Beware the whistleblower: will the IRS take a page out of DOJ's playbook?

• Author: Scott, Paul D.
• Position: Dept. of Justice

The U.S. Department of Justice has long relied on whistleblower actions to safeguard the integrity of public expenditures, with well-publicized and increasingly large recoveries the result. In contrast, the Internal Revenue Service has historically been hesitant to make use of whistleblowers, who have thus had commensurately limited effect on revenue collection. This historical contrast in approach to policing the public fisc, however, is rapidly changing.

The False Claims Act, which is enforced by the Department of Justice, permits whistleblowers to file suits (called qui tams) on behalf of the United States against those who defraud the government, then allows whistleblowers to share in the resultant recoveries. (1) In 1986, Congress amended the False Claims Act to enhance the incentives for whistleblowers to file qui tams. The amended Act provides for treble damages and penalties of up to $11,000 per false claim. (2) Qualifying whistleblowers can receive up to a maximum of 25 to 30 percent of the government's recovery, depending on whether the United States takes over prosecution of a case. (3) Notably excluded from the Act's coverage are claims predicated solely on violations of the Internal Revenue Code. (4)

Since 1954, the IRS has had its own statutory authorization to pay rewards to promote whistle-blowing. (5) The component of the program most familiar to practitioners today is the Form 211 procedure, which is outlined in Revenue Publication 733. (6) Pursuant to this procedure, whistleblowers who have reported underpayments of tax to the IRS may subsequently seek a reward (potentially amounting to 15 percent of the amount recovered) by submitting a completed Application for Reward for Original Information (Form 211), to the local IRS campus, referencing both the subject taxpayer and the information that was provided regarding the taxpayer. (7)

To date, the Form 211 procedure has had limited effect, owing in substantial measure to the historically low cap on rewards ($2 million), (8) the absence of any provisions allowing whistleblowers to enforce their claims to rewards, and limited promotion of the program. (9) Thus, while recoveries by the United States in whistleblower cases under the False Claims Act have been increasing exponentially since the Act was amended in 1986 (from $390,000 in 1987 to over $1.1 billion in 2005), (10) recoveries by the IRS under its whistleblower program in recent years have not even reached $100 million...