New IRS Procedures for Whistleblowers Should Encourage More Significant IRS Whistleblower Claims

This morning’s Washington Post quotes me, among others, in criticizing one aspect of the new procedures for IRS whistleblowers recently published in the Internal Revenue Manual. That one glaring defect aside, the new IRM procedures are welcome news that should encourage more IRS whistleblowers to come forward.

Today’s Post article by David Hilzenrath on the IRS whistleblower procedures makes the following point, among others:

“There’s apparently an institutional resistance to rewarding whistleblowers that will take some time to dissipate,” said Michael A. Sullivan of the law firm Finch McCranie, who represents whistleblowers. “Counterproductive rules such as this one may be a result of that resistance,” he said.

When information from whistleblowers helps the IRS recover unpaid taxes, the informants are entitled to as much as 30 percent of the proceeds. However, the new manual explains that the tipster is out of luck if, instead of yielding a payment to the IRS, the tip stops a refund or reduces a credit.

That rule, which we understood was already the view of some at the IRS, makes no sense. If two whistleblowers each can save the Treasury $100 million or $1 billion, there is no reason why one should be rewarded and the other one not rewarded, simply because one whistleblower’s information thwarts an improper claim for a refund. Instead, each should be rewarded for saving taxpayer funds.

The Tax Court will likely correct this absurd result, but why not set up the procedures sensibly in the first instance?

From my dealings with the IRS Whistleblower Office representatives, they are not the source of this problem. They are sensible and capable professionals who want to see the IRS Whistleblower program work, and it should work to reduce the federal deficit by collecting from tax cheats.

Encouraging whistleblowers to come forward with meaningful information is essential to that effort. Overall, the new IRM procedures should encourage whistleblowers to submit claims, as we tell our clients who increasingly report sophisticated tax schemes that can cost taxpayers billions of dollars.

Among the real “plusses” in the new procedures is a long-needed mechanism for the IRS to share information with the whistleblower and whistleblower’s attorney about the claim. IRS Whistleblower Office Director Steve Whitlock has long spoken of the need to do so, and the Whistleblower Office has delivered with these new procedures.

Other common sense improvements in this IRM revision are its approvals of using information that the whistleblower and the whistleblower’s lawyer can provide in ongoing multiple interviews. This is the approach that has worked so well with qui tam whistleblower cases under the False Claims Act.

Furthermore, the criteria by which the Whistleblower Office will make awards are not spelled out, and in a thoughtful manner that shows careful consideration by the Whistleblower Office staff.

The ‘institutional resistance” is already crumbling, in the face of what makes sense. Tax whistleblowers are now welcome, and will come forward in increasing numbers.

And, unless Senator Grassley someone gets rid of it first, we look forward to challenging and overturning in Tax Court the nonsensical rule criticized above.