Sunday Read: Strengthening the IRS Whistleblower Program
Monday, April 15 is known as “Tax Day” in the United States. The day is dreaded by some, as it marks the federal individual tax filing and payment deadline. Everyone at National Whistleblower Center (NWC) files their returns in a timely fashion, so we will not use this space to lament the process.
On this Tax Day we revisit the effectiveness of the IRS Whistleblower Program, and critical legislation that recently passed the House which can help reform the law.
In this Sunday Read, NWC explores developments regarding the aforementioned tax program and how taxpayers and society-at-large will benefit from its improvements.
What is the IRS Whistleblower Program?
Rampant tax fraud and evasion has cost untold billions in the United States. A principal reason for enacting the IRS Whistleblower Law’s mandatory framework in 2006 (as part of the Tax Relief and Health Care Act of 2006) is that Congress recognized detecting tax evasion and tax fraud is very difficult for the government due to their complexity and the lack of resources to audit or investigate all returns.
The IRS Whistleblower Program incentivizes whistleblowers for reporting violations of tax laws or the underpayment of taxes. According to published reports, IRS whistleblowers have enabled the U.S. to recover more than $6.6 billion from wealthy tax cheats and corporations non-compliant with tax law. Prior to 2006, the maximum award percentage was 15% of collected taxes and penalties.
“The tax whistleblower program has been extremely effective where it has been employed appropriately,” said NWC Chairman of the Board and partner in the whistleblower law firm Kohn, Kohn & Colapinto, during an NWC panel in 2021. Kohn noted that the 15% maximum has since become the minimum, which has helped boost awareness of the program.
“[The IRS Whistleblower framework] can work, and it can work very well,” Kohn said. “But like all these reward programs, they can be tricky, they can be technical, and it’s important to work through it properly.”
Recent Challenges and Modest Positive Signs
Over the past five years, however, the IRS Whistleblower Program has experienced a dip in its rewards. The annual money recovered by the program fell from $1.44 billion in Fiscal Year 2018 to just $172 million in Fiscal Year 2022 and the agency’s payouts to whistleblowers dropped from $312 million to $37 million over those same years.
One possible deterrent is the whistleblower’s wait time to collect. Despite an above-average 15% mandatory minimum reward of funds collected, it takes an average of more than 10 years for the IRS to process a claim, as reported by Whistleblower Network News.
Clearly, reforms are needed to sustain this critical program, which IRS leadership has also acknowledged. But not all the news is bad.
As previously reported, in 2023, the IRS released its tentative plan for spending the approximately $80 billion Congress allocated the agency, which contains encouraging signs for tax whistleblowers.
Specifically, the IRS has already reported improvements in key areas such as percentage of customer calls answered and wait time averages. The agency’s digital modernization and enforcement objectives will be still in progress, clear IRS leadership backs enforcement efforts, and tax whistleblowers specifically.
In February 2023, Commissioner Danny Werfel noted that targeting wealthy tax cheats, and the IRS Whistleblower Office, are urgent areas.
“It is critical that the IRS’s Whistleblower Program be treated with the highest priority,” he said.
The Need For IRS Whistleblower Program Improvements
The Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) aims to support job creators, small businesses and working families while saving taxpayers a projected $70 billion.
The bipartisan tax bill passed the House on Jan. 31, 2024. The Senate has not yet taken up the bill for a vote, and the NWC hopes it will contain a key feature that would affect the whistleblower landscape before its final passage. On March 4, NWC sent a letter to Sen. Mike Crapo (R-ID), the U.S. Senate Finance Committee’s Ranking Member, urging him to include the IRS Whistleblower Program Improvement Act (S. 625) in the bill.
“Despite returning billions of dollars to the pockets of American taxpayers, IRS whistleblowers continue to face unnecessary hurdles that would be addressed by the bill,” NWC Executive Director Siri Nelson noted in March. “An IRS report revealed that the average time to process a whistleblower case is over 11 years. These debilitating delays undermine the efficacy of the IRS program.”
The IRS Whistleblower Program Improvement Act provides common sense reforms to revitalize the Program and ensure plays a pivotal role in cracking down on tax cheats and closing the tax gap. Sens. Chuck Grassley (R-IA), Ron Wyden (D-OR), Roger Wicker (R-MS) and Ben Cardin (D-MD) introduced S.625 in 2023.
The six reforms include:
- Provide for De Novo review in appeals heard by the U.S. Tax Court, allowing for new evidence to be admitted to the record;
- Establish a presumption of anonymity for whistleblowers before the court;
- Exempt whistleblower awards from budget sequestration;
- Provide that interest be paid to awardees if the whistleblower award has not been paid within one year of the IRS collecting all proceeds;
- Bring the tax treatment of attorney’s fees into line with other whistleblower programs; and
- Improve the program’s annual report to Congress to help tax writers identify areas in most need of attention.
“I understand that H.R. 7024 may be the last opportunity to get S. 625 attached to a tax bill this year, and given the importance of improving the IRS Whistleblower Program, I ask that you prioritize having it included,” Nelson added in the letter to Sen. Crapo. “This bill is too important to remain on the sidelines, and it is already long overdue.”
Read NWC’s letter to Sen. Crapo here.
An Additional Message for IRS Whistleblowers: ‘Think Broadly’
During the aforementioned panel on tax whistleblowing in 2021, Kohn noted that the IRS program has been instrumental in creating systemic change. More directly, he addressed the audience on the full potential of rewards. Those who report to the IRS whistleblower program, he noted, are not limited to the one agency’s incentives.
“The IRS Whistleblower law is not in a vacuum,” Kohn said. “You can use the tax law in conjunction with the other related whistleblower laws. In a Foreign Corrupt Practices Act case, there is often taxed liability. But you can get [rewards] for bribery, securities violations under the SEC program, and the tax violation under the IRS program.”
Prospective tax whistleblowers and those who may not be fully informed, should not undervalue their claim.
“Think of the tax whistleblower law not just for tax and tax under your payments and money-laundering and things that are directly covered under the IRS program,” Kohn noted. “Think of it in a [broader] way.”
Resources For Whistleblowers
The decision to come forward is not one to be taken lightly, nor should selecting a whistleblower lawyer. NWC provides resources that can connect you with the right legal professional.
Support NWC
NWC fights to bolster whistleblower programs, inform the public and employees in all sectors about available laws and protections, and help connect them with the right legal representation. As a 501(c)(3) non-profit our awareness building work is made possible with the support of our generous donors. Please consider donating $100 today to help us continue to educate the public on how to find help when it is time for them to blow the whistle, and donors will receive a copy of Rules for Whistleblowers: A Handbook for Doing What’s Right, written by Stephen M. Kohn.
This story was written by Justin Smulison, a professional writer, podcaster, and event host based in New York.
