The IRS estimates that U.S. taxpayers under report and underpay about $400 billion in taxes each and every year. The IRS operates a Whistle blower Program where the agency will give monetary awards to individuals who provide information that results in the collection of significant un-reported tax dollars.
The IRS Whistleblower Office was established by the Tax Relief and Health Care Act of 2006. There were ways to turn in alleged tax cheats before that, but since 2006 there are specific procedures. Now, if the IRS uses information provided by the whistleblower; it can award the whistle blower up to 30% of the additional tax, penalty and other amounts it collects.
The information must be specific and credible, and it must result in the actual collection of taxes, penalties and interest from the noncompliant taxpayer. The information must be detailed. They are not interested in speculation and unsubstantiated accusations about your ex-husband or former employer.
There are two types of awards for whistleblowers: (1) If collected taxes, penalties and interest exceed $2 million, the IRS will pay at least 15 but not more than 30%. This is the major change in the program that was made by the 2006 law. These awards are no longer discretionary. The new law says that the whistleblower shall receive 15 to 30% of the collected proceeds. The IRS’s determination on this award is appealable by the whistleblower. If the taxpayer is an individual, his or her gross income must exceed $200,000. (2) If tax is less than $2 million or the alleged cheat’s annual income is less than $200,000, there are also awards. These can be up to a maximum of 15%, and the IRS’s determination is not appealable.
If you decide to submit information, use IRS Form 211, Application for Award for Original Information. You must provide specific and credible information regarding the taxpayer that you believe has failed to comply with tax laws and that will lead to the collection of unpaid taxes. Attach all supporting documentation (for example, books and records) to substantiate the claim. If documents or supporting evidence are not in your possession, you must describe these documents and their location. You must also describe how the information which forms the basis of the claim came to your attention, including the date(s) on which this information was acquired, and a complete description of your relationship to the taxpayer. The IRS emphasizes that under no circumstance do they expect or condone illegal actions taken to secure documents or supporting evidence.
If you chose to file Form 211, the process could take several years. There must be an audit or investigation resulting in the collection of proceeds. The taxpayer’s appeal rights must be expired and all sums collected before any award is paid to the whistleblower.
A person who reports under the IRS Whistleblower Act does not have the right to prosecute it. A whistleblower cannot compel the IRS to investigate a claim nor may a whistleblower file a private cause of action if the IRS declines to pursue an investigation.
Will the alleged tax cheat know you turned them in? The IRS will protect the identity of the whistleblower to the fullest extent permitted by the law (whatever that is). If the whistleblower is an essential witness in a judicial proceeding, it may not be possible to pursue the investigation or examination without revealing the whistleblower’s identity. The IRS will inform the whistleblower before deciding whether to proceed in such cases.
Offshore accounts are an increasing priority for the IRS and the Whistleblower Program has helped in uncovering these situations. As reported by Janet Novack and William P. Barrett for Forbes, "In June 2007, Bradley C. Birkenfeld–motivated in large part, he now acknowledges, by the new reward law–came to U.S. officials with documents in hand and laid out how his former employer, UBS AG, helped wealthy Americans hide money offshore. So far the investigation he triggered has produced a $780 million payment to the U.S. government from UBS, Switzerland’s largest bank; an unprecedented agreement by the Swiss to finger 4,450 U.S. taxpayers with secret UBS accounts; and criminal investigations of more than 150 American UBS clients."
However, Birkenfeld tried to conceal his own involvement in the fraud and was prosecuted for a felony for his participation. His prosecution has been roundly criticized. Here is the lesson: If you’re going to blow the whistle, you must "tell all" truthfully. Whistleblowers willing to tell the full truth can usually obtain any protection needed.
The fact the Birkenfeld was prosecuted is not a bar to his award. He is still eligible for the "bounty."