The IRS Pays 15-30% Bounties on Tax Fraud Tips. Here Is What You Need to Know.

Each year, the United States loses an estimated $600 billion or more to the "tax gap" -- the difference between what taxpayers owe and what they actually pay. The IRS Whistleblower Office exists to close that gap by rewarding individuals who report tax cheats with a percentage of the recovered funds. For those with knowledge of significant tax fraud, the financial incentives can be substantial: awards range from 15% to 30% of the total amount collected.

Two Tiers of IRS Whistleblower Claims

The IRS operates two distinct whistleblower programs, and understanding which one applies to your situation is essential.

Section 7623(b): The Mandatory Award Program

This is the primary program for high-value cases. It applies when the tax, penalties, interest, and other amounts in dispute exceed $2 million. If the taxpayer is an individual rather than a corporation, their gross income must also exceed $200,000 for at least one of the tax years in question.

Under Section 7623(b), the IRS is required by law to pay an award of 15% to 30% of the collected proceeds if the information leads to a successful enforcement action. This is not discretionary -- it is a statutory mandate. The whistleblower also has the right to appeal the award determination to the U.S. Tax Court if they disagree with the amount.

Section 7623(a): The Discretionary Award Program

For cases below the $2 million threshold, the IRS may pay an award of up to 15% of the collected proceeds, capped at $10 million. However, unlike the mandatory program, these awards are entirely at the IRS's discretion. There is no right to appeal, and the IRS is not obligated to explain its decision. Claims under this program are often smaller and may take longer to process.

What Types of Tax Fraud Qualify

The IRS Whistleblower Office accepts information about a wide range of tax violations, including:

• Unreported income: Cash businesses, unreported foreign income, hidden offshore accounts, and cryptocurrency gains that are not reported on tax returns.
• False deductions and credits: Fabricated charitable donations, inflated business expenses, fraudulent research and development credits, and bogus conservation easement schemes.
• Employment tax fraud: Misclassifying employees as independent contractors to avoid payroll taxes, paying workers off the books, or failing to remit withheld taxes.
• Estate and gift tax evasion: Undervaluing assets, hiding transfers, or failing to file estate tax returns for high-net-worth individuals.
• Abusive tax shelters: Participating in or promoting tax avoidance schemes that lack economic substance and exist solely to reduce tax liability.
• Corporate tax fraud: Transfer pricing manipulation, profit shifting to low-tax jurisdictions, and other schemes to understate corporate income.

How to File an IRS Whistleblower Claim

The filing process begins with IRS Form 211, "Application for Award for Original Information." This form requires detailed information about the tax violation, including:

1. Identification of the taxpayer: The name, address, and taxpayer identification number (if known) of the person or entity committing the violation.
2. Description of the violation: A thorough narrative explaining the nature and extent of the tax fraud, including the tax years involved and the estimated amount of unpaid taxes.
3. Supporting evidence: All available documentation that supports your claim, such as financial records, emails, contracts, bank statements, or accounting files.
4. Your relationship to the taxpayer: How you obtained the information and your connection to the taxpayer. This helps the IRS assess the credibility and originality of the information.
5. Signed declaration: A statement signed under penalty of perjury attesting that the information is true, correct, and complete to the best of your knowledge.

Form 211 is submitted by mail to the IRS Whistleblower Office in Washington, D.C. Unlike the SEC, the IRS does not currently offer an online filing portal for whistleblower claims.

The Timeline: What to Expect

IRS whistleblower cases are notoriously slow. The average processing time from submission to award payment is five to seven years, and some cases take even longer. Several factors contribute to this timeline:

• The IRS must first conduct an examination or investigation based on the information provided.
• The taxpayer has the right to contest any assessment through administrative appeals and, if necessary, in court.
• Collection of the assessed taxes, penalties, and interest must occur before the whistleblower award can be calculated and paid.
• The Whistleblower Office must review the claim and determine the appropriate award percentage.

Despite the lengthy timeline, the financial rewards can be transformative. In fiscal year 2023, the IRS Whistleblower Office made awards totaling over $88 million to whistleblowers whose information helped the IRS collect more than $338 million in taxes.

Tax Implications of Whistleblower Awards

IRS whistleblower awards are taxable income. The full amount of the award is subject to federal income tax in the year it is received. However, legal fees and costs incurred in pursuing the claim are deductible as an above-the-line deduction, meaning they reduce gross income rather than being subject to the limitations on itemized deductions. This provision, enacted in 2018, was a significant victory for whistleblower advocates.

Confidentiality and Protection

The IRS is required by law to protect the identity of whistleblowers. Section 6103 of the Internal Revenue Code prohibits the unauthorized disclosure of tax return information, including the identity of informants. However, the IRS's anti-retaliation protections are less robust than those offered by the SEC's program. While the IRS Restructuring and Reform Act of 1998 provides some protections for IRS employees who report wrongdoing, there is no equivalent of Dodd-Frank's broad anti-retaliation provisions specifically for tax whistleblowers.

"The IRS whistleblower program remains one of the most underutilized enforcement tools in the federal government. Billions of dollars in tax fraud go unreported each year simply because potential whistleblowers do not know the program exists or believe the process is too complicated." -- Former IRS Whistleblower Office Director

Strengthening Your IRS Whistleblower Claim

To maximize your chances of a successful outcome, consider the following strategies:

• Be specific. The IRS cannot act on vague suspicions. Provide specific facts, dates, amounts, and the methods used to evade taxes.
• Provide documentation. Documentary evidence is far more persuasive than oral allegations. Financial records, emails, and internal communications are particularly valuable.
• Quantify the tax loss. Help the IRS understand the magnitude of the fraud by estimating the amount of unpaid taxes for each year involved.
• Act promptly. The IRS prioritizes recent information. Stale claims involving tax years that are approaching the statute of limitations are less likely to be pursued.

If you have knowledge of tax fraud exceeding $2 million, take our free case assessment to understand your potential award and the strength of your claim. The IRS whistleblower program exists to reward civic-minded individuals who help ensure everyone pays their fair share.