We’ve all heard the saying “snitches get stitches’ but how about, ‘snitches get riches’? The IRS Whistleblower Office accepts tips from individuals who notice tax problems in their workplace. If the IRS moves ahead and collects as a result of the information, they may pay the whistleblower an award of 15% to 30% of the total collection.
What is the IRS whistleblower law?
The whistleblower rules can be found in Internal Revenue Code (IRC) 7623(b). Established as part of the Tax Relief and Health Care Act of 2006, they apply to claims made after December 20, 2006.
In short, when an individual notices a tax-related problem in their workplace, they can report it to the IRS Whistleblower Office. The office will assess the tip and decide if it is credible. It if is legitimate, the office assigns the case to the IRS for further investigation.
If the investigation leads to the collection of additional taxes, penalties, and interest, the informant can receive 15% to 30% of the proceeds.
How is the award amount determined?
The award percentages are statutory and generally range from 15% to 30% of the tax, penalties, interest, and other amounts collected. There is no maximum limit to the award.
The award amount maxes out at 10% if the case is based on the disclosure of allegations from the following sources:
- Government hearing, report, audit, or investigation.
- Administrative or judicial hearings.
- News media.
An appropriate reduction will also be made if the whistleblower was actively involved with the tax problem. If they are convicted of planning and/or initiating it, they will not receive an award.
Further, if the whistleblower disagrees with the outcome of the case, they will have 30 days to file an appeal to the U.S. Tax Court.
In what cases does whistleblower law apply?
In order for the 15% to 30% award to apply, the amount in dispute must exceed $2 million. Further, if the non-compliant taxpayer is an individual, their gross income must be more than $200,000 for the tax year in question.
If the amount in dispute is less than $2 million, the case will be processed according to IRC 7623(a). This section does not require an award, but the IRS may issue one at their discretion. Awards under this section max out at 15% or $10 million, whichever is less. Further, no minimum statutory award percentage or appeal provisions exist.
How do you submit information and seek an award?
If you would like to blow the whistle on a non-compliant taxpayer, you can do so by filling out and sending in IRS Form 211.
It requires you to provide:
- Information about the taxpayer.
- An explanation of the violation and supporting documentation to substantiate the claim.
- Your relation to the taxpayer.
- Whether you reported the violation to an IRS employee.
- How and when you learned of the violation.
- An estimate of the tax owed and when it was due.
- Your personal information.
- An original signed Declaration under the Penalty of Perjury.
Whistleblowers should use the same form, no matter the amount of the dispute.
What is the tax treatment for whistleblower awards?
Awards will be subject to federal tax reporting and withholding requirements. Whistleblowers will usually receive a 1099 form, and the IRS considers any 1099 payments as taxable income.
Confidentiality for whistleblowers
The IRS will protect a whistleblower’s identity to the fullest extent possible. However, in some cases, the informant will be an essential witness. In these instances, the case can’t proceed without revealing their identity. The IRS will inform the whistleblower of this in advance and will give them the option to proceed or not.
Why might the IRS deny whistleblower claims?
The IRS can deny a whistleblower claim for the following reasons:
- The taxpayer is guilty but has no assets for the IRS to collect.
- Although liable, the taxpayer appeals the liability and is successful.
- The taxpayer is not liable for any additional amount.
- Another source already gave the same information to the IRS.
Whistleblowers won’t be able to find out about the actions of the taxpayer, only the disposition and status of the claim.
Need tax help?
If you own a business and want to ensure your taxes are up to code, a tax preparation firm can help you. Experts can audit your records and finances to help you keep everything in order. If you want to avoid being audited by the IRS, it’s much better to be proactive than reactive — your employees have an incentive to report any mistakes you make.
Consider hiring a tax relief expert, if you already have a large tax debt. You may have tax relief options you didn’t consider. Choose a company that offers a free initial consultation, a money back guarantee, and employs tax lawyers, such as Optima Tax Relief and Paramount Tax Relief.
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Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.