Tight security issues surround tax return information. And rightfully so; a tax return contains some of the most private information disclosed to the government by individuals and businesses each year. But the IRS needs help in uncovering tax fraud, especially in these economic times, and whistleblowers are often the best tool in the detection, uncovering, and reporting of tax cheats. The question is, how hard should it be for whistleblowers and their attorneys to help the IRS?
In analyzing and investigating information provided by a whistleblower, the IRS may determine that it requires the assistance of the whistleblower and his/her attorney. As the law stands, if the IRS wants help, it must enter into a written contract with the whistleblower and his/her attorney for services relating to the detection of violations of the internal revenue laws or related statutes. (26 U.S.C. §§ 7623 et seq.; See also The Tax Relief and Health Care Act of 2006, Section 406, Public Law 109-432 (120 Stat. 2958)). Only in connection with the written contract for help in uncovering tax fraud may the IRS disclose the suspect individual or entity's tax return information to the whistleblower and his/her lawyer. The IRS has the discretion to determine whether to enter into a written contract with the whistleblower for fraud-detecting services, and can also limit the amount of information provided in the disclosure. The whistleblower and his/her attorney must additionally agree to protect the confidentiality of the return information and prevent any disclosure or inspection of the return information in a manner not authorized. A breach of the contract could mean serious consequences, including denial of any reward to the whistleblower for his/her efforts.
The federal False Claims Act, dubbed "Lincoln's Law," after the celebrated former president, is often seen as the cornerstone of whistleblower laws. 31 U.S.C. §§ 3729 et seq. The federal False Claims Act has never required formal contracts to be entered into by whistleblowers in order to aid in fraud prosecution.
Nonetheless, in 2008, additional regulations under section 301.6103(n) of the Tax Code were published in Federal Register (73 FR 15668) describing the circumstances under which the IRS may disclose return information to whistleblowers and their counsel in connection with written contracts for services relating to the detection of violations of the internal revenue laws or related statues.
Pursuant to any written contract the IRS may enter into with a whistleblower, the newly enacted sections require the IRS to conduct an inspection of the whistleblower and his/her counsel's premises to make sure the area is secure for the receipt and containment of disclosed return information. This may require the whistleblower to purchase a safe in order to secure disclosed return information pursuant to the contract to help unravel a tax fraud scheme. Unannounced inspections of the premises by IRS agents could always be a possibility. The IRS could also request the whistleblower and his/her attorney to maintain a very specific log detailing the dates and times tax return materials were moved to and from the secure location. Once the documents are no longer needed, they may need to be returned or destroyed, with the destruction process detailed and note on the log. This requirement makes tax return information akin to "top secret" documents.
Earnest whistleblowers are hard to come by. And once the decision to come forward is made, these individuals work tirelessly and make sacrifices in order to help the government uncover fraud. They often offer on-going expertise and technical assistance to governmental agencies for years, and even at the outset of a case, whistleblowers' counsel do their best to break down fraudulent schemes in initial disclosures so that the government can have a clear roadmap of approach. The proverbial forest may just be lost for the trees with burdensome requirements being imposed on those individuals wanting and willing to help the IRS fight fraud.
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Joanna A. Hojdus is an attorney in Dallas, Texas. Joanna focuses her practice on qui tam (whistleblower) cases and is licensed to practice law in Florida and Texas.
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