On December 20, 2006, the Tax Relief and Health Care Act (the “Act”) was enacted. The Act amended Internal Revenue Code § 7632 and established a Whistleblower Office in the IRS which has the responsibility for the administration of the whistleblower program. The program pays whistleblowers who have solid information on persons who fail to pay the tax they owe.
The law provides for two types of awards. To receive the first type of award the tax, penalties, interest and other amounts must exceed $2 million and meet some other qualifications. In this circumstance, the whistleblower will receive 15-30% of the amount collected. If the case deals with an individual, that individual’s gross income must exceed $200,000. For these awards, the whistleblower has 30 days after receiving the final determination from the Whistleblowers Office to appeal the award amount to the United States Tax Court.
The second type of award is for whistleblowers who do not meet either the amount or gross income threshold. These awards are capped at a maximum of 15% of the amount collected up to $10 million and the awards are discretionary and cannot be disputed in the United States Tax Court.
For both types of awards, the whistle blower must complete Form 221 Application for Award for Original Information. The form asks for identifying information related to the alleged violating taxpayer, the areas of alleged violated tax law, as well as requesting detailed information about the alleged violation and finally for the claimant’s identifying information.
Internal Revenue Code § 6103 generally prohibits the IRS from sharing tax return information with anyone outside the IRS. However, subsection (n) of the section provides a general exception that allows for disclosure when necessary “for providing of other services, for purposes of tax administration.” Proposed rules (73 FR 15687, REG-114942-07) and temporary rules (T.D. 9389) have been in place since 2008 which allow the IRS to disclose to whistleblowers information under 6103(n) for the purposes of tax administration subject to certain limitations. In March of 2011, these rules were finalized and made permanent (T.D. 9516); the IRS may disclose return information to the whistleblower or their legal representative for the purposes of “services relating to the detection of violations of the internal revenue laws or related statutes.” The IRS and the whistleblower must enter into a written contract which specifies the extent and purpose of the disclosure and that disclosure is limited to “only to the extent the IRS deems it necessary in connection with the reasonable or proper performance of the contract.” The regulations also provide that the whistleblower and their legal representative are subject to both civil and criminal penalties for the “unauthorized inspection or disclosure of the return information.”
It is important to note that the rewards are based on a percentage of the amount collected. Pursuant to Internal Revenue Code § 6502(a). The IRS may collect on an assessment of a tax liability for up to ten years from the date the tax is assessed up until what is known as the Collection Statute Expiration Date (“CSED”). The CSED, however, may be extended for many reasons including voluntary extensions when entering into Offers in Compromise, Installment Payment Arrangements, or non-voluntary extensions such as when military members enter combat zones or when the assessment is being disputed through formal and informal means. Certain penalties such as a fraud penalty or negligence penalty may carry its own CSED outside of the underlying tax liability. In a whistleblower case where no collection is made, no reward is awarded to the whistleblower as the rewards are contingent on collection. While methods exist for the IRS to collect and extend the time to collect unpaid tax, penalties, and interest, those methods do not always yield results.