By David L. Haron and Maro E. Bush
IRS whistleblowing has rather recently become an important weapon in the government’s arsenal against fraud.  According to the Government Accountability Office, each year the United States loses an estimated $345 billion in tax underpayments and fraud.  However, recent amendments to the long-standing IRS whistleblower statute I.R.C. § 7623 now provide for a mandatory “bounty payment” to tax fraud whistleblowers, and the law has been a noticeable success.  According to Steve Whitlock, head of the IRS Whistleblower Office, reward claims have been pouring in since the amendments were passed in December of 2006, some involving billions of dollars.  Since informants who provide information that assists the IRS in the enforcement of tax laws are eligible to receive up to 30 percent of the amount recovered by the IRS, this can result in substantial rewards for IRS whistleblowers.

New life was breathed into the IRS whistleblower law with the amendments to I.R.C. § 7623 in December of 2006 under the Tax Relief and Health Care Act.  Previously, the law allowed the Secretary of Treasury to pay whistleblowers a discretionary reward under I.R.C. § 7623(a) “for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same.”  Under I.R.C. § 7623(a), there is no minimum statutory award provision, nor is there a process for whistleblowers to appeal their awards if they disagree with the IRS’s determination.  Now, I.R.C. § 7623(a) generally operates as a catch-all provision for claims that do not fall under the new I.R.C. § 7623(b).

Under I.R.C. § 7623(b), awards to whistleblowers are no longer entirely discretionary.  Instead, I.R.C. § 7623(b) entitles a tax whistleblower to receive 15 to 30 percent of the collected proceeds, including penalties, interest, additions to tax and additional amounts.  Additionally, under I.R.C. § 7623(b)(4), whistleblowers may appeal their award determination to the United States Tax Court if they do so within 30 days.  This provides a conduit for whistleblowers to object to award payments if they feel the amount is insufficient based on their involvement in the case.

The IRS whistleblower statute could easily be put to work in the medical community.  Last year, a Government Accounting Office (GAO) report found that while the majority of Medicaid providers pay their taxes, thousands of others regularly abuse the federal tax system.  The GAO’s data indicated that “[o]ver 30,000 Medicaid providers, about 5 percent of those paid in fiscal year 2006, had over $1 billion of unpaid federal taxes.”  The report also found these Medicaid providers “accumulating substantial assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes.”  GAO, Medicaid:  Thousands of Medicaid Providers Abuse the Federal Tax System, GAO-08-17 (Washington, D.C.: Nov. 14, 2007).

The Center for Medicare & Medicaid Services (CMS) does not prevent health care providers who have federal tax debts from enrolling in Medicaid, generally because federal law acts as an obstacle by prohibiting the disclosure of taxpayer data to CMS and the states.  CMS is also concerned that screening providers for tax delinquency will eat up valuable time and fiscal resources and could adversely affect the states’ ability to provide health care to the poor.  With CMS and the states left without a mechanism to prevent these health care providers from enrolling in or receiving Medicaid payments, physicians and their employees are in a unique position to detect tax fraud being committed by health care providers and report it to the IRS under the IRS whistleblower statute I.R.C. § 7623.

Both § 7623(a) and (b) claims are initiated by the whistleblower submitting, under penalty of perjury, information on the Application for Award for Original Information Form 211.  The form requires the whistleblower to provide his or her personal information, as well as the facts pertinent to the alleged violation, including how the whistleblower learned about the fraud and the suspected amount owed by the taxpayer.  The IRS encourages whistleblowers to provide any evidence they may have with their initial submission of Form 211, but there are no formal requirements at this time regarding the format that the submission of evidence must take.

Because Form 211 provides a limited amount of space, many whistleblowers and their attorneys attach an additional Disclosure of Material Information to better inform the IRS of the fraud and pique its interest in the case.  Any other pertinent documentation, such as tax returns, accounting reports and other financial documents, should also be included in the initial submission.  The more information a whistleblower can provide to the IRS, the more likely it is to initiate an investigation.

