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Blowing the whistle on tax fraud: amendments to the tax code have beefed up the IRS's ability to pursue tax fraud claims made by whistleblowers. Plaintiff lawyers have an important role to play in this litigation, but first they need to bone up on the rules.

Article Excerpt
In 2006, Congress amended [section]7623 of the Internal Revenue Code to require the IRS to pay awards to whistleblowers under certain conditions. (1) Before this, whistleblowers who uncovered and reported fraud on the government related to tax law violations were at the mercy of the secretary of the Treasury, who had sole responsibility for determining whether to pay any award.

The amendments, which strengthened the IRS's whistleblower program, made payment of awards to tax whistleblowers mandatory. Consequently, plaintiff attorneys--especially those who have represented whistleblowers under the False Claims Act (FCA)--may want to add tax whistleblowers to their practice. (2)

But even lawyers who have considerable experience handling FCA qui tam actions will need to study the tax whistleblower provisions before venturing into this area of practice. The two laws differ in many ways.

While the general policies behind the FCA and the tax whistleblower law may be the same--namely, the remediation of fraud on the government--the mechanics of the two whistleblower systems could not be more different. A brief overview is in order.

Filing the case. Under the FCA, the whistleblower files a lawsuit in federal district court, and the government decides whether it will intervene in the suit. However, under the tax whistleblower statute, the whistleblower does not file a lawsuit but rather provides information to the IRS in an information return, using Form 211.

One advantage the tax whistleblower statute has over the FCAis that it relieves the whistleblower from the obligation of complying with Federal Rule of Civil Procedure 9(b)'s requirement that allegations of fraud must be pleaded with specificity. In an FCA case, Rule 9 (b)--which requires that an FCA complaint specify the time, place, and content of an alleged false representation--is often the basis for a motion to dismiss. (3)

On the other side of the coin, FCA qui tam plaintiffs have an advantage over tax whistleblowers in that they may pursue the lawsuit themselves if the government decides not to intervene. But the tax whistleblower is at the...

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