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Last year, more than 300 people whispered in Uncle Sam’s ear about big-time tax cheaters: people who owed more than $2 million after all the penalties and interest were included.
That’s according to a newly released IRS report, which says its whistleblower program identified 671 taxpayers who may be in big trouble.
Here’s how it works:
Section 7623(b) of the Internal Revenue Code (the Code) generally requires the IRS to pay awards if information an individual provides substantially contributes to the collection of tax, penalties, interest, and other amounts when the amounts in dispute are more than $2,000,000. The law set award ranges based on percentages of the collected proceeds and established a Whistleblower Office within the IRS to administer those awards.
Those percentages range from 15 to 30 percent – so the minimum reward would be $300,000. But it often takes a long time to get it, because audits, investigations and multiple chances to appeal can stretch the process up to seven years. The average appeal takes about eight months, while the longest recorded took nearly three years.
The IRS is just now paying the first awards since the program was revamped in 2006, and says only five claims have been paid under the revised law.
Still, patience pays off. In 2011, just over $8 million was paid out to whistleblowers. In 2012: $125 million. The program brought in $592.5 million last year, far more than the $48 million it collected in 2011. It’s paying an average of 21 percent of the amounts collected to whistleblowers for 2012, a record high – perhaps reflecting changes in the law. Prior to 2006, the reward cap was 15 percent, with a maximum of $10 million.
In most cases, taxpayer privacy laws prevent the IRS from disclosing individual award amounts. But a footnote in the report notes that, “One claim paid in FY 2012 was accompanied by a limited privacy waiver that permits the IRS to confirm that, on August 27, 2012, the IRS paid an award of $104 million to a whistleblower.”
While the report doesn’t name him, the press has. Reuters reported this whistleblower is Bradley Birkenfeld, an ex-employee of UBS, the largest Swiss bank. In 2009, he was sentenced to 40 months in prison for helping people evade taxes. Then, apparently, he started talking.
At the 30 percent reward level, his snitching would have resulted in somewhere around an extra $350 million for the IRS. If the trickster-turned-tipster is receiving a smaller percentage, then he helped bring in an even bigger haul – probably much bigger. The IRS has identified a number of UBS clients involved in tax avoidance, including Wolfgang Roessel, who last May pleaded guilty to filing a false tax return and failing to file a Report of Foreign Bank and Financial Accounts. The plea agreement tax and penalty add up to more than $6 million. There are dozens more cases going back to 2009, many worth millions.
The IRS publishes how many submissions it receives per year, along with how many potential tax cheaters are snagged by that information. The numbers went up sharply between 2007 and 2010. In 2007, 50 submissions affected 875 taxpayers. In 2010, 422 submissions affected 5,545 people. Since then, the numbers of affected taxpayers have gone back down, although submissions haven’t dropped proportionally. The following year, 2011, 314 submissions affected 734 taxpayers.
This suggests the whistleblower program may be working as intended – scaring more people into paying what they’re supposed to. But as long as a few rich people keep cheating, there’s still plenty of money to be made. To submit a claim under the whistleblower program, you have to mail in a completed IRS Form 211.
Be careful, though: The IRS notes the program does not currently provide whistleblower protection. It warns that whistleblowers who snitch on their employees may get fired, or “face threats of physical harm or damage to economic interests.” Depending on state law, you may have a solid court case, but there’s no guaranteed protection from the government.