Washington (DC), Amended 26 USCA § 7623 of the Internal Revenue Code now provides that persons who have information about underpayments of tax or violations of the Code who provide that information to the IRS can receive substantial cash awards, in some cases up to 30% of the amount the IRS collects as a result of that information. Almost anyone can provide information and be eligible for an award, but there are exceptions to this rule.

Section 7623 was amended to help the government collect more revenue by better utilizing the information informants may have about companies or wealthy individuals who were underpaying their taxes. Congress was particularly targeting large-scale underpayments about which they received little information under the former Informant Rewards Program. The old program was unsuccessful in gathering high-value information because it was extremely user-unfriendly and typically paid small awards, if any, to informants. Awards were also frequently reduced or eliminated if the tax whistleblower participated in the actions that led to the underpayment. These problems were fixed in the amendments to section 7623 by: i) creating a new office to handle tax whistleblower submissions, ii) expressly authorizing payments of awards to a broader scope of persons, and iii) greatly increasing the amounts of the potential cash awards. The persons that Congress and the newly created IRS Whistleblower Office are hoping to attract are ideally “insiders” who have firsthand knowledge of the facts that led to an underpayment of over $2 million USD. However, in practice just about anyone – from the executive ranks to the secretarial pool, from highly paid consultants to the clerk at Kinko’s – can be an informant with a legal right to be paid for their information.

The tax whistleblower statute does not limit a person’s eligibility for an award for the information they provide unless a few factors are present. First, if a person is convicted of criminal conduct arising from their role in planning or initiating the actions that led to the underpayment or violation of the Code, they are not eligible for any award. As such, persons who have been convicted of conspiracy to commit tax evasion cannot claim an award for their testimony against co-conspirators, nor can persons simply turn in themselves in an effort to mitigate their tax bill by a potential tax whistleblower award. If a person is indicted for their involvement in the underpayment, but they are not ultimately convicted, they are still eligible for an award but still have to satisfy the Director of the IRS Whistleblower Office or the U.S. Tax Court that they did not run afoul of the second limitation on who can receive a reward for providing information.

The second limitation on awards for information about tax underpayment is that the person who planned or initiated the actions that led to the underpayment of tax or violation of the Code either cannot receive an award or they are likely to have their potential award reduced. This limitation seems broad in scope, but was intended to be narrowly interpreted to reduce or eliminate awards only for those individuals at the highest levels of decision making on a transaction or issue that gave rise to the underpayment. At the May 2007 ABA Section of Taxation meeting, Stephen Whitlock, the Director of the Tax Whistleblower office said “… if a person was involved in planning or initiating [an action, such as non-filing] I have the discretion to reduce the award … down to zero…”. In other areas of the law, such as cases under 31 USC § 3730(d)(3), in order to be considered a person who “planned or initiated” the person must have knowingly perpetrated the fraud on his own accord. However, because awards paid to individuals who “planned or initiated” may be reduced, but not completely eliminated depending on the facts, individuals who are concerned that their role in planning or implementing actions which gave rise to an underpayment should consult an attorney to determine if they have sufficient information to make a viable submission to the IRS, and if so, to determine if they are eligible to receive an award.