Few words strike more fear in Americans than IRS audit. But now, a new law arms IRS agents with more ammunition in its pursuit for underreported income and illegal activity as the IRS takes a giant step to embracing and rewarding whistleblowers who provide the IRS with valuable information.

Recently, there has been a significant development that substantially impacts IRS whistleblower claims. After years of ambiguity and uncertainty, a new law has cleared the way for tax whistleblowers to finally get paid top dollar for original information provided to the IRS.

The IRS has a program that allows tax whistleblowers to receive between 15 to 30 percent of any proceeds the IRS collects based upon original information provided by the whistleblower. For years, the IRS has fought with whistleblowers as to what should be considered “proceeds” under the program, arguing that any fines or penalties obtained by the IRS due to a whistleblower's information should not be credited in the award to the whistleblower.

After much litigation and lobbying, the U.S. Congress finally stepped in and adopted a broader definition of “proceeds” so that whistleblowers can receive the full benefit of their cooperation. New legislation signed into law by President Donald Trump now settles the debate and whistleblowers are the clear winners. Under the new definition of “proceeds” under the statute, IRS whistleblowers will be paid a percentage of whatever criminal fines, forfeiture, or nontax related penalties the IRS collects.

Blow a whistle on a bank and the bank pays a fine, the whistleblower stands to collect tens of millions of dollars. Turn in a businessman with an undeclared foreign bank account in Switzerland and the IRS collects a penalty, the whistleblower can receive a portion of the monies hidden offshore. Expose a corporate scheme to cook the books and the IRS acts, the whistleblower stands to collect.

Cryptocurrencies and Nontax Penalties and Seizures Are Now Subject to Whistleblower Award

The new law also opens the door to potential whistleblowing to the IRS in the world of cryptocurrencies. One of the major perceived advantages of cryptocurrencies is that their use makes it difficult, if not impossible, for the IRS, or other regulators, to accurately track profit. If a whistleblower is aware of the use of cryptocurrency in order to evade taxes and the IRS begins an audit and then the IRS collects money, the whistleblower will benefit. Under the new law, if the cryptocurrency was used for an illegal purpose, like a fraud scheme, and the IRS seizes the actual cryptocurrency, the whistleblower will receive between 15 and 30 percent of the seized bitcoin.

In traditional qui tam actions, the relator, or whistleblower, normally waits on the sideline as a parallel criminal proceeding takes precedent over the civil qui tam complaint. If the United States intervenes, the relator will not collect on any criminal fines paid to the United States. Additionally, whistleblower programs administered by the Securities and Exchange Commission or the Commodity Futures Trading Commission exempt criminal fines and penalties. The new broader definition of proceeds creates the incentive to provide information to the IRS because criminal fines and forfeiture are now ripe for collection.

For nearly a decade, the IRS has aggressively pursued taxpayers with assets and bank accounts concealed outside of the United States. The penalties for not reporting these foreign assets to the United States are draconian. Worst case scenario, the IRS could actually collect a penalty in excess of the unreported assets held outside the United States. The new law now makes penalties associated with not disclosing foreign assets, including not filing a Foreign Bank Account Report (FBAR), subject to whistleblower collection.

As a general minimum threshold, IRS whistleblower claims must involve more than $2 million in controversy.

The IRS whistleblower program is still far from perfect, but with these new changes the Treasury and whistleblowers stand to collect a significant amount of newly found money.
Jeffrey A. Neiman is a former federal prosecutor and a founding partner at Marcus Neiman & Rashbaum (MNR). Over the last few years, MNR has submitted more than $2 billion in IRS whistleblower claims. MNR also regularly defends taxpayers under investigation by the IRS.