IRS enlists tipsters

Blowing the whistle on big-time tax cheats could make some informants wealthy – as long as they have hard evidence and plenty of patience.

Just over a year ago, President Bush signed legislation authorizing the Internal Revenue Service to pay sharply higher rewards to tipsters in cases involving large amounts of money. In some cases, the reward could be as high as 30 percent of whatever the IRS collects.

The idea behind the whistleblower law is simple: Congress hopes the lure of much bigger rewards will prompt more informants to offer better tips and help the IRS reduce the nation’s $290 billion tax gap, the difference between what the agency collects each year and what it thinks it should be collecting.

Since the law was enacted, the IRS has received some large tips – including one from someone who alleges that one of the world’s biggest companies underpaid its U.S. taxes by more than $2 billion, including penalties and interest. That claim was filed just a few weeks ago on behalf of the informant by two Washington tax lawyers, Greg Lynam and Scott Knott, who have given up their regular jobs at well-known law firms in order to pursue major tax-whistleblower cases on a full-time basis at the Ferraro Law Firm, which has offices in Washington, D.C., and Miami.

Lynam and Knott say they already have filed at least five other separate claims with the IRS.

The attorneys tell clients not to expect speedy payouts since the IRS can’t pay a reward until it actually collects and the case is officially over. Informants generally should expect “somewhere between four and seven years to get paid,” says Knott. They won’t identify any of their clients or the targets.

So far, the IRS has received “a little over 80” reward claims under the new law, says Stephen Whitlock, director of the IRS’s whistleblower office. He declined to give details, but did offer thoughts on what makes a good or bad claim. “Bad claims are speculative – not a lot of evidence,” Whitlock says. A good claim has “documentation of transactions, or good, solid paper trails,” he says.

If you are considering filing a claim under the new program, take a look at the IRS’s recently issued guidance (IRS Notice 2008-4) at the Web site, irs.gov. As the notice points out, the new program is limited to very large cases.

To be eligible for an award under the new program, the total amount of taxes, penalties, interest and additional amounts in dispute must exceed $2 million.