Expanded Whistleblower Tax Deductions: Key Changes in the 2018 Budget Bill
The federal budget bill signed into law on February 9, 2018, significantly improves tax treatment for whistleblowers. It extends the tax deduction for attorney’s fees—previously available only to federal False Claims Act and IRS whistleblowers—to include many other federal and state whistleblower programs. Additionally, it broadens the scope of what can be investigated under the IRS whistleblower program, ensuring a fairer process for those who expose fraud.
Eliminating Double Taxation for Whistleblowers
Before this change, whistleblowers faced double taxation, paying taxes on 100% of their awards—even though a portion was paid to their attorneys, who then paid taxes on that amount as well.
A 2005 amendment to the Tax Code eliminated this issue for whistleblowers under the federal False Claims Act and the IRS whistleblower program, allowing them to deduct attorney’s fees. However, this deduction did not extend to other federal or state whistleblower programs—until now.
Section 41107 of the 2018 budget bill expands the deduction to include:
- State whistleblower programs
- Dodd-Frank Act whistleblower programs
- SEC whistleblower program
- Commodities Futures Trading Commission (CFTC) whistleblower program
This long-overdue amendment ensures that whistleblowers do not pay taxes on funds they never actually receive, making it easier for them to come forward without fear of excessive taxation.
Expanded Scope of the IRS Whistleblower Program
In addition to fixing the tax treatment of whistleblower awards, the budget bill also strengthens the IRS whistleblower program. Section 41108 redefines what counts as “proceeds” in whistleblower cases, now explicitly including:
- Penalties, interest, and tax additions under internal revenue laws
- Proceeds from laws the IRS is authorized to investigate, including:
- Criminal fines and civil forfeitures
- Violations of reporting requirements
This amendment directly contradicts the IRS’s previous stance (see Whistleblower 21276-13W v. Comm’r, December 20, 2016), which excluded recoveries outside of Title 26 from whistleblower awards. Now, whistleblower recoveries will more accurately reflect the actual financial impact of their efforts in recovering government funds.
Why This Matters
These changes mark a major win for whistleblowers and government fraud enforcement. The tax deduction expansion removes financial barriers for whistleblowers who expose fraud, while the IRS program update ensures whistleblower rewards more fairly reflect the funds recovered.
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This article is for informational purposes only and should not be considered legal advice.