The Internal Revenue Service knows that at least $400 billion dollars never makes its way into the U.S. Treasury each year because of tax evasion and tax fraud, so it has enlisted the help of insiders, called whistleblowers, to help it recover the money. Tax fraud whistleblowers file federal qui tam lawsuits. Qui tam is a Latin phrase that loosely translated means "he who sues for himself as well as the king". The king, in this case, is the IRS.

Whistleblower Lawsuits

Whistleblowers, most often employees who witness fraudulent activity by an individual or corporation, have already successfully recovered billions of dollars for the government under the False Claims Act (FCA). Congress approved the Tax Relief Act of 2006 that included a provisional rewards program for whistleblowers who provide "specific and credible" information to the IRS leading to the recovery of at least $2 million in unreported or under-reported taxes. A successful court determination can net a whistleblower between 15% and 30% of the IRS's recovery.

Who are the Tax Cheats

Most tax crimes are committed by wealthy individuals or corporations who "cook their books" in order to underpay or avoid paying taxes. Tax fraud is often deeply hidden in illegal tax shelters and intricate, ever-changing schemes - offshore accounts, false tax minimization and money transfer manipulation - that can be difficult and time consuming for the IRS to trace. 

In 2010, the IRS reported spending over $13 billion to hunt down tax criminals and it's looking for assistance from whistleblowers to make the most of U.S. tax recovery. The nation's taxing authority estimates that having accurate insider tax fraud information from whistleblowers saves enough time, manpower and government dollars that the IRS spends 60% less on a qui tam probe than it would by conducting an investigation on its own without inside information.

Who Pays for Tax Fraud

When individuals, trusts, businesses and estates fail to pay or underpay taxes, the economic burden falls back on the government and, ultimately, legal taxpayers to make up the difference. Without the extra tax revenue coming into the government's coffers, the nation's deficit increases and the taxpayers, who have been abiding by the tax laws all along, see an unfair hike in their own tax debt.

Proposal to Improve the Whistleblower Program

In January 2011, the IRS proposed a new amendment for the federal tax whistleblower statute, designed to encourage and increase whistleblower qui tam lawsuits by making it easier for whistleblowers and their attorneys to provide information and collect recovery rewards. 

One of the stumbling blocks the IRS hopes to overcome is centered in IRS non-disclosure laws, which limit what a qui tam lawyer, usually a personal injury attorney rather than a tax expert, can know as a whistleblower case is being investigated. The U.S. Treasury Department and the IRS have opened up the proposal for comments from the general public, hoping for suggestions that will improve the IRS Tax Whistleblower Program. The deadline for public comment is April 18, 2011.