Today’s tax quotes:
“We try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail.” Dave Barry
“If you get up early, work late, and pay your taxes, you will get ahead-if you strike oil.” J. Paul Getty
Dick Mansfield has written extensively in this space about the growth of whistleblower and qui tam statutes that encourage citizens to report wrongdoing by others, and reward them for doing so. Companies are at risk if they do not incorporate risk management and compliance programs for all federal laws. Among the risks that should be addressed is the risk that employees with knowledge of company tax issues will report them to the IRS in the hopes of claiming awards under the IRS whistleblower statute, which was amended and substantially enhanced in 2006. In addition to the point made by Dave Barry above, this is another reason to cooperate with the IRS. If companies do not do so, individuals may seek to “strike oil” by informing on them.
The Internal Revenue Code has contained authority for IRS to pay whistleblowers since its inception, now covered in section 7623. For many years, the statute limited awards to information instrumental in prosecuting wrongdoers. In 1996 it was amended to include authority to pay awards out of funds collected from taxpayers as a result of information leading to the detection of tax underpayments. But awards were discretionary, and limited to no more than 15% of amounts collected. The amounts, if any, IRS decided to award were not reviewable by a court.
In 2006, the law was substantially amended. Section 7623(b) was added, under which awards of at least 15% but not more than 30% of collected proceeds are mandatory provided certain conditions are met. The information provided must involve additional taxes, penalties, and interest of at least $2 million, and in the case of an individual taxpayer the taxpayer’s gross income for some relevant year must exceed $200,000. The IRS’s determination of awards is subject to review in the Tax Court. And the law requires establishment of a Whistleblower Office within the IRS, which is to provide a yearly report to Congress. The new provisions were effective for information provided after December 20, 2006.
The IRS proceeded to establish the new office, which as of 2010 had a staff of 17. Its most recent report, filed in December of 2010 and covering fiscal year 2009, provides some interesting data on the program.
The report shows some 5,678 cases received in fiscal 2009, up by almost 2,000 over the prior fiscal year. IRS paid 110 awards totaling some $5.85 million, down from 198 awards totaling $22.4 million in 2008. Of the cases received in 2009, some 460 appeared to meet the monetary thresholds for the new mandatory awards. However, IRS noted that all of the awards granted in 2009, and in previous years, related to information received prior to the effective date of the new rules. That is, no mandatory awards have yet been issued. This simply illustrates that there is a long interval between submission of information and the determination of an award. It is not uncommon for cases to take five-to-ten years to work their way through the system, since IRS will not pay awards until it has collected the additional taxes and all taxpayer appeals have been exhausted.
However, according to tax lawyers working in this area, it is expected that IRS will begin paying awards under the new law soon, and that once it does so the floodgates will open as more corporate employees realize the substantial benefits that could accrue through reporting wrongdoing by their company. According to one analysis, Fortune 500 companies currently have some $200 billion of uncertain tax positions recorded that represent opportunities for employees to come forward with information undermining the company’s position.
Of course, doing so does not guarantee an award. The information must be instrumental in recovering taxes. It cannot be publicly available information, or information already known to the IRS. And the award may be reduced if the whistleblower “planned and initiated” the actions that led to the underpayment of tax, or eliminated if the whistleblower is convicted of a crime as a result of his actions. However, the IRS has recently published proposed regulations expanding the definition of “proceeds” from whistleblower information to include information resulting in denial of refunds, or where the resulting tax deficiency is eliminated by carryovers, carrybacks, credits, or other tax offsets.
Although some questions remain concerning program administration, it appears that the public profile of this somewhat obscure IRS program will soon be elevated as large awards begin to appear based on information provided after the 2006 changes went into effect. IRS has said that many of the whistleblowers coming forward since 2006 are insiders who have offered extensive documentation of wrongdoing by their employers.
Worldwide ERC member companies need to be aware of the possibility that tax whistleblowing may soon become more popular, and take steps to make sure that they assess their own risk. In addition to its own audit resources, IRS can count on substantial help from disgruntled insiders to identify tax reporting issues and assert deficiencies.