Reporting IRS Fraud
An individual who wants to report the underpayment of taxes under the whistleblower program must complete IRS Form 211 and send it to the IRS Whistleblower Office. Form 211 requests information about the whistleblower making the report; the entity allegedly underpaying taxes; any relationship between the whistleblower and the entity; and any alleged misconduct. Whistleblowers are asked to describe how they learned of the tax fraud, facts supporting their allegations and the amount believed to be owed to the government.
After submitting Form 211, the IRS first determines whether the claim exceeds $2 million. For claims of less than $2 million in unpaid taxes or tax fraud, the information is forwarded to the Informant’s Claim Unit and handled under Section 7623(a). Rewards under Section 7623(a) are based on the discretion of the IRS. Information involving claims of more than $2 million are assigned a claim file number and notification is made to the whistleblower and/or his or her attorney. These claims are handled under Section 7623(b) which provides for a mandatory award under the Internal Revenue Code.
During review of the claim, an IRS examiner might need clarification about the submission or seek additional information that could assist the investigation. In those situations, the IRS will arrange an interview with the whistleblower.
In 2017, the Director of the IRS Whistleblower Office issued a memorandum following a review of IRS operating procedures regarding communications with whistleblowers. The memorandum noted that there “may be instances when ongoing interaction with a whistleblower during an examination can assist in the timely and correct resolution of issues.” The IRS is prohibited by law to disclose confidential information contained on a tax return, and this prohibition limits the scope of the whistleblower’s role in an IRS investigation.
“[T]here may be instances when ongoing interaction with a whistleblower during an examination can assist in the timely and correct resolution of issues.”
-Lee Martin, Director of the IRS Whistleblower Office
The memorandum explains that 26 U.S.C. § 6103(n) permits the IRS to enter into a contract with a whistleblower for services related to tax administration. After execution of a section 6103(n) contract, the IRS can share tax returns and return information with a whistleblower, and his or her attorney, to further the whistleblower’s participation in the investigation.
At the conclusion of an investigation, the IRS completes Form 11369, the Confidential Evaluation Report on Claim for Reward, which is sent to the IRS Whistleblower Office for determination of an award. After the IRS has recovered the amount owed, the Initial Claim Evaluation unit will ensure that the whistleblower has no outstanding tax returns or tax liability before an award is issued.
For additional details, visit https://www.irs.gov/compliance/whistleblower-informant-award for information about award determination proceedings or reduced rates of withholding.
Any award paid under the IRS Whistleblower Program is taxable income. The IRS will withhold tax from any payment to a US citizen or resident. If a portion of a reward will be paid to an attorney, the whistleblower can file for a reduced income tax withholding to reflect the decreased tax obligation. Nonresident aliens who receive an award under the program will also be subject to withholding unless they are exempt pursuant to a US income tax treaty. If the IRS denies an award, an appeal can be filed with the United States Tax Court.
The IRS treats whistleblowers as confidential informants and protects their identity to the fullest extent permitted by the law. In one case, the Tax Court allowed a whistleblower to remain anonymous while appealing the determination of an award under section 7623.
“The IRS takes the privacy of individuals and entities submitting tax returns very seriously.”
Even though confidentiality is protected, the IRS warns that a whistleblower could be identified as a witness and called to testify in judicial proceeding in certain cases. The IRS also has a policy that it will neither confirm nor deny the existence of a whistleblower in discovery requests where the whistleblower is not listed as a witness. However, an adverse discovery ruling could lead to disclosure of information that might reveal the identity of the whistleblower.