Overview of the Tax Whistleblower Laws

Section 7623(b) was created by the Tax Relief and Health Care Act of 2006.  The law that is now located 26 U.S.C. § 7623(a) was the original tax whistleblower law, which has provided authority to the Secretary of the Treasury to issue discretionary rewards for nearly 150 years.  The Internal Revenue Service has also developed additional rules and regulations governing these two laws and the operation of the IRS whistleblower office.

The History of the IRS Whistleblower Program

The IRS has had the authority to pay a reward to whistleblowers for more than 145 years.  Since March 1867, Internal Revenue Code Section 7623 has provided the Secretary of the Treasury discretionary authority to reward whistleblowers for “detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same.”  Guidelines for the program were established by Treasury Department and IRS regulations.  IRS policy provided for awards of 1, 10 or 15% of the recovery up to $10 million.

Two changes to the early whistleblower program were made in 1996.  It applied the whistleblower program to cases of underpayment of taxes.  It also amended the law to provide for the whistleblower’s reward to be paid from the amount recovered instead.  The program originally paid out to the whistleblower from appropriated IRS operating funds.

In June 2006, the Treasury Inspector General for Tax Administration released Audit #200530022 about the whistleblower program titled, “The Informants’ Rewards Program Needs More Centralized Management Oversight.”  The audit found that the Informants’ Reward Program was an effective tool for collecting unpaid taxes.  Between Fiscal Years 2001 and 2005, the IRS received more than $340 million in unpaid taxes as well as fines, penalties and interest based on informant tips.  The program paid informants more than $27 million for their information.  It concluded that the informant program was more effective than IRS examinations, the traditional method for identifying underpayment of taxes.  However, the audit found problems with the program.  Informants’ Claim Examiner units were decentralized and no nationwide database of claims existed.  Case files were missing key elements and a review of award determinations found justifications for both paid and denied claims insufficient in a significant percentage of cases.  Unexplained delays at the start of investigations and an average length from informant report to payment of seven years led the auditors to determine that the program could be improved.

The new IRS whistleblower program was created by Section 406 of the Tax Relief and Health Care Act of 2006.  It expanded the existing program for significant tax noncompliance and required the mandatory payment of between 15 and 30% on tips leading to the collection of more than $2 million.  This mandatory whistleblower award program is now found in Section 7623(b).  It also created the Office of the Whistleblower at the IRS, which set forth additional rules and regulations to cover the tax award program.

The original whistleblower program still exists today.  It applies to cases where the new mandatory program does not apply and is now found in Section 7623(a).  The IRS continues to pay out a significant number of its awards under the old program, either because the amount collected did not reach the minimum for payout under § 7623(b) or they were filed prior to the establishment of the new whistleblower program at the IRS.  The old whistleblower program continues to evolve, however.  Awards for whistleblower tips submitted on or after July 1, 2010 are now paid out according to the procedures for 7623(b) claims, for example.

For additional information about these laws, please contact one of our IRS whistleblower attorneys by filling out our contact form or calling 1-800-590-4116.

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