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Whistleblowers: Incentives, Disincentives, and Protection Strategies by Frederick D. Lipman

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Chapter NIne

IRS Whistleblowers

THE FALSE CLAIMS ACT explicitly excludes tax fraud and other tax claims. Section 3729(e) states that the Act “does not apply to claims, records, or statements made under the Internal Revenue Code.” However, on December 20, 2006, the Tax Relief and Healthcare Act was signed into law, which inserted a provision in the Internal Revenue Code (Code) mandating that the Internal Revenue Service (IRS) pay rewards to whistleblowers who exposed major tax underpayments. The IRS was also required to establish a Whistleblower Office and permitted an appeal by the whistleblower to the U.S. Tax Court (“tax court”) if the whistleblower was arguably entitled to a mandatory award. The congressional effort to expand rewards to whistleblowers was led by a conservative Republican, Iowa senator Charles Grassley.

Prior to December 20, 2006, the IRS had a discretionary whistleblower award system, which is now embodied in Section 7623(a) of the Code. The mandatory system adopted on December 20, 2006, is embodied in Section 7623(b) of the Code.

On April 8, 2011, the first whistleblower award was made under the mandatory system in the amount of $4.5 million (less withholding) to an in-house accountant who tipped off the IRS that his employer was skimping on taxes.1 The accountant's tip netted the IRS $20 million in taxes and interest from the employer, a financial services firm and a Fortune 500 company. The accountant had filed the complaint with the IRS in 2007 but had ...

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