Tax Claims Over $2 Million

Tax Claims Over $2 Million

On December 20, 2006, the President signed into law the Tax Relief and Health Care Act of 2006 (“the Act’).

Click here to read key parts of the new law, as codified in the United States Code.

Section 406 of the Act dramatically strengthens the IRS’s whistleblower program, by increasing available rewards and creating a reliable enforcement mechanism for whistleblowers to collect them.  Under prior rules, the maximum award generally available to whistleblowers was 15% of funds recovered by the IRS (including penalties, taxes and interest).  Section 406 establishes a floor of 15% and increases the cap to 30%, in those cases where the IRS pursues an administrative or judicial action against a taxpayer based on information brought to its attention by the whistleblower.  Moreover, while whistleblowers were unable to enforce their claims to awards under the old program (unless they had a contract with the IRS), the new legislation provides that payments to qualified whistleblowers are mandatory, and it permits whistleblowers to appeal IRS award determinations to the Tax Court.  If they are successful, whistleblowers will be permitted to take an above-the-line deduction for attorney’s fees and costs paid by them to recover their award. 

The following guidelines, set forth by the IRS, describe some of the key features of the program, codified at 26 U.S.C. 8723(b):

• The law applies to claims filed after enactment date December 20, 2006.
• The award percentage ranges are statutory, with a general range between 15% to 30%, with some exceptions. There is no limit on the dollar amount of the award.
• A reduced award amount of up to 10% in cases based principally on disclosure of specific allegations resulting from:
  • Judicial or administrative hearings,
  • From a governmental report, hearing, audit or investigation,
  • Or from the news media.
  • An appropriate reduction if the whistleblower “planned and initiated” the non-compliance.
• The law applies to cases in which the amount in dispute exceeds $2 million. If the taxpayer is an individual, the individual’s gross income must exceed $200,000 for any taxable year at issue in a claim.
• Requires the Whistleblower Office to analyze these $2 million cases, and authorizes the IRS to request assistance from the whistleblower and their counsel.
• Individuals are eligible for awards based on additions to tax, penalties, interest, and other amounts collected as a result of any administrative or judicial action resulting from the information provided.
• Awards are subject to appeal to the U.S. Tax Court.
• If the thresholds in 7623(b) are not met, section 7623(a) authorizes, but does not require, the Service to pay for information relating to violations of the internal revenue law that result in recovery of tax.