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Whistleblowers have long been a strategic part of how the IRS investigates potential tax fraud cases. Now a change to whistleblower law will mean those who disclose unreported international accounts could receive rewards based on FBAR penalties and criminal fines. That could lead to more reporting and more FBAR investigations.
The federal government has relied on civilian informants for over a century. Since 1867, tax laws have allowed the government to compensate people who provide information on tax law violations. In 1996, Congress expanded the program, allowing the IRS to pay whistleblowers for information when a taxpayer is paying less tax than he or she should. The change also linked the whistleblowers’ pay to the funds collected by the IRS because of the information.
In 2006, Congress created the IRS Whistleblower Office, which processes reports of tax noncompliance valued at more than $2 million. If those claims meet certain requirements, the whistleblower is entitled to a mandatory award of 15-30% of the collected proceeds. Where the award falls within that range depends on the extent of the whistleblower’s contributions.
The information gathered because of this law is extensive. Between 2007 and 2017, whistleblowers helped the IRS collect $3.6 billion in unpaid tax. The average whistleblower award in 2018 was over $140,000. But an IRS regulation meant that even that number was less compensation than many whistleblowers may have thought they deserved.
In August 2014, the IRS issued a regulation that interpreted the tax whistleblower law to apply only to unpaid taxes collected under Title 26, the U.S. Tax Code. The regulation said that other fines and penalties weren’t subject to compensation. Other money brought in, including those resulting from FBAR violations collected under the Bank Secrecy Act (Title 31) and criminal fines under Title 18, were excluded from whistleblower award calculations.
That meant a lot of whistleblowers were not receiving compensation for FBAR investigations into the non-disclosure of overseas financial accounts. A recent report by the Government Accountability Office (GAO) surveyed 132 whistleblower claims between January 1, 2012 and July 24, 2017. Of those cases, the IRS assessed approximately $10.7 million in FBAR penalties. None of those penalties resulted in whistleblower compensation. If the IRS had included FBAR investigations in their awards, the whistleblowers involved could have received an additional $1.6 million to $3.2 million dollars, according to the GAO.
As part of its investigation, the GAO spoke to several attorneys who represented tax whistleblowers. They said they had refused or limited the number of FBAR-related claims they took unless there was strong evidence of tax noncompliance as well. They warn their clients that they may have to go to court to get FBAR penalties included in their awards. This means fewer whistleblowers report FBAR violations than they would if the IRS were issuing awards based on their information. In fact, several whistleblowers have taken the IRS to court over its regulation. In August 2016, the U.S. Tax Court said the IRS had to include criminal fines and civil forfeitures (including FBAR penalties) in the award calculations. But the IRS filed an appeal, sending the issue up to the U.S. Court of Appeals for the District of Columbia Circuit.
Then, on February 9, 2018, Congress stepped in. While the appeal was still pending, Congress amended the whistleblower law in the Bipartisan Budget Act of 2018. It said the “proceeds” on which whistleblower awards were based included “any proceeds arising from laws for which the IRS is authorized to administer, enforce, or investigate including criminal fines and civil forfeitures, and violations of reporting requirements.” In other words, Congress told the IRS it had to include FBAR investigations in its whistleblower payments.
The IRS is still trying to implement the new law. A new regulation has been drafted and the government is receiving comment on it. Until then, informal memos have instructed IRS agents to communicate the results of FBAR investigations with the Whistleblower Office for the calculation of awards. However, when the broader definition of proceeds comes into full effect, taxpayers with financial accounts overseas can expect to see more whistleblowers come forward. That could mean a higher chance that undisclosed bank accounts will be discovered and an increase in FBAR investigations and penalties.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding FBAR investigations or penalties, contact Joe Viola to schedule a free consultation.