Sometimes, the IRS Makes Whistleblowers Millionaires

For most people, the IRS is a nuisance. But for whistleblowers, the agency can be a kingmaker.

In what is likely to be the largest whistleblower award in the Internal Revenue Service's history, the agency may pay a former executive for Caterpillar (CAT) hundreds of millions of dollars for reporting on a shady tax strategy he witnessed.

Though the IRS has been allowed to award whistleblowers since 1867, Congress passed a law in 2006 that dramatically changed the whistleblowing program. Under the 2006 law, if a whistleblower's report leads to a collection of more than $2 million, the whistleblower is entitled to 15% to 30% of the total amount collected.

In Caterpillar's case, the agency has put the manufacturer on the hook for $2 billion, according to the IRS. In theory, that means that whistleblower Daniel Schlicksup could see a payday of up to $600 million. But the company is appealing the decision, which may mean a much smaller payout, an expert said.

Thomas C. Pliske, a former IRS attorney who has represented whistleblowers since 2006, said that it's unlikely that Caterpillar will pay the full $2 billion - estimating that the final settlement may be as little as half that. Even so, it would likely be the largest IRS whistleblower payout ever.

Pliske said that besides the total amount of the collection, the size of Schlicksup's windfall might also be affected by how important the IRS says his information was to the outcome of the case.

"The other issue is, will the IRS give credit to this whistleblower for significantly contributing to their determination of facts," he said. "That's pretty subjective."

Though Schlicksup would be the largest benefactor of the IRS whistleblower program, he's far from the only one. According to TheStreet's analysis of IRS data, the program has shelled out an average of $46 million per year since 2007.

In 2011, the agency paid the whistleblower who reported the Enron scandal $1.1 million. In 2012 the agency paid a $104 million award to Bradley Birkenfield, who disclosed massive fraud at the Swiss bank UBS.

The program seems to provide a good return on investment for the government. Since 2007, the IRS collected more than $3 billion through the program or almost 700 percent of what it dispensed in awards.

The payouts have increased since around 2012. Between 2007 and 2011, the average amount awarded collectively to whistleblowers per year was almost $14 million. Between 2012 and 2016, the figure was almost $80 million.

The increase was likely caused by the 2006 rule change, Pliske said. Because investigations take years, the payouts didn't start to increase until long after the rule change.

Not everyone who reports corporate malfeasance to the IRS becomes a millionaire. In 2016, the IRS rejected more than 12 thousand reports that they considered speculative, vague, or not credible.

"What I tell all my clients is, the only way to get a whistleblower case in the system is to have specific and credible information. And documentation certainly gives credibility to any allegations," Pliske said.

More from Stocks

Stocks Extend Slide, U.S. Dollar Weakens as Trade Tensions Cloud Global Markets

Stocks Extend Slide, U.S. Dollar Weakens as Trade Tensions Cloud Global Markets

Lotteries Are for Losers: Kick the Habit and Become a Millionaire

Lotteries Are for Losers: Kick the Habit and Become a Millionaire

Bearish Bets: 2 Well-Known Stocks You Should Consider Shorting This Week

Bearish Bets: 2 Well-Known Stocks You Should Consider Shorting This Week

Alphabet's Waymo Is Moving Toward Self-Driving Semi Trucks

Alphabet's Waymo Is Moving Toward Self-Driving Semi Trucks

This 'Modern' Stock Market Needs to Change

This 'Modern' Stock Market Needs to Change