New IRS Legislation

The Tax Relief and Health Care Act of 2006, signed into law on December 20, 2006, amended the Internal Revenue Code to provide for substantially increased rewards for whistleblowers.

The new law applies to claims for reward in cases in which the potential amount owed to the IRS for taxes, penalties, and interests exceeds $2 million and, in cases of individuals, the taxpayer’s gross annual income must exceed $200,000.

The new law provides a minimum reward of 15% and a maximum reward of 30%. This is a substantial increase over the previous regulations that provided a minimum recovery of 1% and a maximum recovery of 15% for whistleblowers.

The new law also provides that IRS must make a reward payment in those cases in which pursues a remedy against a taxpayer based upon information provided by the whistleblower. This mandatory requirement that the IRS pay a reward is a drastic change from the previous regulation that, in effect, gave the IRS the discretion to decide whether a reward was appropriate in any given circumstance.

The new law also provides the whistleblowers the right to appeal a reward to the Tax Court. Again this is a significant change to existing law strengthening the rights of whistleblowers, who under previous regulations could not appeal a decision by the IRS as to the amount of a reward or whether a reward was appropriate.

The new law does place a cap of 10% on rewards if the IRS determines that the whistleblower’s information was not the original source of information but still contributes to the additional collection. Whistleblowers who planned or initiated the tax scheme may be barred from recovering a reward.

In February 2007, the IRS named Stephen Whitlock the first director of its new Whistleblower Office. The statute, which was enacted on December 20, 2006, provides that, within twelve months of the enactment of the new law, the Whistleblower Office shall be handling claims submitted under the new law. The new law will apply to any claims submitted after the date of enactment of the new law on December 20, 2006.

The IRS is in the process of implementing regulations to implement the new law.