The Price of a Good Deed

Not All Whistleblowers Are Taxed Equally

R. Mithu Dey, PhD, CPA, and Lesia Quamina, JD, LLM, CPA (Md.)

In BriefAlthough the IRS, the SEC, and the Department of Justice (DOJ) awarded whistleblowers approximately $400,000,000 in fiscal year 2014, those whistleblowers were not all taxed the same. Several acts regulate whistleblower awards and, as this article illustrates, how the amount included in income, the itemized deduction available, and the associated tax liability can differ under each act. It also examines changing legislation and court cases in order to shed light on the taxability of whistleblower awards. First, awards must be included in gross income. Second, awards are taxable as ordinary income and not as a capital gain, which reduces the tax liability. Third, with respect to attorney fees, awards are a deduction for adjusted gross income (AGI) when the award comes from the IRS or the DOJ, but are a deduction from AGI when the award comes from the SEC. Generally, whistleblower awards should be included as gross income—specifically, ordinary income—and the treatment of attorney fees will depend upon the source of the award.