The IRS Whistleblower Program & Cryptocurrency — The Feds Eye Bitcoin & Cryptocurrency
Did you know that the IRS will pay you to turn in tax evaders? While the IRS Whistleblower Program has been around for 150 years, the Tax Relief and Health Care Act of 2006 made whistleblowing a much more lucrative pursuit. In fact, you may receive up to 30 percent of the amount the IRS collects from the culprit.
History of the IRS Whistleblower Program
In March of 1867, the Secretary of the Treasury was granted the right to award payments to those who assisted in “detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws…” However, these payments were left up to IRS discretion, so whistleblowers sometimes didn’t get any reward for their assistance. For the next hundred years or so, the IRS Whistleblower Program remained essentially unchanged. Finally, in 1996, Congress made two small but significant changes to the program: it added a clause allowing whistleblower payments for “detecting underpayments of tax,” and also ruled that payments to whistleblowers would come from the tax money collected based on the whistleblower’s tip.
In June 2006, the Treasury Inspector General audited the Whistleblower Program and found that during the fiscal years 2001 through 2005, the program had collected more than $340 million in taxes and related penalties and paid out rewards of more than $27 million to whistleblowers. These results were particularly impressive considering that the IRS had done little to no publicity of the Whistleblower Program; at that point, it was virtually unknown to the public at large. The Treasury Inspector General recommended expanding the program and revising its procedures to reduce inconsistencies in the rules and speed up processing times.
The new and improved whistleblower program
The Tax Relief and Health Care Act of 2006 used the Treasury Inspector General’s findings to set new rules and limits for the IRS Whistleblower Program. The new rules only apply in cases where total tax, interest and penalties are greater than $2 million and (if an individual rather than a business) the transgressor’s annual gross income is greater than $200,000.
Thanks to the new rules, whistleblower rewards are no longer discretionary. If a whistleblower meets the basic requirements, he or she is guaranteed a percentage of however much the IRS collects from the transgressor. This reward can be anywhere from 15 percent to 30 percent of the amount collected. Thus, if a whistleblower tip led the IRS to collect $3 million in back taxes and penalties, the whistleblower in question would get anywhere from $450,000 to $900,000 as a reward.
The law also established the IRS Whistleblower Office. This office reports to the IRS Commissioner and is responsible for managing the entire program. Prior to the 2006 changes, the whistleblower program was managed at a regional level and did not keep any centralized records. Lastly, the new rules granted whistleblowers the right to appeal the result of their claims to the Tax Court.
The new Whistleblower Office divided the whistleblower program into two different branches based on whether or not a claim qualifies for the new rules. Claims that don’t meet the $2 million claim/$200,000 income limits are classed under the Informant Claims Program, which uses the pre-2006 whistleblower rules. Rewards for these claims continue to be discretionary and are capped at 15 percent of the amount collected, up to a maximum reward of $10 million.
The IRS finds a new target
Even as the IRS got to work implementing the new whistleblower rules, a brand-new innovation called Bitcoin was emerging that would one day shake up the financial world. The Bitcoin software become available to the public in 2009, allowing the first transactions to occur shortly thereafter. The new cryptocurrency went through some rocky times at first; during the earliest years of its existence, only a handful of early adopters jumped onto the Bitcoin bandwagon. Worse, certain shady individuals began using the cryptocurrency to launder money and perform other criminal transactions. But by March 2013, the value of all Bitcoins in circulation had reached $1 billion. In the years to follow, the cryptocurrency became widely adopted by investors despite enormous swings in value.
As growing numbers of taxpayers purchased, mined, or otherwise became involved in Bitcoins, the IRS began to take an interest in the cryptocurrency. According to IRS regulations, virtual currency transactions are taxable — though just how they are treated varies depending on their use. For example, Bitcoins held as investments are taxed as property using the same parameters as stocks and bonds, while Bitcoins used to pay for goods and services are taxed as income.
Unfortunately, many bitcoin owners and recipients either don’t know about these tax rules or don’t care to follow them. In November 2017, LendEDU released the results of a survey it had conducted that investigated attitudes and behaviors involving Bitcoin investments. The survey found that nearly 36 percent of the respondents planned not to report the results of their Bitcoin transactions on their tax returns.
The IRS is well aware of the high level of nonconformity among Bitcoin owners and has taken steps to identify the culprits. In March 2018, after a drawn-out legal battle, the agency forced Coinbase — one of the largest bitcoin exchanges in the world — to release information on 13,000 of its users. The IRS managed this feat largely through the use of “John Doe” summonses, which allow the agency to compel the release of account information even if they don’t know which specific account holders are guilty of violating the tax laws.
Cryptocurrencies and whistleblowers
As IRS pursuit of cryptocurrency tax evaders heats up, whistleblowers will likely play a major role. A whistleblower who reports someone using cryptocurrency to evade taxes can receive a reward of up to 30 percent of the collected taxes and penalties. The potential reward is even greater for whistleblowers who report cryptocurrency being used for illegal purposes; in that situation, if the IRS seizes the cryptocurrency involved in the transaction, the whistleblower will receive 15 to 30 percent of the entire value of the seized monies.
What’s more, the IRS isn’t the only government agency actively soliciting whistleblowers to report cryptocurrency-related lawbreakers. The US Commodity Futures Trading Commission (CFTC) created a bounty for whistleblowers who expose cryptocurrency “pump and dump” schemes. If such a report results in CFTC sanctions of $1 million or more, the whistleblower will receive a reward of 10 percent to 30 percent.
If you know that someone is failing to pay taxes on their cryptocurrency gains or is using cryptocurrency for illegal transactions, it’s important to file a whistleblower report with the IRS as soon as you possibly can. The entire process, from the moment you submit your report until the IRS collects the proceeds, can easily take several years. If you don’t act quickly, the transgressor may be able to hide the evidence and make it far more difficult for the IRS to make a case. And because most tax crimes fall under a statute of limitations, delaying too long may mean that the culprit will get away clean. To file a whistleblower report with the IRS, simply fill out Form 211 and mail it in to the IRS Whistleblower Office.
If you’re not sure if you should proceed or need help filling out the form, contact us and will be happy to assist you. By reporting these illegal activities, not only will you be doing the right thing, but you could also be ensuring yourself a fat paycheck down the line.