Collecting an IRS whistleblower reward is a tricky road to navigate

Every few years a politician or pundit will note the "tax gap" and suggest more needs to be done to collect unpaid tax already owed, rather than to increase current taxes or reform complicated tax laws. But the IRS has limited resources to enforce existing tax laws, and occasionally individual and corporate returns that hide income or otherwise dodge taxes slip through the cracks.

The IRS therefore rewards tax whistleblowers who report to the IRS regarding tax dodging behavior. A whistleblower may receive up to 30 percent of taxes collected for providing valuable information that leads to the recovery of tax income for the IRS.

Actually obtaining a whistleblower reward can be difficult, however. Presenting evidence of wrongdoing or a legitimate suspicion of wrongdoing can be complicated. In addition, the IRS may not be interested in the lead given, as the IRS is generally only interested in investigations that lead to large recoveries. The IRS may be aware of the issue raised by the whistleblower and already be conducting its own investigation, in which case the whistleblower will not be eligible for a share of the recovery.

These myriad concerns make actually obtaining recovery from whistleblowing difficult. However, it is possible, and should the IRS withhold a share of the recovery without cause whistleblowers have 30 days to appeal to the Tax Court. It is also possible to resubmit a whistleblower claim to the IRS if the agency refuses to act on the information previously provided.

The IRS and the IRS Chief Counsel often argue in Tax Court, as would be expected, that whistleblowers can only recover under specific and narrow circumstances. For example, if the IRS uses information provided by a whistleblower to collect a forfeiture under Title 18, rather than Title 26 tax penalties, then the IRS will withhold sharing any recovery amount.

Tax Court appeals

Should the IRS withhold tax income to a legitimate whistleblower, the Tax Court has the authority to judge in favor of the whistleblower. However, Tax Court will not force the IRS to investigate a lead. Tax Court does not have the authority to do so and it is up to IRS discretion whether to pursue an investigation against an individual or business.

Whistleblowers do have rights regarding information they provide that leads to a related IRS investigation. For example, if a whistleblower provides information that taxpayer A was underreporting income, and a subsequent IRS investigation reveals that same taxpayer also has an offshore tax haven, then the whistleblower may be able to recover for an amount recovered by that action as well.

Complicated claims, difficult recovery

Submitting a claim regarding another taxpayer's illegal action is a complex claim that requires protection and careful steps by the whistleblower. The IRS is not known for giving money away and will often take pains to reduce or eliminate a share of the recovery with a whistleblower. In addition, a whistleblower may need protections such as anonymity throughout any proceedings in order to remain employed or protected while the IRS conducts an investigation.

People contemplating submitting a whistleblower claim with the IRS should consult with an experienced tax law attorney to discuss potential future steps and to protect their interests.