If I had $1 for every time someone has asked me “How do I report someone who is cheating on their taxes?” I would probably be a rich man. The IRS does have an established procedure for reporting tax evaders and there can be handsome rewards for turning in a tax cheat. That’s the good news. The bad news is that it is a very painstaking process, your chances of getting a reward from the IRS are slim, and it takes a very long time for a case to be resolved – typically six to seven years.
There are actually two different programs for whistleblowers. The large awards program is for cases involving more than $2 million in taxes. The reward can be up to 30% of the taxes, penalties and interest. The actual amount of the award is at the discretion of the IRS. This law has been on the books since 2006, and the IRS just announced its first award under this program. The amount of the award is $4.5 million paid to a former in-house accountant for a large financial services firm. Since this law was enacted the IRS has had 1,328 qualified submissions involving almost 10,000 taxpayers.
The small awards program is for cases involving less than $2 million in taxes, and is up to 15% of the penalties and taxes but not interest. This program has been in existence as a part of the False Claim Act of 1863. The IRS accepted 7,600 new claims in fiscal year 2010, the highest total since 2006. Obviously, far more claims in both categories are submitted, but only a few are qualified under IRS guidelines.
In order to report a claim, you must complete Form 211, Application for Award for Original Information. The IRS wants a timely, well-developed claim. Merely reporting that Joe Smith must be cheating on his taxes because he buys an expensive new car or operates a cash business will not be sufficient. The form asks for facts, including supporting information; how you learned about the claim, and the amount the taxpayer is owed. No matter how strong a case you think you may have, don’t spend the money yet. Attorneys who handles such cases agree there is no such thing as a slam dunk case.
Additionally, the IRS typically avoids two types of cases – those involving churches or non-profit organizations because of the IRS reluctance to pursue them; and those involving money laundering or organized crime, for fear of physical harm.
A very big caution is that there is no legal protection for whistleblowers. Although the IRS will not reveal you identity, you should be careful about who you tell about the case.
And yes, if you receive an award, it is taxable. The IRS will withhold up to 28% of the award to pay the taxes on your new-found income.