Apr 13, 2011

Tax Dodgers and Whistleblower Ethics

A curious section of the Internal Revenue Code allows the IRS to pay money to people who blow the whistle on persons who fail to pay taxes owed. Particularly curious when the whistleblower may be the tax dodger's own accountant!

The amount of the reward is determined by the IRS' "Whistleblower Office," and depends on the extent to which the whistleblower "substantially contributed" to the administrative or judicial action the IRS brings based on the information. All relevant factors, including the value of the information furnished in relation to the facts developed by an investigation of the violation are taken into account in determining the amount of the reward.

Section 7623 allows the Secretary to pay an "informant award" of at least 15 percent, but not more than 30 percent of the amount collected if the taxes, penalties, interest and other amounts in dispute exceed $2 million. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court.

There is also an award program for other whistleblowers -- generally those who do not meet the dollar thresholds mentioned above. Awards in the smaller cases are discretionary and the informant cannot dispute the outcome of the claim in Tax Court.

Recently, the IRS paid $4.5 million to an accountant who "blew the whistle" on his employer, and found something like $20 million for the government. Sounds like a "win-win," but the notion of Uncle Sam encouraging advisors to turn in their employers and clients is unsettling to say the least. Most of us consider our first obligation to provide honest, reputable advocacy to all of our good and valued clients, and not to function as government cops, policing the collection of revenue.

But if you're so inclined, consider IRS Form 211: Application for Award for Original Information.