Growing Trends in Whistleblower   Protection and Rewards

New amendments to the Internal Revenue Code that increase financial rewards for whistleblowers reporting large tax underpayments make it more important than ever for companies not to inadvertently underestimate their tax obligations. The Tax Relief and Health Care Act, passed in December of 2006, raised reward percentage

IRS Random Audits are Back     In a few months, a group of taxpayers will receive official letters from the IRS telling them they have been chosen for a special study. It involves auditing their tax returns ... even though the tax agency has no reason to suspect they have done anything wrong. These random audits will be done so that the IRS can better detect areas where taxpayers are not complying with the law.     According to the IRS, the National Research Program will start in October 2007 and auditors will examine about 13,000 randomly selected individual returns for tax year 2006. Data gleaned from the audits will help reduce the tax gap -- the difference between what all taxpayers should have paid and what they actually sent to the federal government on a timely basis.     IRS random audits are controversial. In the early 1990s, the tax agency was criticized for conducting lengthy line-by-line audits in which taxpayers were asked to prove nearly everything on their tax returns. After Congress complained about the cost and intrusive nature of these audits, the IRS scaled back its random audits in a couple of programs. But now, the IRS has announced that a new updated program is needed "because as time passes, patterns of noncompliance change."

Other Noteworthy Whistleblower Laws     The provisions of the Tax Relief and Health Care Act that amend the Internal Revenue Code to reward whistleblowers joins more than 50 federal laws with whistleblower protections, including: Sarbanes Oxley Act; Occupational Safety & Health Act; False Claims Act; Surface Transportation Assistance Act; Asbestos Hazard Emergency Response Act; International Safety Container Act; Energy Reorganization Act; Corporate and Criminal Fraud Accountability Act; Safe Drinking Water Act; Federal Water Pollution Control Act; Toxic Substances Control Act; Solid Waste Disposal Act; Comprehensive Environmental Response, Compensation and Liability Act; Wendell H. Ford Aviation Investment and Reform Act for the 21st Century; Clean Air Act; and  Pipeline Safety Improvement Act of 2002     In addition to federal whistleblower protections, many states and local governments also have their own whistleblower statutes.

amounts for informants and created an official IRS Whistleblower Office to administer the program.

While the IRS has maintained an ongoing whistleblower program, it drew a modest $27.3 million in total collected revenue for the five fiscal years that ended in 2005. In contrast, with the invigorated program, the IRS expects to bring in $182 million in previously uncollected revenue over the next ten years.

What exactly has changed? Under the old IRS reward program, the most an informant could receive was a discretionary payment of up to 15 percent of the back taxes the IRS collected.

Under the new provisions of the law, an informant can receive between 15 and 30 percent of the back taxes, penalties and interest collected. In addition to raising the percentage amount, a whistleblower can now petition the Tax Court to challenge the discretionary reward paid by the IRS. In the past, there was no recourse if an informant was not satisfied with the amount.

As further incentive, tax whistleblowers can now claim a deduction for court costs and attorney fees paid in connection with the reward.

However, the new, higher rewards are only for substantial tax evasion cases. They are paid to informants providing information about a business or individual with an annual adjusted gross income (AGI) above $200,000. The tax evasion must involve taxes, penalties and interest of more than $2 million. In addition, the IRS must move forward with "judicial or administrative action" based on information supplied by the whistleblower.

According to the IRS on its Web site, the agency's new Whistleblower Office "will process tips received from individuals who spot tax problems in their workplace, while conducting day-to-day personal business or anywhere else they may be encountered."

Increasing Employee Protection

The new tax whistleblower provisions add to the growing number of laws that provide shelter to those who report suspected misdeeds committed by their employers (See bottom right-hand box).

One such law is the Sarbanes Oxley Act, which enables employees and others to freely report corporate irregularities they believe are a violation of SEC rules or other federal laws relating to fraud against shareholders. Sarbanes-Oxley also requires that a company set up formal procedures for addressing both internal and external complaints.

While corporations are given latitude in determining what procedures work best for them, many public companies have set up toll-free numbers so that employees can report questionable auditing and accounting matters in a confidential anonymous manner.

Whistleblower Hotlines

With so much at stake with regard to compliance, even private companies that are exempt from SOX regulations have instituted whistleblower programs as a form of internal auditing.

While internal reporting mechanisms can be costly, they may save a company in the long run by establishing a 'first responder' system where concerns can be addressed swiftly and within the organization.

Many companies have found that one of the most cost effective ways to institute a whistleblower program is through a hotline that employees or outsiders can call if they feel that something is amiss with regard to compliance within the company.

While some whistleblower hotline programs are managed in-house, others utilize an outside firm. Once a complaint is received, response comes from a comprehensive team composed of in-house employees and service providers including internal audit committees, accounting, legal, operations and IT departments. The most important component of any internal whistleblower program is that employees know who to contact and under what circumstances. They should also be issued ongoing reminders about these guidelines.

Internal Systems: Beyond the Hotline

Even companies that institute hotline systems, however, need procedures in place to respond, investigate and manage whistleblower concerns that come in.

Companies must establish investigative protocols that preserve the confidentiality of the whistleblower while thoroughly investigating the issue. If employees feel confident that they can internally report grievances they have while retaining their anonymity, they are less likely to consider going outside the company to lodge complaints.

Internal audit procedures may seem cumbersome, but they can provide safeguards. And with the growing number of federal fraud protection laws, your company can never be too safe.