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In recent years, the Internal Revenue Service has paid individual awards as high as $1 million to folks informing on tax cheats. And that was under an old program in which amounts were discretionary and capped at 15 percent.

In 2006, a new federal law restructured the IRS whistleblowers program to pay 15 to 30 percent of the taxes and penalties recovered. These are for cases in which taxes and penalties top $2 million for individuals who make more than $200,000 a year.
“It’s designed so we are not dealing with mom and pop type taxpayers, but higher-income folk,” said Stephen Whitlock, 55, director of the IRS Whistleblowers Office.
Even informants who participated in the tax violations may get rewards if they did not plan and initiate them. Bradley Birkenfeld, who admitted helping wealthy clients hide assets in foreign tax havens, claimed that his later whistle-blowing saved taxpayers billions. But in January, the former UBS banker reported to federal prison start a 40-month term for his role in his Swiss employer’s tax-avoidance schemes.

But don’t expect a quick payoff. The process can take three to five years, Whitlock said.
And it won’t be enough to merely report overhearing a guy on the golf course bragging that he stiffed tax collectors by squirreling away millions in a Swiss bank or the Cayman Islands, said Michael Sullivan, a former federal prosecutor whose Atlanta firm represents wannabe tax tattlers. The IRS wants solid evidence like records and account numbers.

“Typically, the informant had a business relationship of sorts, either as a current or former employee, or perhaps as a competitor,” Whitlock said. “Some had a personal relationship.” Like a scorned ex-spouse? “Can be.”

Tips under the old scheme are still in the lengthy audit and collections process. Payments to informants under that program peaked in 2006 at $24 million, dropped to $13.6 million the following year, and then rose to $22 million from $155 million collected in 2008. The median award works out to about $30,000 under the discontinued scheme, Whitlock said.

The old program did not target high-dollar cases and was hardly publicized. Before 2007, someone searching for whistleblower information on the IRS Web site found nothing, he said.

Now, the Whistleblower’s Office gets 30 to 40 tips a month about alleged noncompliance of at least $2 million, the office’s threshold. An additional 200 a month fall below that and are passed on to other IRS investigators, said Whitlock, whose staff has grown from four to 17 and has a new computer system.

The first cash awards under the new program could be made this year. “We expect to pay some,” Whitlock said. “I don’t know how many.” But, he went on, “things can happen, and there aren’t proceeds. Taxpayers can come in with an amended return and show an operating loss.”

Even though nothing has been paid out under the new, more lucrative scheme, a cottage industry of whistleblower-assisting attorneys has materialized. There are even blogs, like www.whistleblowerlawyerblog.com. And some attorneys are crowing about cases that haven’t paid off yet.

A Miami-based law firm said it made a $4.4 billion whistleblower tax submission in 2008, beating its own, self-described record of $2 billion six months earlier. Rival attorneys in various blog postings noted that divulging details might hurt an IRS investigation while tipping off the alleged tax cheat.

Whitlock, a lawyer by training, declined to comment on the cyberspace fracas between lawyers. He did say that an attorney was not needed to make a submission, but that it might be a good idea to seek legal advice on how informing might affect a person’s job or relationships.

Atlanta attorney Sullivan says his firm is juggling about 15 tax whistleblower cases.
“Claims run the gamut from people in the financial services industry, hedge funds and real estate to smaller ones from folks who feel like their employers are abusing independent contractor status, say, by not paying withholding taxes. There’s a great emphasis right now on offshore [bank] issues, which are priority of the IRS.”

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