he represents whistleblowers in claims brought under state and federal False Claims Acts, various state whistleblower statutes, and the IRS, SEC and CFTC whistleblower programs. Contact him at firstname.lastname@example.org .
Benjamin H. McCoy is an attorney with Fox Rothschild. He has a broad commercial defense practice with an emphasis on international business, health care and first amendment litigation. Contact him at email@example.com.