February Budget Bill Eliminates Double Taxation and Expands the Scope of the IRS Whistleblower Program

Published on: February 13th, 2018

The federal budget bill signed into law on February 9, 2018 extends the tax deduction for attorney’s fees paid out of federal False Claims Act whistleblower awards to many other federal and state whistleblower programs and expands the scope of what can be investigated under the IRS whistleblower program.

Double Taxation Eliminated at the State and Federal Level

Double taxation occurred when whistleblowers were required to pay taxes on 100% of their awards even though they paid a percentage of their awards to their lawyers, who then also paid taxes on the portion of the award paid to them.  A 2005 Tax Code amendment eliminated this double taxation on whistleblowers under the federal False Claims Act and the federal IRS whistleblower program by granting those whistleblowers tax deductions for the amounts of their awards paid over to their attorneys as fees.  That deduction did not apply to other federal whistleblower programs or any state whistleblower programs until the recent budget bill became law.

Section 41107 of the budget bill unifies the tax treatment of all of these whistleblower programs by giving all whistleblowers the deduction for the part of their awards paid over to their lawyers under state whistleblower programs, the whistleblower programs created by the Dodd-Frank Act, the SEC whistleblower program and the Commodities Futures Trading Commissions whistleblower program. This long-overdue amendment will ensure that successful whistleblowers will not pay taxes on funds they do not get to keep.

Expanding the Scope of the IRS Whistleblower Program

Section 41108 of the budget bill expands the scope of the term “proceeds” as defined under the IRS whistleblower program to include “(1) penalties, interest, additions to tax, and additional amounts provided under the internal revenue laws, and (2) any proceeds arising from laws for which [sic] the Internal Revenue Service is authorized to administer, enforce, or investigate, including (A) criminal fines and civil forfeitures, and (B) violations of reporting requirements.” The amendment refutes the position the IRS has taken in the past (See Whistleblower 21276-13W v. Comm’r (December 20, 2016)) that whistleblowers under the IRS program are not eligible to be awarded proceeds collected outside of Title 26. The amendment will ensure that whistleblower recoveries more accurately reflect the amount of government dollars their actions returned to the public fisc.

To learn more about the important provisions added to the 2018 budget bill, visit the Taxpayers Against Fraud website and read their press release.

This article was drafted by Wilbanks & Gouinlock, LLP and is intended for general informational and educational purposes only and should not be construed as legal advice.