Philadelphia Wins First IRS Tax Fraud Whistleblower Award

It’s not easy being a whistleblower; it "ruins your life," as discussed more here. Consequently, if there’s no financial incentive to blow the whistle on government fraud, then most everyone who encounters it will just try to distance themselves from it rather than stop it. We’re all human. We all have bills to pay and mouths to feed.

The IRS learned that the hard way; from 2001 to 2005, its dismal tax fraud program produced an average individual relator reward around $24,000, hardly enough to risk your career over, so in 2006 Congress amended the relevant statute (26 U.S.C. § 7623) to bring it more in conformity with the False Claims Act, most notably: 

(b) Awards to whistleblowers.–

(1) In general.–If the Secretary proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary’s attention by an individual, such individual shall, subject to paragraph (2), receive as an award at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action. The determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action.

The IRS website describes the new process in a bit more detail.

Though the changes are more than four years old now, tax fraud lawyers have been on pins and needles waiting for someone, anyone, to actually finish one of these cases, since whistleblower lawsuits in general tend to take years from filing until settlement or trial (and, if trial, then a few more years on appeal).

Finally, it happened:

PHILADELPHIA (AP) — An accountant who tipped off the IRS that his employer was skimping on taxes has received $4.5 million in the first IRS whistleblower award.

The accountant’s tip netted the IRS $20 million in taxes and interest from the errant financial-services firm.

The award represents a 22 percent cut of the taxes recovered. The program, designed to encourage tips in large-scale cases, mandates awards of 15 to 30 percent of the amount recouped.

Companies which engage in government fraud, whether filing false claims or engaging in tax fraud, and their attorneys routinely complain about the role that the whistleblower lawyers play in the case, arguing that they’re just holding onto the United States Attorney’s Office ("USAO") for the ride. This lawsuit is a class example of what really happens:

The accountant filed a complaint with the IRS in 2007, just as the IRS Whistleblower Office opened, but heard nothing for two years. Frustrated, he hired [Eric L.] Young to help push the issue.

“We were able to help him get it back on track,” Young said.

Exactly. Every lawyer who does qui tam cases wants the government to help move the case along, but let’s be honest: the USAO is overwhelmed with work. They don’t have the time or resources to investigate the details of every potential False Claims Act, Dodd-Frank, or IRS tax fraud case. That’s where the relator’s lawyer comes in: they do the heavy lifting, putting the case together in a nice package for the USAO to review and act on.

Good to hear that the IRS and USAO are finally getting around to resolving these cases. Rather than shutting down the government, which is all the rage this week, how about we make sure big corporations pay their fair share to keep it going?

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