The IRS can now pay big rewards – from 15 up to 30 percent of amounts collected – to tax whistleblowers for providing information about underpayments of tax. Nearly every tax whistleblower is concerned with maximizing the percentage of the award. So how do you, as a tax whistleblower, go about getting the full 30 percent award from the IRS? The good news is that there are some things within your control that you can do.
The IRS has made it easier to figure out how to maximize tax whistleblower awards by providing a list of positive and negative factors that the IRS plans to use in determining whether the tax whistleblower qualifies for the full thirty percent award. The factors are important because they provide tax whistleblowers insight into the IRS’s award determination process and alert potential tax whistleblowers to what the IRS would like to see in tax whistleblower submissions.
The positive and negative factors can be found in the Internal Revenue Manual, which is a manual published by the IRS in which the IRS instructs its employees on how to do their jobs. The factors are as follows:
- Positive Factors (applicable to section 7623(b) (1) and section 7623(b) (2) determinations):
- Prompt action by the whistleblower to inform the Government or the taxpayer of the tax noncompliance may, depending on the acts, be a positive factor. For example, providing the Government with an opportunity to address the tax noncompliance early can help mitigate the impact of the noncompliance.
- The whistleblower submits information that identifies an issue of a type previously unknown to the Government or a taxpayer behavior that the Government was unlikely to identify or was especially difficult to detect through the exercise of reasonable diligence.
- Submissions in which the whistleblower thoroughly presents the details of the noncompliance in a clear and organized manner may, depending on the facts, be a positive factor. For example, a detailed submission may save the Service work and resources.
- The whistleblower (and/or his/her representative) provided exceptional cooperation and assistance during the audit, investigation, or trial, including useful technical or legal analysis of the taxpayer’s records.
- The whistleblower identified assets of the taxpayers that could be used to pay the taxpayer’s liability or assets not otherwise known to the Service.
- The whistleblower identified connections between transactions, or parties to transactions, which enabled the Service to understand tax implications that might not otherwise have been revealed.
- Impact of the report on the behavior of the taxpayer. For example, the whistleblower’s report may, directly or indirectly, cause the taxpayer to correct an improper position.
- Negative Factors (providing an offset against positive factors) (applicable to section 7623(b) (1) and section 7623(b) (2) determinations):
- The whistleblower delayed reporting after learning the relevant facts, and the delay had an adverse impact on the ability of the IRS to pursue the issues raised. Delayed reporting can allow the noncompliant activity to be repeated, increasing the magnitude of the noncompliance and, in some cases, compromising the ability of the Government to assess and collect.
- The whistleblower’s role in the underpayment of tax reported, such as when a whistleblower actively and knowingly participates in carrying out the tax noncompliance. If the whistleblower directly or indirectly profits from the noncompliance, this may also be considered a negative factor.
- A whistleblower puts the tax case at risk. For example, a whistleblower’s premature disclosure to the taxpayer of the existence or scope of IRS planned enforcement activity may be a negative factor if the whistleblower disclosed information regarding the IRS interest in a matter in such a way that permitted the affected taxpayer(s) to impede IRS access to relevant information and thus impeded the exam or audit.
- Whistleblowers will normally be given specific instructions regarding permissible and impermissible activities; violation of these instructions may be a negative factor in determining the award percentage if it causes the Service to expend additional resources it would not otherwise have spent.
These factors provide a solid road map to maximizing tax whistleblower awards. The first positive factor and the first negative factor highlight the importance of bringing the noncompliance to the IRS’s attention in a timely manner. Timing of the tax whistleblower submission is important because waiting too long to report the noncompliance may result in the expiration of the statute of limitations. However, filing a tax whistleblower submission too early may also be problematic, as the taxpayer may not done anything wrong yet.
According to the second and sixth positive factors, the IRS looks favorably upon tax whistleblower submissions that identify underpayments that the IRS would likely not have discovered on their own. For example, the IRS likes to see tax whistleblower submissions that identify situations where the taxpayer has attempted to mask the realities of a transaction from the IRS or situations in which the taxpayer has hidden or destroyed evidence. Additionally, the IRS looks favorably upon tax whistleblowers that clearly explain the relationship between and among all entities under the taxpayer’s control.
The third positive factor the IRS uses in making tax whistleblower award determinations relates to the nature of the submission itself. The IRS views clear, concise tax whistleblower submissions positively, so it is important to thoroughly explain the facts. Also, it is important to explain how and where the IRS may obtain corroborating documents because such information saves the IRS time and resources. For example, the IRS looks favorably upon tax whistleblowers that identify suggestions for discovery requested to be issued during the audit or investigation.
The fourth positive factor notes the importance of cooperating with the IRS. The IRS looks especially favorably upon tax whistleblowers that provide a detailed explanation of the tax issue, including summarizing relevant tax law and applying that law to the facts of the case. Essentially, the IRS is looking for tax whistleblowers that provide the IRS an analysis of the case from an insider’s perspective.
The fifth factor asks the tax whistleblower to provide the IRS with details of assets that may satisfy the taxpayer’s unpaid tax liability. The IRS looks favorably upon tax whistleblowers that lead the IRS to information about the taxpayer’s assets that the IRS would not have found on its own. Specifically, the IRS appreciates bank account numbers, details regarding the location of offshore assets, and details about assets that are titled in other names.
The negative factors indicate that the IRS does not look favorably upon whistleblowers that hinder the IRS’s investigation or have a substantial role in furthering the noncompliance. The IRS does not want whistleblowers to taint the investigation by providing the IRS with privileged documents. To avoid spoiling the IRS investigation, it is useful to engage experienced tax whistleblower counsel. Firms that practice tax whistleblower law, like The Ferraro Law Firm, use their knowledge and experience to help tax whistleblowers navigate through the factors in order to maximize tax whistleblower award payments from the IRS and are available to answer any questions potential tax whistleblowers, such as you, might have throughout the process.
In our view, the most important factor that determines a tax whistleblower’s award eligibility is one that is not even listed above in the IRS Guidelines – and that is: persuading the IRS that you have a good case that they should act on. If the IRS: can’t understand what the issue is you are raising, has a hard time discerning the what part of the information you have is relevant to the violation of law, doesn’t know when the tax underpayment occurred or whether the statute of limitations has expired, doesn’t know how big the tax underpayment is or how they might actually collect it, or many other key pieces of the puzzle, then they might decide not to allocate IRS agent time to looking into your allegations. Simply put, if the IRS isn’t motivated enough by your submission to act on your case, you won’t get anything. Fortunately, many of the same things that are known to motivate the IRS to choose to act on a submission are also positive factors which will increase your award.
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