Takeaways:

• The IRS is modernizing its somewhat anemic whistleblower program.
• IRS whistleblower awards are finally rebounding.
• The IRS is aggressively targeting high-net-worth taxpayers and large corporations.
• Meanwhile, state false claims acts allowing tax-related claims continue to grow in number and have already yielded hundreds of millions of dollars in recoveries.

I. The IRS Whistleblower Program’s Historical Obstacles

The Federal False Claims Act expressly excludes claims based on violations of the Internal Revenue Code. In 2006, Congress recognized the lack of an adequate tax whistleblower program and required the Internal Revenue Services to establish its formal whistleblower program.

For a time, it looked like the Internal Revenue Service Whistleblower Program might be the next big thing. Unfortunately, the IRS Whistleblower Program has historically faced the same institutional hurdles as the IRS as a whole – a lack of adequate funding and chronic understaffing. This led to exceedingly long delays in enforcement actions and the issuance of whistleblower awards. A perceived lack of transparency led many practitioners to label the program a black box. The IRS Whistleblower Program never quite took off. Meanwhile, the Securities and Exchange Commission Whistleblower Program quickly eclipsed the IRS’s program in terms of awards totals, despite tax evasion being far more widespread than securities law violations and the SEC program launching years later.

II. The IRS Turns a Corner on Funding While Targeting High Earners and Big Corporations

Tax whistleblowing may finally be gaining momentum. The Biden administration has increased funding to the IRS in an effort to modernize the agency, and its Whistleblower Office is getting in on the action. The Whistleblower Office is using this funding to streamline the whistleblower process and increase staffing. Ultimately, more funding and more staff should mean more enforcement, a smoother whistleblower process, and better odds that a whistleblower’s tip leads to a recovery and an award. The data suggests that these modernization efforts may be bearing fruit. Fiscal year 2023, in fact, saw the first notable increase in IRS whistleblower awards since 2018. Other IRS data shows that new tips are being processed significantly faster despite the agency receiving a growing number of submissions. This positive data appears to be the start of a trend, not a blip on the radar.

Meanwhile, the IRS has publicized its full court press on high-income, high wealth individuals and large corporate entities. This initiative has already returned over a billion dollars from wealthy taxpayers alone. Not only is the focus on these targets providing a positive return on investment, but it is also part of the agency’s communications strategy. The IRS wants to prove to the public and Congress that it is going after the “right” kinds of taxpayers. That may help convince Congress to maintain adequate funding to the IRS into the future. Further, the IRS’s focus on high earners and large companies is a clear signal to potential whistleblowers – if you have information on these types of targets, the agency wants to hear from you.

III. The States Join the Party

Most state false claims acts, like their federal counterpart, exclude tax-related claims. That is starting to change. Today, false claims acts in Delaware, Florida, Hawaii, Illinois, Indiana, Nevada, New York, Rhode Island, and Washington D.C. allow for whistleblowers to pursue various tax-related claims. Further, Maryland recently created a tax whistleblower program which operates like the IRS Whistleblower Program.

State FCAs Allowing Tax Claims Without Significant Limitations

• Delaware
• Florida
• Hawaii
• Nevada
• New York (includes modest income, sales, and damages thresholds)
• Washington D.C. (includes modest income, sales, revenue, and damages thresholds)

State FCAs Allowing Tax Claims With Significant Limitations

• Illinois (excludes violations of the Illinois Income Tax Act)
• Indiana (excludes income tax violations)
• Rhode Island (excludes personal incomes tax violations)

Non-Qui Tam Whistleblower Complaint Systems

• Maryland

These laws have led to substantial recoveries. In 2018, Sprint paid $330 million to settle a qui tam lawsuit under the New York False Claims Act which claimed the telecommunications giant had dodged its sales tax obligations. The whistleblower was awarded over $62 million.

In 2021, a hedge fund manager agreed to pay $105 million to settle claims that he underpaid state and city income taxes. That case also arose from a qui tam lawsuit filed under the New York False Claims Act. The whistleblower was awarded over $22 million.

Earlier this year, the D.C. False Claims Act (which was recently amended to allow tax-related claims) yielded its first tax recovery when billionaire Michael Saylor and his company, MicroStrategy, Inc., agreed to pay $40 million to resolve a qui tam lawsuit. Saylor had allegedly failed to pay over $25 million in D.C. income taxes. The whistleblower award in that case has yet to be decided, but, under the D.C. False Claims Act, the whistleblower is due up to 25% (here, $10 million) of the recovery.

IV. A New Era

A better-funded, modernized IRS and an increasingly large arsenal of tax-friendly state false claims acts are reinvigorating tax whistleblowing. If the IRS can maintain adequate funding and modernize its whistleblowing process, the IRS Whistleblower Program may finally live up to its promise. Further, given the already remarkable results we have seen from the state false claims acts, it seems inevitable that other states will update their false claims acts to allow tax claims.

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