Whistleblower programs are undermined by harsh tax policy, specifically by the elimination of income averaging. Income averaging is a tax exemption granted for back pay compensation in employment discrimination cases.
Under income averaging, the tax rate is determined using the average income over the years without pay, rather than treating the entire reward sum as income for that particular year. Let’s say, in a hypothetical scenario, a whistleblower who is also the victim of employment retaliation wins a $600,000 reward after being unemployed for 10 years during their case. Their average income – when distributed among their 10 years of unemployment – equates to $60,000. Therefore, they’d be taxed in the tax bracket for individuals making $60,000. Using 2023 tax rates, the whistleblower would owe $5,466 in taxes for each of the ten years, or a total of $54,660 in taxes.
Unfortunately though, income averaging, which was once permitted for any victim of wrongful termination, has been eliminated. Without income averaging, the reception of a $600,000 award in one year would place an individual at the highest 2023 tax bracket. They would be forced to pay $180,807 in taxes, which is over three times as much as they would have under income averaging.
The lack of income averaging exemptions for whistleblowers who were subject to employment retaliation is extremely damaging, especially when we consider that these victims of wrongful termination also missed out on contributing to pensions and other financial safety nets during the years in which they were unemployed. The goal of whistleblower rewards should be to prove that blowing the whistle is worth it, not make whistleblowers regret their decision, and in doing so, deter others from blowing the whistle on crimes in the workplace.
When we think about the labor rights movement in the United States, we often envision the excitement of picket lines and union meetings, but tax policy is an equally important – albeit less exciting – part of the fight for protecting workers.
Whistleblowers keep corporations in check, but doing so comes at a cost, sometimes the cost of a career. Whistleblower rewards are meant to compensate for that cost. They are designed to give whistleblowers a reason to make the sacrifice and to fairly compensate them for their invaluable information. However, the failure of income averaging undermines the effectiveness of rewards programs and therefore interferes with the rewards programs’ ability to appeal to whistleblowers, enhance fraud detection, and deter fraud. It is time to bring back income averaging.