Blowing the whistle on high-stakes financial fraud, misappropriation, or criminal mismanagement can come at great personal risk to a well-intentioned individual. Following the financial crisis of the late 2000s, numerous laws, including the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010 (“Dodd-Frank”), contain financial incentives for “whistleblowing” by employees who provide evidence of corporate wrongdoing. Other government agencies, including the Internal Revenue Service (“IRS”), also incentivize reporting of financial impropriety, including tax fraud. Recent legislative changes have bolstered the IRS’ internal whistleblower program and decreased the tax consequences of collecting a whistleblower award pursuant to Dodd-Frank.
The IRS Whistleblower Program
Callout out high-stakes tax evaders is especially lucrative – the Internal Revenue Service’s whistleblowing program rewards whistleblowers who expose individuals or corporations who fail to pay the taxes they owe.
If the IRS is able to pursue, prosecute, and collect amounts owed using information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional taxes, penalties, and other sums collected. As with most IRS matters, there are numerous requirements, qualifications, and restrictions regarding how to qualify for and quantify an individual whistleblower’s award.
Two New Amendments Enhance Whistleblower Protection
The Bipartisan Budget Act of 2018 included two amendments that significantly enhance protections for whistleblowers under the IRS whistleblower program and Dodd-Frank. These amendments will further incentivize individuals with evidence of financial malfeasance to take the time, effort, and personal risk to help reduce fraud.
The first new amendment fixes a loophole in the Dodd-Frank whistleblower program that allowed some whistleblowers to be taxed on the fees they paid to their attorneys as well as their portion of the award proceeds. In the past, a whistleblower could be taxed up to 80 percent of their net award, which made the law’s award incentives significantly less of an enticement to potential whistleblowers. Under the new amendment, whistleblowers under all major state and federal whistleblower laws are specifically permitted to deduct certain legal fees, preventing double-taxation of whistleblower awards.
The second new amendment closes a major loophole in the IRS’s internal whistleblower program. Previously, many whistleblowers who reported illegal tax-avoidance schemes (like offshore banks) collected little if any reward. This was because the interpretation of “proceeds” for the purpose of calculating whistleblower awards excluded criminal fines, fees, and penalties. The new Internal Revenue Code subsection, 7623(c), expands the definition so that a whistleblower’s award can be calculated based on a wider range of proceeds including criminal fines. Since many large tax fraud cases involve significant criminal fines, fees, and penalties, this is an important component of calculating a whistleblower’s award.
Proposed Changes to SEC Whistleblowing Rules
Additionally, on June 28, 2018, the U.S. Securities & Exchange Commission (“SEC”) voted to propose amendments to its rules governing its whistleblower program. Some of the proposed changes include increasing the size of whistleblower awards in smaller cases (payouts of less than $2 million) and reducing the size of whistleblower awards in cases in which the U.S. recovers $100 million or more. If approved, the rules would also be amended to comport with the U.S. Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers regarding qualifying as a whistleblower under Dodd-Frank.