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IRS Releases annual whistleblower report; new director brings opportunity for growth

The IRS Whistleblower program is an important tool to detect fraud and abuse of the tax system. Since its inception in 2007, the IRS Whistleblower Office has paid out more than 2,500 awards to whistleblowers totaling over $1.05 billion and recovered $6.39 billion from non-compliant taxpayers. However, as the office commemorates its 15th year, its FY 2021 annual report to Congress reflects noticeable declines in the amount and pace of awards and proceeds collected that appear to be part of an alarming trend for the program.

The annual report, released earlier this month from the IRS Whistleblower Office, shows that the IRS collected more than $245 million based on tips from whistleblowers, and paid out over $36 million in awards to 179 whistleblowers for FY 2021. This is down significantly from FY 2020 when the office collected about $472 million based on information from whistleblower tips, and paid out over $86 million in whistleblower awards.

Declines in Awards and Collections

The declines reported in FY 2021 aren’t just confined to the past fiscal year. For example, in FY 2018, whistleblower awards reached more than $312 million but have declined over the years to about $120 million for FY 2019, $87 million for FY 2020, and then only $36 million for FY 2021.

This decline is also reflected in the total dollars recovered by the IRS from fraudulent taxpayers. In FY 2018, the IRS collected $1.4 billion, which declined to $600 million in FY 2019, under $500 million in FY 2020, and finally, declined to $245 million in FY 2021, despite having more than 27,000 open claims.

Lengthy Processing Times for Claims

Another troubling trend that has continued in FY 2021 is the length of time the IRS takes to process whistleblower claims and pay out awards.

The IRS report shows that for claims where the amount in dispute is over $2 million, the length of time is now over 11 years on average from complaint receipt to payment. Where whistleblowers choose to appeal the IRS’s award determination in Tax Court, this rises to over twelve years on average.  The average time it takes to process such submissions increased in FY 2021 by 2.9% over the prior year.

The IRS report also shows that it now takes on average over eight years to process claims for awards in cases either filed under an older version of the program or where the amount in dispute is under $2 million, or involving individual taxpayers with gross incomes of less than $200,000.   The average claim processing time for payments increased by 10.4% from the prior year.

Long delays in processing whistleblower claims can deter whistleblowers from coming forward in the first place.

Lawmakers Recognize the Need for Faster Claims Processing, Express Concern About Declining Award Amounts

Senator Chuck Grassley, the author of the law creating the IRS Whistleblower Office, emphasized the importance of timely claims process in his letter to John Hinman, the new Director of the IRS Whistleblower Office of May, 2022. The letter reads, “The IRS Whistleblower program is an important tool that helps the IRS identify and target those attempting to abuse the tax system. …For the program to be successful, it is vital the Whistleblower Office efficiently and timely process claims and awards so whistleblowers can be confident that coming forward is worth the risk they face.”

In his letter, Senator Grassley expressed concern over the declining amount of award money paid out by the IRS, noting that the $36 million paid in awards in FY 2021 “represents the continuation of a trend since FY 2018, when the total dollar amount of whistleblower awards began to steadily decline.” He further noted that the “downward trend is also reflected in total proceeds collected from delinquent taxpayers, which declined from more than $1.4 billion in FY 2018 to around $600 million in FY 2019 to under $500 million in FY 2020.” Senator Grassley pointed out that, importantly, these downward trends began prior to the COVID-19 pandemic, and cannot be attributed to a declining number of open claims, as the number of claims is higher than it has been since 2018. Last year, Senator Grassley introduced legislation—the IRS Whistleblower Program Improvement Act—designed to fix some of these problems faced by the program.

Senator Grassley has requested that Director Hinman meet with him and his staff to work together to improve the IRS Whistleblower Office.

Director Hinman joins the IRS Whistleblower Office after a long career with various leadership roles in the IRS. He most recently served as the Director of Field Operations, Transfer Pricing Practice in the LB&I Division. His appointment offers the IRS Whistleblower Office a new opportunity to live up to its potential in utilizing the valuable tips brought forward by whistleblowers to recover Americans’ tax dollars lost to fraud.

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