Shouldn’t the IRS Pay Tax Whistleblowers Who Help Prevent Fraudulent Refunds?

When IRS whistleblowers save U.S taxpayers money, they deserve the rewards that lawmakers such as Sen. Chuck Grassley fought to establish. In 2006 his efforts resulted in the first meaningful IRS Whistleblower program ever, which is attracting many tax whistleblowers with significant evidence.

We have discussed previously the many positive aspects of the long-awaited IRS Whistleblower procedures published in June–and one illogical, self-defeating feature. Some in the IRS–and apparently not the IRS Whistleblower Office–thought whistleblowers should not be rewarded when they report tax violations that prevent a tax refund, or reduce a credit balance. (See, e.g., IRM 25.2.2.1(7)). The Washington Post’s David Hilzenrath has reported on this anomaly.

Sen. Grassley acted swiftly to protect the IRS Whistleblower program. In a June 21, 2010 letter to Treasury Secretary Tim Geitner, Grassley forcefully urged that a more sensible rule replace this new IRM oddity:

In addition to the IRS posting the new IRM provisions without public comment, there are many substantive concerns within the IRM. For example, the new definition of”collected proceeds” is particularly troubling because it seems to limit the payment of awards to whistleblowers only in those instances where the IRS receives cash payment from a taxpayer. An IRS spokesperson, in response to an inquiry from the media, stated that the IRS is bound by the written statute. Yet, this was never raised with me or my staff. The denial of a whistleblower award where the whistleblower’s information leads to the denial of a claim for refund seems to create a perverse incentive for the whistleblower to wait until the IRS has paid an improper refund. In addition, the IRM says that satisfaction of a taxpayer’s liabilities by reducing a credit balance is not within the scope of collected proceeds so the whistleblower would receive no award.

The IRS position is even inconsistent with its prior rule on paying rewards.

The IRS should listen to Sen. Grassley and modify this nonsensical rule. Billions in taxpayer funds can be saved by whistleblowers who help prevent bogus refunds, or reduce a tax cheat’s credit balance. Grassley has more knowledge of what makes an effective whistleblower program to protect taxpayer funds than perhaps anyone in government.

We (and our whistleblower clients) look forward to reason prevailing at the IRS, and a change in this interpretation of “collected proceeds.”