From Bad Acts to Whistleblower Claims: Reporting Bad Behavior

There’s no doubt that whistleblowers are making news. Informants are coming forward with allegations impacting taxpayers from President Donald Trump to companies like Walmart Inc. and, more recently, the Mormon Church. Not everyone has a headline-grabbing story, but what happens when a taxpayer wants to make a claim?

The Internal Revenue Service has a Whistleblower Office to collect information about tax cheats. The office pays money to people who provide “specific and credible information” that results in the collection of taxes, penalties, and interest.

The IRS can award the whistleblower up to 30% of the additional tax, penalty, and other amounts it collects. Typically, that award applies when the total tax liability, including penalties and interest, exceeds $2 million. If the accused taxpayer is an individual, the taxpayer must also have at least $200,000 in gross income for any taxable year at issue in the claim.

However, awards can vary depending on the size and type of the claim, as well as how much the allegations contributed to the agency’s recovery of the tax. Whistleblowers who do not meet those dollar thresholds may be eligible for a lesser award of 15% up to $10 million. Those awards are discretionary, and you may not dispute the outcome of the claim in Tax Court.

Despite what you read in the papers, making a complaint isn’t dramatic. To begin the process, file a formal claim for award via Form 211, Application for Award for Original Information. As part of the submission, you’ll need to offer details about the tax liability and why the action is a violation of the law. Except in extreme circumstances, you’ll need to provide evidence—or where such evidence can be found—to substantiate the claim. You’ll also have to reveal how you know about the alleged bad acts and what relationship, if any, you have to the taxpayer.

The IRS then has to decide if the case is worth pursuing. If the IRS does move forward, the process can take several years. You won’t be compensated until any related taxes, penalties, interest, and additions to tax have been collected, which can often take up to five to seven years. For most taxpayers, this means that making a complaint about someone else generally won’t result in money in your pocket for many years, if at all.

That may give you pause before making a claim—with good reason. The IRS wants to make sure that the complaint is legitimate and not a waste of their resources. The claim should be significant (thresholds may apply). The IRS is not interested in guesses or unsupported speculation. The IRS warns, “this is not a program for resolving personal problems or disputes about a business relationship.”

It also isn’t a way to gain information about a taxpayer. Privacy is still a consideration: While the IRS will protect the identity of the person making the claim to the fullest extent permitted by the law, the opposite is also true. Once a claim is submitted, the IRS has no obligation to reveal additional details. The recent Taxpayer First Act (Pub. L. 116-25), signed into law over the summer, made some changes related to the notification process. Still, the whistleblower may only be told limited facts, including the status and disposition of the claim. That’s because strict privacy laws apply to the accused, too.

But what about those taxpayers who may not meet the Whistleblower Office’s criteria, but are interested in turning in a cheat?

There are procedures in place to allow taxpayers to report wrongdoing to the tax authorities. The easiest way to disclose bad behavior for an individual or a business is to file Form 3949-A, Information Referral. Such acts include taxpayers who file false exemptions and deductions or earn money from organized crime, kickbacks or drugs. It also includes instances of public or political corruption, producing or filing false or altered documents (like fake Forms W-2), and failing to report income from sources including gambling. If you don’t have Form 3949-A, you can also send a letter, but don’t bother calling: The IRS doesn’t accept alleged tax law violation referrals over the phone.

It’s important to be sure that the information that you’re presenting is credible. Lying under the penalty of perjury, or aiding or assisting in a return, affidavit, claim, or other documents that turn out to be false can land you in trouble. Similarly, it’s a crime to willfully and knowingly deliver or disclose a false or fraudulent document to the IRS, even if it’s not signed under penalty of perjury. It doesn’t stop there. In addition to criminal prosecution, you can be subject to civil actions for bad acts.

Sometimes a taxpayer is willing to throw himself or herself under the bus to exact revenge on another person. In that case, the taxpayer is willing to “come clean” with the IRS even if it means dragging someone else—a spouse on a joint return or an employer—down with them. It’s important to consider the consequences before making any allegations since there is no guaranteed immunity for taxpayer making a claim. The consequences for bad behavior may end up applying to you. As cliche as it may be, two wrongs do not always make a right.

The bottom line: When making a claim, either as a taxpayer or on behalf of a taxpayer, make sure that you have actual support, not mere suspicions. It’s not your job to be the tax police. The IRS has an active Criminal Investigation division already chasing the bad guys.

This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.