
UPDATED The IRS WINS $373 Million Case Study
UPDATED April 9, 2014
New information changes this story dramatically.
$373 million collected from tax fraud whistleblowers
122 awards for a total of $53 million
For the case study the money was divided equally among all whistleblowers
but
We had a good year with the IRS Whistleblower Program because they paid one of our clients a $38 million award. The Whistleblower Report Erica L. Brady
With the updated information :
Please remember I am not an attorney, tax expert, or all that great at math-so if the calculations are off or if you have updated information please feel free to contact me to update the slides and thank you to
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for the updated statistics.
April 5, 2014
Original Story
Congress, in an annual report said the IRS collected $373 million from tax fraud whistleblowers paid out 122 awards for a total of $53 million! The IRS should really throw a party! That certainly sounds impressive doesn’t it? Well, let’s do a little math:
That’s an average* of $435,ooo per award-still sounds impressive, right? But it can take years to collect awards.
Sen. Chuck Grassley of Iowa helped write the whistleblower law. Grassley applauded the payouts but said he worries the slow pace will discourage whistleblowers.
The process, from submission of complete information to the Service until the proceeds are collected, may take several years. IRS
So let’s use a hypothetical whistleblower in conjunction of the recent IRS statistics:
IRS collects $373 million divided by 122 whistleblowers are awarded $435,000*. (There are no statistics to give the actual breakdown)
It’s important to know what the whistleblower’s annual salary was prior to coming forward, did they lose their job in the process, were they able to find work, and also to add the other factors into the settlement:
Taxes-yes whistleblower settlements are subject to taxation. Weird, right? The government gives the whistleblower money and then takes 55% of that settlement back in taxes.
False Claims Act whistleblowers have to pay income taxes on their relator’s share of any recovery―at ordinary income rates. Hodgson Russ LLP
So anything over $250,000 is taxed at 55% of the gross income.
For this hypothetical exercise we’ll say the whistleblower was an accountant making an average of $50,500 annually, had total job loss during the three year duration of the case. Whistleblowers face most corporate retaliation ever in 2011.
And now the math:
Annual Salary $50,500
Lost income over three years $151,500
Whistleblower is awarded $435,000
minus taxes $239,250
minus attorney(average 30%) $58,725
Grand Total “Award” $137,025 This doesn’t sound so bad…..until job loss calculation
Remember the accountant whistleblower was out of work for three years @ total of $151,500.
Three years with job loss $151,500 minus the Grand Total of $137,025 = Negative $14,475
That’s right, by this calculation it would have been better for the whistleblower to keep their mouth shut, keep their job, and let the government suffer. Fortunately for the government, money is not the number one reason whistleblowers come forward.
Although the relators (whistleblowers) in this sample all ended up using the qui tam mechanism, only six specifically intended to do so. The others fell into the qui tam process after seeking lawyers for other reasons (e.g., unfair employment practices) or after being encouraged to file suit by family or friends. Every relator we interviewed stated that the financial bounty offered under the federal statute had not motivated their participation in the qui tam lawsuit. Reported motivations coalesced around four non–mutually exclusive themes: integrity, altruism or public safety, justice, and self-preservation . New England Journal of Medicine
Senator Grassley should be worried that whistleblowers will become discouraged and should start an investigation into the IRS.
And if we keep doing the math, and 122 people paid 55% of their settlements back in taxes:
The IRS is re-rewarded $29,188,500 back!!!
So all of this really begs two questions:
1. Why would anyone ever come forward as a whistleblower?
2. What does the IRS do with all that money? Oh that’s right the IRS spent $5o million on 220 employee conferences over three years!
The media and even government officials are quick to point out the millions a whistleblower is ‘awarded’ without really applying all the formulas at play. It’s very obvious that there is a high cost to the whistleblower coming forward and great reward for the IRS at the expense of the whistleblower and taxpayers. Until the government is willing to table their greed for the greater good, they will soon find those willing and wanting to come forward all but going away-or to the extremes, like Edward Snowden.
*this would mean all 122 whistleblowers got the exact same amount of money awarded to them but individual data was not provided from the article.
Full story: Washington Post
FCA Aficionado
I posted a comment on Forbes prior to reading your article here.
http://www.forbes.com/sites/robertwood/2014/04/08/dog-whistles-at-irs-whistleblower-office/
Some of us potential WB’s have looked at the risk vs reward and decided the risk is too great and the benefits are too meager to come forward; under the current system, the WB’s go to ground as to the fraudsters go the spoils.
You bring up some good points that I was not aware of when I posted on Forbes a moment ago; specifically the 55% tax hit (I had understood it as a 30% hit) this adds further discouragement to an already unappetizing deal.
I should add that the failure of the WBO program (and this points directly to the dolts, where found and as applicable in the Commissioner’s Office, the Chief Counsel’s Office, the WBO Office and the rest of the IRS’ bureaucracy in general) well reflects my mashed-up adage of:
“He who knows the price of everything but the value of nothing,
Is destined to be both penny-wise and pound foolish”
This is the ethic that has killed the IRS WB Program.
Melayna Lokosky
Thank you for taking the time to read and respond. Unfortunately it appears the government is not really transparent when it comes to these cases and I’ve found it difficult to cull data and statistics for much greater clarity. And thank your for letting me know that one person received $35 million that certainly changes the calculation dramatically and quite negatively for the other 121 people. I also found a statistic from the IRS that states these cases take five to seven years (the earlier IRS verbiage said ‘several years’ guess I was generous giving them three) Please let me know if you find any other information-I truly appreciate it and will update.
FCA Aficionado
I should also add that you might want to revise your calculation because the situation is even more dire than you illustrate.
It was reported, by the Ferraro Law Firm, that ca. 35M$ of the 53M$ paid to WB’s in 2013 went to a single WB client of theirs.