The Taxpayer First Act: A New Era for Whistleblowers

On July 1, 2019, President Trump signed into law the Taxpayer First Act of 2019, a breakthrough for taxpayer whistleblowers. This Act provides substantive protections for taxpayer whistleblowers including an anti-retaliation clause and a mandatory notice provision.

History

Prior to 2006, the Internal Revenue Service (IRS) had full discretion whether to pay whistleblowers for verifiable information of tax evasion or fraud.[1] In 2006, Congress passed Public Law 109-432,[2] which revised the whistleblower statute to include two provisions detailing reward guidelines. First, Section 7623(a)[3] of the Internal Revenue Code (IRC) allows for claims barred under monetary restrictions to be brought to the IRS and for the whistleblower to be eligible for award. Second, the 2006 law establishes under Section 7623(b)[4] whistleblower rewards, where the dispute exceeds $2,000,000 and where the individual’s income is over $200,000, that the whistleblower rewards would be between 15% – 30% of proceeds. Additionally, where the informant received information from a government hearing or through the media, the reward given cannot surpass 10%. All rewards are determined by the Whistleblower Office in the IRS.

In 2018, Congress added an additional section which stated that qualified “proceeds” included penalties, interest, criminal fines, civil forfeitures, and nontax penalties arising from violations of reporting requirements.

Prior to the Taxpayer First Act the only guaranteed protection tax fraud whistleblowers received was the promise to protect the identity of the whistleblowers; however, whistleblowers were at risk of retaliatory measures.

The Process

The whistleblower has 180 days to file with the Secretary of Labor after the violation occurs. Whistleblowers will fill out a form in order to file a claim with the IRS. However, this process generally takes between 5 and 7 years. Often times more if the taxpayer chooses to go through the appeals process. The IRS can only award payment where money has been collected.[5]

After payment to the whistleblower from the Whistleblower Office within the IRS, the whistleblower has 30 days to file an appeal regarding the payment to the U.S. Tax Court.[6]

The Taxpayer First Act

The Taxpayer First Act establishes an anti-retaliation provision for tax whistleblowers and requires the IRS to have better communication with these whistleblowers.[7] This law provides protections for those who provide information to the IRS regarding underpayment of taxes or other tax law violations. Whistleblower protections include the right to be reinstated, compensatory damages, back pay, and expeditious administrative remedies with the right to go to federal court for a jury trial rather than arbitration.

Under the Taxpayer First Act, the IRS is also required to inform the whistleblower throughout the process of the proceedings including whether the information provided has led to collection. There are two major points in the proceedings when the whistleblower will be informed: First, the whistleblower will be notified when the case is referred for examination. Second, the whistleblower will be notified when the indebted taxpayer makes a payment to the IRS. Finally, the whistleblower may file a written notice with the IRS to request additional information.

If the IRS uses the information provided by the whistleblower, it can provide the whistleblower with up to 30% of the additional tax penalty or other amounts it collects. [8]

This new law also provides remedies to those who have previously been harmed through tax whistleblowing. Some of these remedies include compensatory damages, 200% of back pay with interest, and special damages (such as litigation costs).[9] These remedies are in part to give reparations to employees, who reported their supervisors or company to the IRS, and faced employment-related consequences for doing so.

It is important to note that so long as the information is “specific and credible” the IRS does not require hard evidence to be given when reporting on an individual or company.[10]

Conclusion

The Taxpayer First Act of 2019 provides significant incentives and protections for whistleblowers. As the IRS receives nearly 1.5 million tax returns a year, giving protections and incentives to whistleblowers helps to ensure that tax fraud and tax evasion are detected.

[1] What Happens to a Claim for an Informant Award (Whistleblower), IRS (Oct. 1, 2019), https://www.irs.gov

[2] Pub. L. No. 109-432 (tax whistleblowing protections).

[3] I.R.C. § 7623(a) (2019).

[4] Id. at  § (b).

[5] What Happens to a Claim for an Informant Award (Whistleblower), IRS (Oct. 1, 2019), https://www.irs.gov.

[6] Id.

[7] Pub. L. No. 109-432 (tax whistleblowing protections).

[8] I.R.C. § 7623(b)(2).

[9] Id.

[10] 26 U.S.C.  §7201.

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