Tax Whistle-Blowers Can Reap Rewards

The Internal Revenue Service looses about $345 billion annually from people cheating -- underreporting or underpaying -- on their taxes. Now the IRS is making new efforts to close the "tax gap," and if you provide the right information, it can be a serious boon for both you and the feds.

"For the first time a tax whistleblower, someone with knowledge of a significant tax fraud, has an enforceable right to get a reward," says Michael A. Sullivan, a whistleblower attorney with Finch McCraine in Atlanta. Before the Federal Whistleblower Office was established in 2007, "it took forever, claims were lost in the process and there wasn't much incentive to turn someone in."

Things have dramatically changed since then, and now a whistleblower is entitled to 15% to 30% of the total proceeds the IRS recovers, including interest and penalties. But there's a small catch. In order to make a whistleblower claim, there must be more than $2 million in tax liabilities. And while individuals do report other individuals, the majority of cases are brought by a company insider.

"A company might cheat on payroll taxes and treat full-time employees as independent contractors," says Sullivan. "Or, someone at a hedge fund might know about some large scale improprieties where there's a great temptation to hide income by treating it as if it were earned by some off-shore entity that's not subject to U.S. tax law." Most of the time whistleblowers are individuals who are genuinely disturbed by improprieties. ...