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.

Whistle-blower 101

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 program.

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.