John Bullis: Whistleblower rewards are limited

Congress changed the whistleblower rules in 2006, Internal Revenue Code Section 7623(b).

That change provides that if the taxes, penalties, interest and other amounts in dispute exceed $2 million the IRS will pay 15-30 percent of the amount collected as a reward to the whistleblower.

If the case deals with an individual, his or her annual gross income must be more than $200,000. If those thresholds are not satisfied, IRS, may in its discretion, pay for information relating to violations of the tax laws that result in recovery of tax.

IRS recently published its approval to pay a whistleblower $2 million who exposed a tax avoidance scheme.

It has been said "...The IRS whistleblower program is a crucial tool-especially in a time of fiscal challenges-to make sure corporations and financial institutions pay their fair share..."

IRS has denied certain whistleblower claims if its investigation resulted in no collection of proceeds. The Tax Court has held if the claim did not lead the IRS to begin an action against or collect any proceeds from a taxpayer, the reward did not meet the requirements to be eligible and was not required to be paid.

An "above-the-line" deduction (claimed as an adjustment to gross income) is allowed for court costs and attorney's fees paid by or on behalf of the taxpayer in connection with a whistleblower award for providing information regarding tax law violations. However, the deduction cannot exceed the amount that can be included in gross income as a result of the award.

That means if no award is received, no deduction for the costs is allowed.

IRS has lots of discretion in determining if a whistleblower award will be paid.

It seems IRS is not interested in small amounts, at least as to paying awards.

IRS did award $104 million to one whistleblower recently. You can imagine some of what must have been involved and how much IRS collected. Maybe the program has some merit, but time will tell how much more might be collected under this program.

Did you hear? "It is the constant and determined effort that breaks down all resistance and sweeps away all obstacles," by Claude M. Bristol.

• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.