Can the IRS Tap the Full Potential of Its Whistleblower Program?
The IRS whistleblower program could be the nation’s top weapon for fighting tax evasion. Tax fraud is hard to identify and difficult to stop, but knowledgeable whistleblowers can help turn the tides by providing insight and information not otherwise available to the government. When whistleblower information leads to collection of taxes or penalties, the IRS program provides for rewards of 15-30% of those collected proceeds to the whistleblower, which is a powerful incentive for coming forward.
We can see the positive impact of the program in the most recent report from the IRS Whistleblower Office. Since 2007, the IRS has recovered $6.14 billion based on information from whistleblowers, and it has paid $1.01 billion in whistleblowers rewards. That is both a big recovery for the public fisc and a great return on the investment in whistleblowers.
But there is much, much more to do. That $6 billion comes out to under $500 million recovered per year on average. In comparison, those who dodge taxes are responsible for a tax gap generally estimated at around $400 billion per year. Seen in this light, the Whistleblower Program barely moves the needle. And yet almost every single one of those tax dodgers has at least one person who, properly incentivized and protected, might be willing to expose their fraudulent behavior.
So what can be improved about the program to motivate them to come forward?
Boosting IRS funding is critical. It would allow the IRS to leverage additional resources into enforcing tax laws. IRS routinely declines to pursue tips based on a lack of resources, when a public-private partnership with whistleblowers and their counsel could fill that gap. Additionally, removing the bar to actions under the False Claims Act related to tax fraud would make the Government’s most powerful anti-fraud tool available in the tax arena, with enormously positive consequences. Although a growing list of jurisdictions like New York, Illinois, and D.C., have lifted the bar, to hundreds of millions in recoveries, such proposals have generally gone nowhere at the federal level.
Other key legislative changes are more within reach and supported by whistleblower champion Senator Charles Grassley (R-IA). Meaningful, anonymous review in the Tax Court of the IRS’s award determinations would help provide clarity about standards and ensure that those deserving of awards are treated properly. It is also important to underscore the message to the agency that whistleblowers are here to help, something the Department of Justice does effectively in the context of the False Claims Act.
Even without legislative action, the IRS could take steps to improve its program. With the Office experiencing a change in leadership, it is the perfect time to implement some positive steps.
Meaningful, anonymous review in the Tax Court of the IRS’s award determinations would help provide clarity about standards and ensure that those deserving of awards are treated properly.
First off, it should be more transparent. While it must attend to taxpayer privacy laws, there are specific carveouts in those laws that permit—and in some instances require—the IRS to communicate with whistleblowers about the status of their tips. The agency so far has chosen to read those narrowly, when more communication would improve relations, encourage more meritorious tips, and reduce unnecessary litigation over awards.
Second, building off this, the IRS should take advantage of its ability to leverage whistleblowers’ knowledge and expertise when it is carrying out audits and investigations. The IRS has understandably been reluctant as an institution to open its audit function up to outsiders, but the massive success of the federal False Claims Act and the SEC program, which both work more closely with whistleblowers, show the enormous benefits that could be gained.
Finally, the Whistleblower Office should do everything in its power to accelerate the tip and award processes. Recent legislative and administrative changes, along with hiring, have improved the timeline somewhat, but even optimistic estimates from the IRS suggest the timeline from tip to award will be five to seven years. Annual reports put the current average at ten. While certain realities will limit this, any streamlining will reap big rewards for the program.
Right now, the IRS whistleblower program has had some huge successes despite its growing pains. With the right changes, it could become a model for others
