IRS Tax Fraud Cases

The Internal Revenue Service offers powerful incentives for individuals who report significant tax fraud, underpayments, and wrongful tax schemes. These incentives fall under Section 7623 of the Internal Revenue Code, which authorizes monetary awards for whistleblowers whose information leads the IRS to collect unpaid taxes. Many of these cases evolve into IRS tax fraud qui tam-style actions, where insiders expose complex financial misconduct.

Creation of the IRS Whistleblower Program

In December 2006, Congress passed the Extension of Tax Relief Act of 2006 (“Tax Relief Act of 2006”), which contained a whistleblower reform provision (Section 406) amending Title 26 U .S.C. Section 7623 to include whistleblowers.¹ These amendments authorize the IRS to create a Whistleblower Office to process tips received from individuals who “spot tax problems in their workplace, while conducting day-to-day personal business, or anywhere else they may be encountered.”² Furthermore, the IRS is now currently authorized to pay such sums as deemed necessary for “(1) detecting underpayments of tax, and (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving of the same.”³

The Tax Relief Act of 2006 significantly increased incentives for whistleblowers since Section 406 now provides for a recovery of at least 15%, but not more than 30%, of the collected proceeds.⁴ However, if the action is based upon “disclosures or specific allegations…resulting from a judicial or administrative hearing, from a government report, hearing, audit, or investigation, or from the news media,” the whistleblower’s recovery is limited to no more than 10% of the collected proceeds unless the whistleblower is an original source.⁵ Unlike the definition of original source in the FCA, Section 406 simply states that the reduction based upon public disclosure will not apply if the information was originally provided by the whistleblower.⁶

A whistleblower’s share will also be reduced if the whistleblower planned and initiated the violations. Furthermore, if the whistleblower is convicted of criminal conduct arising from planning and initiating of the violations, he is not entitled to any share of the recovery.⁷ A whistleblower may appeal an award determination to the Tax Court within thirty days of such determination.⁸

Concerns and Criticism of the IRS Whistleblower Statute

Critics of the tax whistleblower statute argue that it infringes on the rights of taxpayers by allowing informants to allege wrongdoing with little or no evidence.⁹ These critics also suggest that the statute raises serious privacy concerns.¹⁰ The most significant of these concerns is that “allowing private citizens to profit by disclosing taxpayer information would result in those individuals recklessly exposing information to persons not authorized by statute to receive such information.”¹¹ However, under existing law, informants and qui tam plaintiffs must turn their information over to the government agencies that are authorized to receive tax-related information.¹² Furthermore, any privacy concerns should probably be balanced against public policies that encourage private persons to expose tax-related fraud.¹³

Courts consistently recognize that whistleblower reporting helps protect the integrity of the tax system—and IRS tax fraud qui tam-related claims often uncover complex fraud schemes that would otherwise remain hidden.

How The Law Offices of David Berg Can Help

Our firm represents whistleblowers and individuals involved in tax-related investigations, including matters involving:

• Significant tax underpayment schemes
• Fraudulent deductions or offshore tax shelters
• Corporate or executive-level tax manipulation
• Employment-based tax fraud discovered internally
• Multi-million-dollar tax enforcement actions
• Parallel IRS, DOJ, and False Claims Act investigations

We help clients evaluate evidence, prepare submissions to the IRS Whistleblower Office, and navigate award disputes, investigations, and potential retaliation issues.

ENDNOTES

1. Extension of Tax Relief Act of 2006, Pub. L. No. 109–432 §406, 120 Stat. 2922 (Dec. 20, 2006). Section 406 applies to actions against any taxpayer except individuals whose gross income is $200,000 or less for any taxable year subject to the action, “if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000.” Campbell v. Regents of University of California, 35 Cal.4th 311, 332, 25 Cal. Rptr.3d 320 (2005).
   For a discussion on the Tax Relief Act and the Service Whistleblower Office, see Ventry, “Whistleblowers and Qui Tamfor Tax,” 61 Tax Lawyer 357, 358-359 (2008) (advocating for permitting private individuals to bring qui tam suits against taxpayers for violations of the internal revenue laws).
2. Ventry, “Whistleblowers and Qui Tam for Tax,” 61 Tax Law. 357, 361 (2008) (quoting IR–News Rel. 2007–25).
3. Extension of Tax Relief Act of 2006, Pub. L. No. 109-432 § 406, 120 Stat. 2922 (Dec. 20, 2006).
4. Id. Under the previous law, payment of awards was discretionary, depending on what was deemed “adequate compensation” in a particular case. This amount typically did not exceed 15%, and all awards were capped at $2 million. Ventry, “Whistleblowers and Qui Tam for Tax,” 61 Tax Lawyer 357, 362 (2008) (quoting IR-News Rel. 2007-25). Currently, the Whistleblower Office makes the final determination of whether an award will be paid and the amount of any such award. Awards are paid in proportion to the value of information voluntarily given. See Styles, “Claims Submitted to the IRS Whistleblower Office Under Section 7623,” TAF Q.Rev. (April 2008).
5. Extension of Tax Relief Act of 2006, Pub. L. No. 109-432 § 406, 120 Stat. 2922 (Dec. 20, 2006).
6. Id.
7. Id.
8. Id.
9. Ventry, “Whistleblowers and Qui Tam for Tax,” 61 Tax Lawyer 357, 384 (2008) (quoting IR-News Rel. 2007-25).
10. Id. at 372.
11. Id.
12. Id. (Service informants are required to disclose their information to the Treasury Department, whereas qui tam plaintiffs must over their information to the Department of Justice. Both of these agencies are authorized under Section 6103 of the Internal Revenue Code to receive such information.)
13. Id. at 373.

Notice

This website is designed to provide general information only. This information is not and should not be construed to be legal advice. The transmission of the information found on this website also does not result in the formation of a lawyer-client relationship.

You should be aware that qui tam claims are subject to a Statute of Limitations. The area of limitations periods is complex. There are also first to file rules, public disclosure bars, original source issues, and varying limitations in pursuing retaliation claims. If you wish to pursue your claims, you should promptly seek the opinion of an attorney regarding the merits of your qui tam claim and the applicable statute of limitations.