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IRS whistleblower program is under scrutiny

The term "whistleblower" provides an excellent example of the difference between literal and figurative language. Someone who exposes suspected wrongdoing, perhaps because of financial incentives, rarely blows a literal whistle. But the impact of figurative whistleblowers looms large in many different arenas.

One of those arenas, of course, is tax law compliance. Using legislation passed by Congress in 2006, the IRS has sought to upgrade its whistleblower program by providing greater financial awards. The goal is to obtain tips about unpaid taxes and give the people who provide those tips a share of the taxes that are collected as result of the tips.

What kind of money are we talking about? The IRS has released its whistleblower report for the most recent fiscal year, which ended Sept. 30. The agency said it had collected nearly $593 million in previously unpaid taxes from the whistleblower program.

The program is in a sense two programs: one for small awards and one for large. Large awards are defined as those involving taxes of more than $2 million. The financial awards for whistleblowers are greater in those cases - up to 30 percent of the tax collected, compared to 15 percent in small-awards cases.

In FY 2012, there were 128 awards paid out. Twelve of these were under the large-awards program. All together, the amount paid out in financial awards was $125.4 million.

By far the largest award was to a whistleblower who alerted the IRS to attempts by Swiss banking giant UBS to facilitate tax evasion on foreign accounts. The whistleblower in that case received $104 million.

Overall, the number of whistleblower cases was comparable to the year before. That has not stopped Sen. Charles Grassley of Iowa from claiming that he is alarmed by the performance of the program. In a letter to IRS officials late last month, he criticized proposed new regulations that could restrict the scope of the program.

We will continue to follow this story in future posts as it develops.

Source: "IRS Releases 2012 Whistleblower Report," The Wall Street Journal, Laura Saunders, 2-20-13

Our firm handles situations similar to those discussed in this post in California. To learn more about our practice, please visit our tax litigation page.

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