Author: Emily Stabile, Phillips & Cohen LLP
The IRS whistleblower program would get much-needed improvements under a bill introduced by Senators Chuck Grassley (R-Iowa) and Senate Finance Committee Chairman Ron Wyden (D-Ore.).
The IRS Whistleblower Program Improvement Act of 2021, introduced June 15, proposes changes designed to make the program fairer to whistleblowers and lead to increased success in recovering funds lost to tax fraud.
If passed, the IRS Whistleblower Program Improvement Act of 2021 would:
- Require the IRS to make an award determination within one year of its collection of proceeds. If the IRS fails to do so within one year, interest on the whistleblower’s award would accrue.
- Exempt whistleblower awards from reductions due to budgetary sequestration. The Budget Control Act of 2011 and the American Tax Relief Act of 2012 subject IRS whistleblower award payments to sequestration, a rate that is adjusted annually. A 5.7% reduction applies to IRS whistleblower awards after Oct. 1, 2020.
- Establish a rebuttable presumption of anonymity for whistleblowers in US Tax Court. This would create a presumption in Tax Court that revealing a whistleblower’s identity would lead to retaliation, social stigma, economic hardship and other harm, unless the IRS demonstrates specific reasons otherwise. This would offer whistleblowers greater protection from public disclosure of their identities. Many individuals are reluctant to report because of the potential retaliation they might suffer if they are identified as a whistleblower.
- Establish a de novo standard of review for whistleblowers’ appeals of award determinations in Tax Court. Currently, the Tax Court must defer to the IRS’s determination of the award amount, unless the court finds the IRS’s determination arbitrary and capricious. A de novo standard of review would allow the Tax Court to evaluate the whistleblower’s evidence without deference to the IRS’s determination.
- Allow the IRS to use 3% of the proceeds collected to administer the whistleblower program. A portion of that money would go toward investigating whistleblower allegations.
- Bring the tax treatment of attorneys’ fees on discretionary awards in line with the tax treatment of attorneys’ fees on mandatory awards by allowing them to be deducted from taxable income.
- Require that the IRS’s annual report to Congress on the whistleblower program include identification of up to ten of the top tax avoidance schemes reported by whistleblowers that year.
These changes would be significant, especially because they offer whistleblowers greater incentives to undertake the risks that come with providing information to the IRS. For example, timely award payments and additional protection of whistleblowers’ identities would encourage more people to step forward to provide the IRS with information it needs to pursue hidden tax fraud.
Congress enacted a tax whistleblower program in 2006 that gives whistleblowers a way to report information about significant tax fraud to the IRS and receive an award if the tax fraud exceeds $2 million. Grassley was the chief sponsor of that legislation.
If the IRS uses the whistleblower’s information and successfully collects proceeds from an administrative or judicial action, the whistleblower stands to receive an award of 15% to 30% percent of the proceeds.
Since 2007, the IRS has recovered over $6 billion through the IRS whistleblower program. IRS whistleblowers have received over $1 billion in award payments.
But those numbers are somewhat misleading as a gauge for the program’s success. For the past five years, the IRS has made the vast majority of whistleblower awards in small cases with collected proceeds of less than $2 million. Meanwhile, the large tax fraud cases that the 2006 whistleblower program was designed to attract get short shrift.
In addition, the IRS has been rightfully criticized for its slow pace in paying awards and failure to fully utilize whistleblowers’ expertise and insider insights in enforcement efforts.
Two years ago, Grassley and Wyden succeeded in getting Congress to make important improvements to the 2006 whistleblower program as part of the Taxpayer First Act of 2019. That statute mandated better communication by the IRS with whistleblowers and provided whistleblowers protection from employment retaliation for reporting tax fraud to the IRS.
Passing the IRS Whistleblower Program Improvement Act of 2021 would further strengthen the program. Whistleblowers who bring forward high-quality insider information on tax fraud play an important role in helping to close the tax gap, which is estimated to be as much as $1 trillion per year. Both the taxpaying public and the whistleblowers who undertake personal risk to report fraud deserve a fair and efficient whistleblower program.
If you are aware of tax fraud and are considering filing an IRS whistleblower claim, contact Phillips & Cohen for a free, confidential review of your potential case.
Emily Stable, an associate at Phillips & Cohen, represents IRS whistleblowers and other whistleblowers under government whistleblower reward programs. She is a co-author of Tax Whistleblower Laws and Programs, which is part of Bloomberg’s Tax Management Portfolios. She also has co-written articles on whistleblower laws and cases for Bloomberg Law, the Journal of Insurance Fraud in America and newspapers.