The Internal Revenue Service (IRS) offers reward programs that pay individuals for reporting tax fraud and providing information on tax evaders. These reward programs are intended to incentivize people to come forward with information to help the IRS detect and stop illegal tax activity. The two main IRS reward programs are the Whistleblower Informant Award and the IRS Underreporter Program.
Many people refer to providing information to the IRS reward programs as “snitching” or “ratting someone out.” The stigma associated with snitching comes from the idea that it is wrong to report someone to authorities. However, in the case of reporting tax fraud, the IRS states that whistleblowing serves an important civic duty and provides a valuable public service.
When it comes to getting paid for reporting tax fraud, the IRS does have specific requirements and guidelines for eligibility. The programs also offer tiered reward structures depending on the amounts of taxes, penalties, and interest that the IRS recovers based on the information provided.
Whistleblower Informant Award Program
The IRS Whistleblower Office pays rewards to people who blow the whistle on persons who fail to pay taxes owed. If the IRS uses information provided by a whistleblower, they can receive up to 30 percent of the additional tax, penalty, and other amounts the IRS collects.
The IRS Whistleblower Informant Award program has specific eligibility requirements:
– The information must relate to a tax law violation involving unpaid taxes more than $2 million for individual taxpayers, or gross income of more than $200,000 for any year at issue. For individual taxpayers, there is no minimum for cases involving an offshore financial account.
– The whistleblower must provide specific and credible information about tax cheating. Speculation or hearsay is not enough.
– If the IRS already had the information or the information came from the tax audit process, did not qualify for an award. The whistleblower’s information must be new and lead to additional tax collections.
– The whistleblower must provide information by properly completing IRS Form 211 Application for Award for Original Information.
– The whistleblower can remain anonymous throughout the process but needs to be represented by an attorney.
Once the IRS receives Form 211, they will evaluate the application and determine if the information warrants an investigation. The IRS also keeps the whistleblower’s identity strictly confidential throughout the process.
If the IRS proceeds with an investigation based on the whistleblower’s information and collects proceeds, the whistleblower becomes eligible for a reward. Rewards are determined as a percentage of the total taxes, penalties, and interest collected based on:
– If the tax, penalties, interest, and other amounts in dispute exceed $2,000,000, and a few other qualifications are met, the IRS will pay 15% to 30% of the amount collected.
– If the case deals with an individual, his or her annual gross income must be more than $200,000 for any tax year in question.
– The IRS also has an award program for other whistleblowers — 15% of collected proceeds, provided the collected proceeds exceed $2,000,000
It can take several years for a whistleblower to receive an award, but the reward can be well worth the wait. In 2019, the IRS issued whistleblower awards totaling $120 million. The largest award issued under the program was approximately $104 million to a whistleblower in the banking industry.
IRS Underreporter Program
The IRS Underreporter Program, also known as CP2000, ensures that income such as wages, interest, dividends, and self-employment income reported on tax returns is correct and matches the amounts reported by employers and financial institutions. When the IRS detects a discrepancy between what is reported on a tax return and third-party documents, they issue the taxpayer a CP2000 notice.
If you receive income from one of these sources that you do not report on your tax return, the IRS offers an incentive for coming clean through the CP2000 Voluntary Disclosure Program:
– If you agree with the IRS about the underreported income when responding to a CP2000 notice, you qualify for a reduced penalty of 20% of the understated tax instead of a penalty of up to 50% if you do not respond.
– If you take steps to amend your return on your own initiative before the IRS sends a notice, you qualify for a further-reduced penalty rate of 0.5% per month up to 25% of the understated tax when you file Form 8952 Request for Voluntary Disclosure On-Going IRS Examination.
While not exactly a bounty payment like the Whistleblower Award, the CP2000 Voluntary Disclosure Program allows taxpayers to avoid stiffer penalties by self-correcting income reporting discrepancies when prompted by a CP2000 notice. The penalty reduction serves as an incentive for truthful accounting and voluntary cooperation with IRS underreporting investigations.
Limitations of IRS Reward Programs
While the IRS Whistleblower and Underreporter programs provide financial incentives for people to come forward with information, they have some limitations:
– Rewards are taxable – The IRS treats reward payments as income subject to federal taxes. The whistleblower must include the reward payment as income on their tax return for the year they receive it.
– High threshold for rewards – Because Form 211 whistleblower claims must involve more than $2 million in disputed taxes to qualify for a reward, it sets a high bar for information that leads to a payout.
– Long wait to receive payment – It can take years for the IRS to fully investigate a whistleblower claim, so payments often do not get made for several years. Even then, there is no guarantee a reward will be issued.
– No rewards for incomplete information – The IRS does not pay rewards if it already had the information or if the whistleblower provides speculative, partial, or unsubstantiated information.
– Risk of retaliation – Whistleblowers who report their own employer run the risk that the employer may fire them or take other retaliatory actions.
– IRS evaluates and determines reward – The IRS Whistleblower Office has full discretion on whether information qualifies for a reward and the reward percentage based on the contribution of the information. There is no recourse if a whistleblower disagrees with the IRS decision.
