The Tax Relief and Health Care Act of 2006
The Tax Relief and Health Care Act of 2006 provides rewards of 15-30% of any government recovery to individuals who provide the Internal Revenue Service with information relating to any tax fraud exceeding $2 million. The statute also created an IRS whistleblower office dedicated to working exclusively with whistleblowers. This law was passed because the False Claims Act does not permit whistleblowers to file cases against taxpayers who cheat the IRS. While the IRS had its own whistleblower program prior to 2006, that program was largely ineffective and had no provision for a guaranteed reward. A few states, most notably the State of New York, have their own tax whistleblower laws that deal with non-payment of state taxes.
Examples of Tax Fraud
Below are a few examples of common tax schemes that can be the subject of IRS whistleblower submissions:
- Underreporting of income due to investment in offshore tax havens
- Artificially depressing the income reported by U.S. entities based on manipulation of “transfer pricing” (e.g., the prices that one subsidiary charges to another subsidiary for goods or services)
- Tax shelters that lack any real economic purpose other than the evasion of taxes
- Circular transactions in which funds are moved from one country to another to generate artificial tax benefits
- Improper transfer of tax benefits from one company to another
- Manipulation of the recognition of revenue or profits to maximize tax benefits
Similarities to False Claims Act
The IRS whistleblower law has several similarities to the False Claims Act. Like the False Claims Act, it provides for a guaranteed minimum reward of 15% of the amount that the IRS recovers as a result of the whistleblower’s information, up to a maximum of 30%. It also allows the submission to be delivered to the IRS in secret, without revealing the submission to the target company. As with the False Claims Act, whistleblowers who provide detailed, credible, and well-documented information will have better chances of success – both in encouraging IRS officials to investigate the fraud and in obtaining the largest possible rewards.
Significant Differences from False Claims Act
- No Complaint Filed in Court: The IRS whistleblower law does not require whistleblowers to file a formal complaint in federal court. Instead, they must file a “Form 211” with the IRS. The IRS has established a whistleblower office dedicated exclusively to working with whistleblowers. It has specific regulations and guidelines that whistleblowers must follow.
- Evidence of Fraud Can Come From a Public Source: The IRS whistleblower law generally requires that information provided by whistleblowers be original and not publicly known. However, the standards are relatively flexible compared with the False Claims Act, and individuals may still receive an award if their submission adds in important ways to the information in the public domain.
- Confidentiality: While IRS whistleblowers must disclose their identities to the IRS when making a submission, the IRS has a strong policy to protect the whistleblower’s identity. The agency has generally been cooperative in taking steps to ensure that the targeted taxpayer does not learn that there is a whistleblower, much less that person’s identity. However, if the IRS decides to pursue the case, the whistleblower’s identity may be disclosed and also may be disclosed before obtaining any reward following an investigation, proceeding, or settlement.
- No “First to File” Rule: Under the IRS whistleblower law, whistleblowers who provide information during a pre-existing government investigation can be rewarded as long as the information provided is original and useful.
- No Private Right of Action: Whistleblowers cannot continue a claim privately if the IRS chooses not to pursue the case.
- Limited Visibility into the IRS Investigation: Unlike the False Claims Act, the IRS whistleblower law provides very limited information to the whistleblower about the status of any investigation. Typically, a whistleblower may be interviewed only once by the IRS, and may receive no further information until the IRS has either decided not to pursue collection or reached an agreement for payment of taxes.