The False Claims Act and its state counterparts usually don’t allow whistleblowers to report tax fraud. But a few special programs reward upstanding individuals for making sure everyone pays their fair share.
First, a whistleblower can submit a tip directly to the Internal Revenue Service (IRS). Second, several state False Claims Acts allow whistleblowers to report the underpayment of state taxes.
The IRS Whistleblower Program
The IRS estimates that approximately 14% of federal taxes go unpaid, leaving the government with a “tax gap” of over $400 billion every year. According to the IRS Taxpayer Advocate Service, ordinary taxpayers pay an average of $3,000 per year in extra taxes to make up for this lost revenue.
To help combat tax underpayments, Congress established the IRS Whistleblower Program in 2006. Under this program, a whistleblower is entitled to an award of 15% to 30% of proceeds collected if all of the following conditions are met:
- The whistleblower provides a tip with relevant information
- The tip identifies the underpayment of taxes within 3 years of filing the incorrect tax return (or 6 years if the tax return understates income by at least 25%)
- The tip identifies the underpayment of federal taxes, whether intentional or by mistake
- The IRS acts on the tip and collects tax underpayments, whether intentional or not
- The amount in dispute (including interest and penalties) exceeds $2 million
- If the taxpayer is an individual (instead of a corporation), the individual’s gross income exceeds $200,000 for at least one of the years at issue
The IRS Whistleblower Office has collected over $5.7 billion in unpaid taxes and awarded nearly $1 billion to whistleblowers. An experienced attorney can help a whistleblower by:
- Drafting and submitting the strongest possible tip, using information and language that will get the attention of the IRS Whistleblower Office
- Maintaining the whistleblower’s identity to the maximum extent permitted by law
- Fighting for the highest possible award following a successful enforcement action
- Protecting the whistleblower from retaliation from his or her employer
State False Claims Acts
While the IRS Whistleblower Program covers the underpayment of federal taxes, several states permit whistleblowers to report the underpayment of state taxes. New York’s Taxpayer Protection Bureau has been particularly aggressive in pursuing tax cheats and strongly encourages whistleblowers to assist the state in its efforts. In addition, Illinois, Indiana, Maryland, Rhode Island, and Washington, DC all permit whistleblowers to report tax fraud. These state statutes typically entitle a whistleblower to receive between 15% and 30% of the recovery in a successful enforcement action.