The IRS Whistleblower Office was established by the Tax Relief and Health Care Act of 2006 to encourage taxpayers who witness tax problems to make reports to the taxing authorities. Mechanisms for making reports had been in place for nearly 150 years, but the 2006 law created new procedures and incentives for processing and investigating taxpayer claims. To encourage more taxpayers to come forward, the IRS made a public show about the fact that they may pay awards to people who provide specific and credible information to the IRS about non-compliant taxpayers.
Remember those words: specific and credible. The IRS wants details. They don't want guesses or beliefs. They don't want to hear that your neighbor has to be under reporting her income because she otherwise couldn't afford a new car on her salary (you don't know that her long lost uncle just died and left her a bunch of money). And just because you've never personally walked a tax return to the post office for your employer doesn't mean that he or she hasn't filed one.
If you can provide sufficient information that leads to the collection of taxes, penalties, interest, or other amounts from the non-compliant taxpayer, you can be eligible to collect one of two awards:
- If the amount in dispute exceeds $2 million, the IRS will pay a whistleblower up to 30% of the amount collected. If the alleged tax cheater is an individual taxpayer, his or her annual gross income must be more than $200,000 for the whistleblower to be eligible to collect this award.
- In most other cases, the maximum award is 15% of the amount collected up to $10 million
If you're sure you have a claim -- and you're willing to swear to it under the penalty of perjury -- you kick things off by filing a federal form 211. The form requires that you include your name and personally identifying information, such as your Social Security number and address. You must then detail the information you have that you believe supports your claim of unpaid taxes, including the amounts; you must attach any evidence you have to support your claims. You're required to share with the IRS how you know about the potential tax violations. Finally, you have to reveal a complete description of your relationship to the taxpayer (hint: using "my jerky ex-boyfriend" will not help your cause).
Don't underestimate the importance of the perjury penalty. Lying to a government official can result in fines or jail time -- not to mention you could potentially be sued civilly for making false claims (just ask Joe Francis' accountant).
After you file, the Whistleblower Office will acknowledge your claim in writing. Then you wait. You won't be advised of the your award in the case until the end -- which could take years. No awards will be paid out unless and until a final determination of liability has been issued to the taxpayer and the IRS has collected that amount due.
So what if you have information about potential tax issues but don't necessarily want an award? You can make an anonymous report to the IRS using federal form 3949.
You have a number of options available to you for reporting tax fraud. The bigger question is: Would you do it?