Currently, an informant is able to receive an award that allows the IRS to conduct an audit that results in collection of additional tax. Now, if made final, a whistleblower can also receive an award where no additional tax is collected.
‘From the perspective of the IRS, these rules serve a valuable function in enlisting the help of employees to police the actions of employers,’ says Joseph Fletcher, a tax and corporate partner at the law firm Morrison & Foerster. ‘At the same time, they mean that a business must be concerned with having its internal goings on revealed to the IRS. This can create a dynamic where an employee may have both the interests of the business and their own interests in mind.’
Pursuant to whistleblower laws, the IRS is empowered to reward people who provide specific and credible information that can result in the agency’s collection of penalties, taxes, and interest from noncompliant taxpayers. Information supplied to the agency must be based on solid evidence.
‘The whistleblower regulations will continue to complicate life for small businesses, as well as for the most sophisticated of corporate tax departments,’ says Fletcher. ‘Corporate taxpayers should, therefore, consider changes necessary to ensure proper oversight, reporting and compliance– the best ways to manage and mitigate whistleblower risk.’
So how can companies and boards work together to limit the risk of having a whistleblower blow the whistle on them?
Businesses, especially small-cap ones, should begin by fostering a culture that encourages avoidance of activities that a disgruntled employee can easily report to the tax regulator, says Eugene Illovsky, who specialises in white-collar matters and is also a partner at Morrison & Foerster. Strengthening the lines of communication between employees and internal offices has also proven successful in many businesses.
‘A corporation should have in place a mechanism by which a whistleblower can report internally,’ says IIIvosky.
A company should, for example, allow the audit committee or a special committee to the board of directors to function as an avenue via which employees can report complaints and matters of fraudulent activity. The corporation also should work to mend this problem before it reaches to the IRS.
The IRS is accepting and reviewing comments on the proposed regulations until April 18, 2011. The IRS Whistleblower Office has not rewarded any informants to date.
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