There is no shortage of government programs, and few can claim to be genuinely successful. The IRS Whistleblower program may be an exception. It’s been around for a long time, but in 2006, it was given some muscle. That’s when the rules were tightened and the rewards were sweetened. The result? The total number of tips received last year was ten times the previous year. If there’s one complaint about the program, it’s that it functions too slowly -- it is after all, still a government program.
Not all blows of the whistle, of course, are fruitful. But in 2008, out of a total of 1,246 tips, 476 tips could lead to rewards. Of those:
· 228 related to cases of tax dodgers owing at least $10 million.
· 64 relate to cases involving tax owed of at least $100 million.
The IRS Whistleblower Program is not looking for hearsay or unsupported speculation and it is not interested in exacting revenge for personal problems or business relationships gone bad. To qualify, a tip must be based on solid information. In addition, the tip must lead to an action, such as an investigation. The action can be the initiation of an audit of an individual or business that was not already scheduled for an audit.
Under the 2006 rules, the tip must be about a tax dodger who owes at least $2 million in taxes, penalties, interest, and other amounts. If the tip leads to tax collection, the whistleblower can be rewarded with 15 percent to 30 percent of the amount collected. The amount of the reward can be appealed if the whistleblower considers it inadequate.
Also under the 2006 rules, the tip can also be about an individual with an income of at least $200,000. The maximum reward in this case is 15 percent. Again, the amount of the reward is subject to appeal.
If a tip is about a situation which does not meet the dollar thresholds, it may still qualify for a reward under rules that were in effect before 2006. The maximum reward of 15 percent (capped at $10 million) is made at the discretion of the IRS, and there is no appeal process.
When whistleblower rewards are paid, they are taxable income for which the recipient will receive a 1099.
Whistleblowers are promised confidentiality unless they have to appear in court. They are not, however, guaranteed immunity if it is discovered that they willingly participated in the wrongdoing.
A recent example of whistleblower participation is Bradley Birkenfeld, a U.S. citizen. Forty-four-year-old Birkenfeld was the banker for Swiss UBS who helped billionaire Igor Olenicoff hide assets in offshore accounts. Birkenfeld was initially credited with disclosing illegal tactics by UBS. That led to an agreement by the banking giant to reveal the names of 4,450 wealthy Americans who may maintain secret accounts. Birkenfeld applied for a reward through the Whistleblower program, though he did not, at first, confess his own involvement in Olenicoff’s tax evasion. He is now serving a three year, four month prison sentence for his role. Olenicoff was sentenced to two years of probation and was ordered to pay $52 million in back taxes, penalties, and interest.
Stephen Kohn, the executive director of the National Whistleblower Center, opposed Birkenfeld’s prosecution, noting that this kind of thing could have a chilling effect on the willingness of witnesses to come forward. Blowing the whistle poses "a high level of risk and most people won't do it", he said. "You have to protect them if they are retaliated against and you have to reward them for coming forward."
Kohn added that he wants to see the IRS expedite the current investigations and collections. Getting results and paying the promised rewards, he says, is the best way to encourage people to step up and tell what they know.
While the program is clearly effective, it is also slow in administration and even slower in issuing rewards. A big part of that is because rewards are issued only after a thorough investigation, a judgment, and after the tax is collected, and that can take years. For these reasons, no rewards have yet been issued under the 2006 rules, said Stephen Whitlock, director of the IRS Whistleblower Office.