The IRS using paid informants to identify noncompliant taxpayers may seem controversial, but it has not generated much controversy as the program has been poorly administered. In this article, we will discuss the IRS Informants Rewards Program, its eligibility requirements, and the recent changes to the program.
About the IRS Whistleblower Program
The IRS Whistleblower Program pays eligible individuals monetary awards for providing specific and credible information about tax noncompliance that leads to proceeds collected by the IRS. The award percentage generally ranges between 15 and 30 percent of the proceeds collected.
To submit a claim, individuals must complete IRS Form 211 and provide supporting documentation. Eligibility requirements include not being a Department of Treasury employee or obtaining the information through official duties as a federal government employee.
If an award is to be allowed:
the reward percentage is determined by whether the information directly led to the recovery (15 percent); indirectly led to the recovery (10 percent); or caused the investigation but had no direct relationship to the determination of tax liability (1 percent). The dollar amount of the reward is computed by multiplying the reward percentage by the amount of taxes, fines, and penalties (but not interest) collected. Different reward percentages can be used if the case involves multiple taxpayers and/or tax years. The reward amount must total at least $100 to be paid and cannot exceed $2 million in total.
The rules for getting an award include providing information on tax noncompliance matters where the proceeds in dispute exceed $2,000,000 and for taxpayers with gross income exceeding $200,000 for at least one of the tax years in question.
The IRS provides an Annual Report to Congress on the use of the program, and additional information is available on the IRS website.
The audit states that $340,329,427 was recovered due to informant information for FYs 2001 through 2005. Given the size of this figure, you might be wondering if “The Dog” bounty hunter might be in the wrong business. Based on the TIGTA report, the answer is clearly “no.”
The Recent Changes to the Program
The Tax Relief and Health Care Act (TRHCA 2006) brought significant changes to the IRS whistleblower program by adding Section 7623(b) and establishing the Whistleblower Office within the IRS to administer the framework.
The TRHCA 2006 requires an annual study and report to Congress on the use of Section 7623, which includes legislative or administrative recommendations for Section 7623 and its application.
A whistleblower may appeal the Whistleblower Office’s award determinations under IRC § 7623(b) to the United States Tax Court. To qualify for the Section 7623(b) award program, a whistleblower must meet several criteria, including submitting signed and perjury-penalized information related to an action with proceeds exceeding $2,000,000 and related to a taxpayer with gross income over $200,000 for at least one tax year in question.
If the information meets the criteria and significantly contributes to an administrative or judicial action resulting in the collection of proceeds, the IRS will pay an award of at least 15 percent but not more than 30 percent of the proceeds collected. The award percentage decreases for cases based mainly on information disclosed in certain public sources or when the whistleblower initiated the actions leading to tax law violations.
The IRS pays awards from collected proceeds, so award payments cannot be made until the taxpayer has exhausted all appeal rights and cannot file a refund claim or recover the proceeds from the government. Therefore, the IRS generally pays award payments several years after the whistleblower files a claim.
IRS Processing of Claims
The IRS processing of claims can be challenging, with many claims being rejected, and even if accepted, resulting in a low payment percentage. In some cases, payment may take up to seven and a half years, making it vital for potential informants to work with a tax lawyer to present their claim effectively and increase their chances of compensation.
If the IRS implements the TIGTA audit recommendations, the program could become a highly efficient way to collect unreported and under-reported tax, interest, and penalties. This may lead to the emergence of a new industry of “tax bounty hunters.”
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