IRS Whistleblower Law: Passage of the Tax Relief and Health Care Act of 2006

In 2006, Congress passed the Tax Relief and Health Care Act, which established a robust rewards program for individuals who have knowledge of and provide information about violations of the tax laws to the IRS. In order to qualify for a reward under 26 USC § 7623, the whistleblower must provide information about tax fraud exceeding $2 million, and, if the whistleblower is making allegations against an individual, the individual’s annual gross income must exceed $200,000. If these conditions are met, Section 7623 establishes a reward of 15-30% of the total amount collected by the IRS in administrative or judicial actions based upon the whistleblower’s information and allows for lesser awards in other specified circumstances. The law also created a Whistleblower Office within the IRS dedicated to working with whistleblowers and administering the reward program.

In August 2014, the Treasury Department issued final regulations to implement 26 U.S.C. § 7623. The IRS Commissioner called the IRS Whistleblower Program “an important tool for improving tax administration.”

New York State False Claims Act Tax Cases

In September 2010, New York became the first state to explicitly permit whistleblowers to bring tax fraud cases under its state False Claims Act. Whistleblowers with knowledge of false claims, statements or records filed under the tax law can receive 15-30% of the amount the state recovers as a reward for reporting such violations. Click here to read about G&G’s lead role in the conception, enactment, and implementation of the New York False Claims Act.

Under the New York False Claims Act, the taxpayer would be liable for penalties of $6,000 to $12,000 per violation, in addition to treble damages and plaintiff’s costs and attorney’s fees. The tax fraud scheme must involve more than $350,000 in damages, although that amount may be spread over several years, and the net income or sales of the person or company must be at least $1 million during one of the years alleged in the scheme.

Under the New York False Claims Act, the state Attorney General must consult with the commissioner of the Department of Taxation and Finance prior to filing or intervening in any tax-based FCA action. If the state declines to proceed, the whistleblower must obtain the permission of the Attorney General before filing a motion to compel the Department of Taxation and Finance to release the taxpayer’s records.

Shortly after taking office in 2011, Attorney General Eric Schneiderman, who authored the 2010 FCA amendments in his previous position as a New York state senator, created a Taxpayer Protection Bureau within his office in order to pursue fraud on the taxpayers, including large scale tax cheats.

FCA Tax Cases in Other States

Although no other state False Claims act explicitly permits tax actions, cases may potentially be brought if a state’s statute does not explicitly prohibit such acts.

• The False Claims Acts of Delaware, Florida, Nevada and New Hampshire, for example, contain no tax action prohibitions.

• The Illinois False Claims Act, excludes actions brought under the Illinois Income Tax Act, but has been interpreted to permit other tax actions, including for violations of state sales tax provisions. Similarly, Indiana’s False Claims and Whistleblower Protection Act, excludes claims, records, or statements “concerning income tax” and Rhode Island’s False Claims Act, excludes claims under the Rhode Island personal income tax law.
• California, the District of Columbia, Hawaii, Massachusetts, New Mexico, New York City, North Carolina, Tennessee, and Virginia all explicitly prohibit tax actions under their False Claims Acts.