IRS Misses Golden Opportunity in Refusing to Modify Tax Whistleblower Rule

February 21, 2012

In a controversial decision today, the IRS squandered an opportunity to help close the tax gap by attracting more whistleblowers with significant information about large tax schemes. The public will suffer as a result.

Stubbornly, the IRS rejected calls for a common sense approach to rewarding tax whistleblowers, as it refused to modify a proposed rule that narrowly defines the categories of cases that should justify awards to whistleblowers.

At issue is what Congress meant by the term "collected proceeds"--an undefined phrase in the 2006 tax whistleblower law. This law unquestionably sought to expand the number and variety of whistleblower claims presented to the IRS.

As my colleague Richard Rubin and I pointed out in comments to the IRS, Senator Grassley modeled changes to this tax whistleblower law on the dramatically successful False Claims Act, the nation's major whistleblower law. That law has returned some $30 billion to the Treasury by rewarding whistleblowers who help unearth fraud against taxpayers, and helps deter future fraud.

Today, Senator Grassley saw that some in the IRS want to undermine his efforts and ignore Congress's plain intent--essentially supplanting Congress's role as lawmaker. The IRS announcement has insisted on a narrow reading of that phrase. It rejected the commonsense notion that any whistleblower who can help provide a "net benefit to the Treasury" should be rewarded.

To illustrate, although the IRS' own past guidance reveals that it formerly paid rewards based on criminal fines, it now has declared criminal fines off-limits from whistleblower rewards. The IRS also has refused to recognize all benefits provided in preventing improper use of net operating losses (NOLs), as well as a variety of other future benefits to the Treasury.

When Congress in 1986 amended the nation's major whistleblower law that helped inspire the new IRS Whistleblower Program, the False Claims Act, it took a few years before the Department of Justice realized just how essential encouraging and rewarding whistleblowers is to enforcement of the law.

We wish a speedy learning curve for the IRS. With a tax gap of more than $350 billion annually in owed but unpaid U.S. taxes, the public needs the IRS to heed Senator Grassley's words--that whistleblowers are to be welcomed--because the public sorely needs them.