IRS Tipping Payouts

Business is good right now for anybody willing to turn tax cheats in to the IRS. Last year, the Service awarded more than $312 million to tipsters, according to a report released in February. This is exponentially greater than the then-record year of $125 million in 2012. Why? Because the 2018 tax collection results from whistleblowers was revenue of $1.4 billion, compared to $191 million netted from the same efforts in 2017. Last year, one tipster was awarded $100 million for turning in a multi-national corporation.

2019 is not looking to slow down, either. So far this year, the Service has paid out $115 million to whistleblowers.

This surge in payouts reveals that the expansion of the IRS’s whistleblower program is gaining traction. The change was approved by Congress in 2006 and allows the IRS to pay up to 30% of the revenue collected to the tipster. The large percentage is usually applied in cases of over $2 million, while smaller percentages are applied in smaller cases.

Last year, the IRS paid out only 186 small-program awards totaling about $12 million, an average of $64,500 per payout. The larger cases received payouts of $300 million on 91 cases (up from just 15 cases in 2015).

Notably, the whistleblower need not be an employee or in any significant way connected to the taxpayer they are turning in. A tip may be as simple as a neighbor turning in someone they notice with a new car or lavish vacations, but no employment.

It is also important to note that the whistleblower does not have to be completely clean, either. While helpful, the law doesn’t prohibit them from receiving a benefit unless they were architects of the cheating. The most notorious example of this was Bradley Birkenfeld, who blew the whistle on UBS and received a $104 million payout after serving his term of 30 months in prison for his role in the scheme.

However, as simple as qualifying may seem, there remains the hurdle that the IRS rejects about 75% of claims right away. This can be for a lack of supporting evidence, plausible alternate explanations, or simple the size and effort required to pursue the tip.

Another caution for any would-be tipsters: a payout can take a very long time. The February report states that payouts take at least seven years, while five years is considered “fast.”

Most whistleblowers seeking awards us specialized tax attorneys to prepare their submissions. Those attorneys may charge an up-front retainer or up to 40% of the resulting payout to the tipster. Using an attorney can ensure that the tip and materials are packaged in a manner that is more likely for the IRS to pursue the case. The packaging can include account statements or other evidence that the attorney knows the IRS would want to see.

And of course, those who receive these payouts … must pay income tax!