Once Form 211 is filed, an analyst in the Whistleblower Office will evaluate the information provided by the whistleblower and determine whether the case is worth pursuing.  Since the IRS is solely responsible for prosecuting a case once it decides to go forward with a whistleblower’s claim, minimum amount requirements preserve IRS resources by ensuring that the IRS is only required to investigate claims that will result in a substantial monetary return.  I.R.C. § 7623(b) applies to cases against any taxable entity as long as the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000.  If the taxpayer is an individual, the gross income must exceed $200,000 for the taxable year that is the subject of the action.

Under I.R.C. § 7623(b)(1) the individual whistleblower is entitled to receive an award of “at least 15 percent but not more than 30 percent of the collected proceeds.”  However, the Whistleblower Office has the discretion to reduce the award in cases where the whistleblower contributed substantially less to the IRS investigation because the information was based principally on the disclosure of specific allegations resulting from judicial or administrative hearings, a governmental report, hearing, audit or investigation, or the news media.  In those cases, the award may not exceed 10 percent of the collected proceeds from the action itself or any settlement in response to such action.  The Whistleblower Office takes into account the significance of the individual’s information and the role of such individual when considering the award amount.  If the whistleblower is convicted of planning and initiating the non-compliance, the Whistleblower Office is required to deny the award.

If the monetary requirements of I.R.C. § 7623(b) are not met, a case may be brought under the original I.R.C. § 7623(a) provision and it is entirely within the IRS’s discretion whether to pay for a whistleblower award for information that leads to recovery of taxes.  The discretionary award is paid, like I.R.C. § 7623(b), from the proceeds collected from administrative or judicial action resulting from the information provided by the whistleblower.  The discretionary maximum percentage of award is 15 percent, up to $10 million.  If the whistleblower is found to have planned or initiated the actions that led to the underpayment of tax or violation of internal revenue laws, the award may be reduced.

I.R.C. § 7623(b), unlike its earlier counterpart, also allows awards to be appealed to the United States Tax Court.  When a valid claim is submitted to the IRS Whistleblower Office and subsequently leads to an audit or investigation resulting in the collection of proceeds, the Whistleblower Office will communicate the final determination, in writing, to the claimant.  All awards are subject to current federal tax reporting and withholding requirements.

Under I.R.C. § 7623(b)(4) the claimant may appeal the award determination within 30 days to the United States Tax Court.  On June 2, 2008, the Tax Court issued proposed amendments to its Rules of Practice and Procedure regarding whistleblower award actions.  Pursuant to these amendments, the Tax Court has sole jurisdiction over whistleblower award actions.  A whistleblower award action is commenced by filing a petition with the court.  The petition must contain:

a)      The petitioner’s name,

b)      State of legal residence,

c)      Mailing address,

d)      The date of the determination of the award by the IRS Whistleblower Office,

e)      Statements setting forth facts upon which the petitioner relies to support the petitioner’s position,

f)        The relief sought,

g)      The signature, mailing address, and telephone number of each petitioner or each petitioner’s counsel, as well as counsel’s Tax Court bar number,

h)      A copy of the original award determination, and

      i)        The $60.00 filing fee.

The Commissioner will then file an answer or motion with respect to the petition.

Clearly, the IRS whistleblower statute is a valuable tool to curtail tax fraud and waste by taxable entities, including Medicaid, Medicare and other health care providers.  If you are aware of tax fraud being committed, it is in your best interest to contact an attorney to help you compile the information you need to submit a substantial and convincing claim to the IRS Whistleblower Office.  Besides helping the government to eliminate tax abuse, IRS whistleblowers stand to receive a sizable portion of the government’s recovery for the valuable information they provide.

David L. Haron is a principal at Frank Haron Weiner, PLC. His practice includes all aspects of health care law, complex litigation, business transactions and real estate planning and development. As a qui tam lawyer, he has recovered more than $100 million from corporations and individuals who fraudulently received funding from the taxpayers. Maro E. Bush is an associate with Frank Haron Weiner PLC, where she focuses her practice on federal False Claims Act/qui tam litigation and health care law, including representation of individual physicians, health care professionals, home health agencies and other health care entities in a variety of areas relating to health law and regulations.