In recent years, the pharma industry has taken a pounding from a wave of federal whistle-blower lawsuits. These cases, focused
largely on allegations of pricing improprieties, off-label marketing, kickbacks, and other Medicare fraud violations, have
forced companies to pay $2.5 billion in settlements.
Erika A. Kelton
But that amount may pale in comparison to payments that could result from a little-noticed provision in the Tax Relief and
Health Care Act. Enacted in December 2006, the legislation amended Section 7623 of the Internal Revenue Code to increase the
size of whistle-blower rewards, provide whistle-blowers a process to challenge the size of the reward, and establish a whistle-blower
office within the Internal Revenue Service to handle and track whistle-blower cases.
Congress decided it needed to up the ante to get more insider information about tax fraud in order to help close the "tax
gap"—the difference between the amount companies and individuals owe in taxes and the amount actually paid. Like all US government
agencies, the IRS has limited enforcement resources. And while the number of companies the IRS audits is growing, the odds
of corporations getting caught for tax underpayments is still very low. In 2003, the IRS audited 7,125 large corporations
(those with more than $10 million in assets). In 2006, that number grew to 10,591. However, Congress is counting on larger
whistle-blower rewards and the new IRS whistle-blower office to increase the odds of catching tax scofflaws.
"One well-positioned whistle-blower could expose millions of dollars of fraud," said US Senator Charles Grassley (R-IA), who
authored the new whistle-blower tax-fraud law. "It might take IRS auditors years to catch that much cheating on their own."
The new provision in the Tax Relief and Health Care Act follows a similar whistle-blowers' reward provision in the 1986 False
Claims Act, which convinced thousands of insiders to report non-tax fraud against the government, particularly in the defense
and health industries. The government has collected more than $11 billion as a result of these whistle-blower cases (also
known as "qui tam") and has paid whistle-blowers rewards totaling more than $1.8 billion. However, the False Claims Act specifically
exempted tax fraud from the kinds of cases covered under the statute.
These provisions for whistle-blowers in the Tax Relief and Health Care Act will offer a huge incentive to employees thinking
about blowing the whistle—employees who can now hope to reap tens, if not hundreds, of millions in tax cases. Before the new
tax law, the IRS rarely paid rewards to whistle-blowers. When it did, the reward was small—from 1 to 15 percent—and whistle-blowers
had no recourse if they disagreed with the amount.
Under the new law, the IRS offers whistle-blowers 15 to 30 percent of the total amount it collects—including taxes, interest,
and penalties—as a result of information given. The incentive is targeted to employees working at companies that have defrauded
or underpaid the IRS by more than $2 million. What's more, whistle-blowers also may challenge the amount of their awards in
federal Tax Court. Such judicial scrutiny will likely bring increased accountability and transparency to the IRS' whistle-blower
Finally, whistle-blowers don't have to be citizens of the United States—which thereby opens the reward to foreign employees
of multinational companies. The IRS has pledged to keep the whistle-blower's identity confidential. This makes it even easier
for whistle-blowers to report tax fraud without fear of retaliation or harassment from their employers.