The IRS limits rewards to credible whistleblowers who provide specific, timely information involving substantial tax underpayment. While rewards can be lucrative, the programs have high standards and long timeframes that reduce their utility for more minor tax cheating tips.
Famous IRS Whistleblower Cases
Some famous cases brought under the IRS whistleblower program further demonstrate its stringency and lucrative upside:
– Bradley Birkenfeld – A former banker at UBS in Switzerland, Birkenfeld blew the whistle on the bank’s efforts to help wealthy Americans evade taxes using secret offshore accounts. The evidence provided by Birkenfeld led to UBS paying a $780 million fine and major changes in Swiss banking laws. As a reward, the IRS paid Birkenfeld $104 million in 2012 for the substantial tax revenues recovered from Swiss banks and U.S. taxpayers as a result of his disclosures.
– CVLR Trust – In 2013, the IRS issued its second largest whistleblower reward to an undisclosed person involved with a trust. The whistleblower provided information leading to tax collections of over $600 million, resulting in a $57 million reward.
– Andrew Lau – A Deutsche Bank AG executive, Lau revealed how the bank helped its U.S. clients avoid taxes on investment income through improper use of shell companies. Lau stood to collect up to $6 million based on the unpaid taxes and fines collected from the bank’s clients and subsidiaries.
– Joseph N. Inglima – As an accountant for a large farming organization, Inglima informed the IRS about tax evasion related to miscategorizing workers as independent contractors. The IRS recovered over $700 million based on Inglima’s tip, entitling him to over $20 million as a reward.
These and other cases demonstrate how the IRS Whistleblower Informant Award program handsomely rewards individuals who provide credible, high-quality tips exposing major tax fraud. However, for smaller cases of tax cheating, the incentives are less enticing given the high eligibility bar.
Ethics of IRS Whistleblowing
The ethics of blowing the whistle to the IRS for a reward are controversial:
– Civic duty – Whistleblowers can view coming forward as fulfilling a civic responsibility to pay taxes. The IRS depends on informants to improve enforcement.
– Preventing harm – Tax fraud harms the government and taxpayers. Whistleblowing puts a stop to ongoing illegal schemes.
– Personal benefit – Some view informing on others purely for a reward as morally dubious. However, the law provides tax whistleblowing as a legal means to profit.
– Retaliation concerns – Those who expose tax evasion by employers or associates may face reprisals or relationship damage. However, whistleblower laws prohibit retaliation.
– Incentivizing bad behavior – Critics argue rewards encourage questionable motives and false reporting. However, strict IRS vetting works to weed out unreliable claims.
– Trust issues – Whistleblowing can stoke distrust between citizens and erode social capital. But it can also restore faith in institutions like the IRS.
There are good arguments on both sides of the ethics debate when it comes to IRS whistleblowing. Factors like the whistleblower’s motives and the consequences of inaction likely inform individual views of the moral appropriateness of reporting tax evasion for a reward. However, from the IRS perspective, whistleblowing provides a key enforcement mechanism.
How to Report Tax Fraud and Collect an IRS Reward
If you have credible information about large-scale tax cheating that could qualify for a whistleblower reward, here are steps to take:
1. Document the tax fraud in as much detail as possible. Get records, observations, names, dates, tax years, entities involved, and your relationship to the tax issue. Speculation will not qualify for an award – you need solid proof.
2. Calculate a realistic estimate of the unpaid taxes involved. The IRS needs cases with over $2 million in dispute for the Whistleblower Informant Award program. Be prepared to justify your estimates.
3. Hire an experienced whistleblower attorney. An IRS tax law attorney can help evaluate whether you have a viable case and improve your odds of reward eligibility. All communications with the IRS go through your lawyer.
4. File Form 211. Your attorney will help prepare Form 211 detailing the tax fraud and submitting it to the IRS Whistleblower Office under penalty of perjury. Include documentation supporting your allegations.
5. Participate in the investigation. You may need to answer questions or provide additional information if the IRS opens an investigation based on your Form 211. Your attorney will represent you.
6. Wait for the process to conclude. It can take years for your information to get evaluated, investigated, prove successful, and result in tax collections before you receive a reward. Patience is key.
7. Collect your reward. If you qualify based on the tax proceeds your information brought in, the IRS will pay the reward. The reward is taxable, so save enough to pay the taxes!
Blowing the whistle to the IRS can be lucrative, but requires solid evidence, legal support, and patience before seeing a potential payout. Follow the IRS guidelines closely to maximize your chances at a whistleblower reward.
Conclusion
The IRS Whistleblower and Underreporter programs offer sizable financial incentives for reporting major tax fraud or coming clean about income underreporting. However, high eligibility thresholds, stringent requirements, long timeframes, and the taxing of payouts means IRS rewards are best suited to credible tips exposing large-scale, high-dollar tax cheating. Rewards in the hundreds of thousands or millions of dollars go to whistleblowers whose information recovers substantial unpaid taxes for the U.S. government. For lower-level tax evasion, the effort and ethics of informing the IRS for a reward are less compelling. While the programs’ strictness aims to attract serious whistleblowers, it limits their attractiveness for more minor tax cheating revelations. Yet for those with evidence of major fraud against the IRS, huge whistleblower payouts are reachable with persistence.
