The Internal Revenue Service (IRS) Whistleblower Program revolutionized tax fraud enforcement. Since the program was established in 2006, whistleblowers have contributed to the successful collection of $6.39 billion from non-compliant taxpayers. Correspondingly, the IRS has granted over $1 billion in whistleblower awards to brave individuals who have come forward with information about tax fraud.

Despite the program’s success, the need for reforms has been evident for years. In June of 2021, Senator Chuck Grassley (R-IA), who crafted the 2006 legislation establishing the IRS Whistleblower Program, introduced the bipartisan IRS Whistleblower Program Improvement Act of 2021 alongside Senator Ron Wyden (D-OR). The bill makes several reforms to the IRS Whistleblower Program in order to improve the program’s operations and better protect whistleblowers who expose tax fraud.

At the time of the bill’s introduction, Grassley noted that while “the IRS whistleblower program has been a genuine success for American taxpayers,” it needs strengthening. “We ought to do whatever we can to ensure its continued success, so tax dodgers and fraudsters pay what they owe,” he stated.

While Grassley and whistleblower advocates knew that the IRS Whistleblower Program needed reform, the IRS Whistleblower Office’s Annual Report to Congress for the 2021 Fiscal Year underscores the urgent need for the reforms offered by the IRS Whistleblower Program Improvement Act.

The statistics offered by the report show a program in crisis. The amount of recoveries made by the program and awards granted by the IRS are in sharp decline, while the amount of time a whistleblower claim takes to process continues to rise. These figures are particularly shocking given that the whistleblower programs at the SEC and CFTC both had record years in the 2021 fiscal year.

The response to the report has been a loud and clear rebuke by the whistleblowing community. Tax whistleblower attorney Dean Zerbe, who worked with Grassley on the 2006 law, stated that “there is no way to make these outrageous numbers look good. It is extremely dispiriting to see these results.” The report “should be a massive wake-up call to the Congress that it needs to take action now and pass the bipartisan and bicameral reform legislation – the IRS Whistleblower Program Improvement Act,” said whistleblower attorney Stephen M. Kohn. Kohn, a founding partner of Kohn, Kohn & Colapinto, represented UBS whistleblower Bradley Birkenfeld alongside Zerbe. Birkenfeld received the largest IRS whistleblower award, $104 million.

Grassley himself has spoken out about the report. In a letter to the Director of the IRS Whistleblower Office, he expressed his “concerns regarding trends in whistleblower payouts and the time it takes for whistleblowers to receive those payouts,” and noted that he “introduced the IRS Whistleblower Program Improvement Act in order to strengthen the whistleblower program.”

The IRS Whistleblower Office report highlights the urgent need for the IRS Whistleblower Program Improvement Act. The bill promises to restore efficacy to the whistleblower program through reforms, including dedicating funding for the whistleblowing office, imposing interest on delayed whistleblower awards, and reinstituting de novo review for tax whistleblower award cases.

The Troubling Statistics

The IRS Whistleblower Office report details the program’s 2021 Fiscal Year, which ran from October 1, 2020, through September 31, 2021. For the 2021 Fiscal Year, the IRS Whistleblower Program collected $245 million due to whistleblower tips and paid out $36 million in whistleblower awards.

These figures are the lowest since the 2017 Fiscal Year and are dramatically lower than in recent years. The $36 million awarded to whistleblowers is only about half of the program’s yearly average and is substantially lower than the $312 million awarded to whistleblowers in the Fiscal Year 2018.

Similarly, the $245 million in collections is a dramatic drop from the $1.44 billion collected just three years ago. In his letter to the IRS Whistleblower Office, Senator Grassley notes that “[t]hese downward trends started before the pandemic and are contrary to the number of open claims, which at more than 27,000 are higher than they’ve been since FY 2018.”

While the proceeds collected and awards granted by the program continue to decline, the delay in processing whistleblower award claims continues to climb. According to the report, over the 2021 Fiscal Year, the average processing time for IRC § 7623(b) award payments increased by 2.9%, and the average processing time for IRC § 7623(a) award payments increased by 10.4%. The continued increase in delays is particularly troubling because, over the years, whistleblowers have died before being granted their IRS awards.

Reforms to Tackle Delays

A number of the provisions included in the IRS Whistleblower Program Improvement Act are designed to tackle the massive delays plaguing the whistleblower program. One provision dedicates funding to the Whistleblower Office to ensure that it has the proper staffing and resources to handle all the whistleblower tips it receives promptly. The provision provides that up to $10 million of the tax dollars collected thanks to the whistleblower program are dedicated to administering the whistleblower office.

Another provision in the IRS Whistleblower Program Improvement Act imposes interest on whistleblower awards subject to significant delay. Currently, unlike taxpayers, whistleblowers do not get any interest when the IRS is holding money that it owes as an award to the whistleblower. This provision would help mitigate the harms that the massive delays have on whistleblowers.

Reinstating De novo Review

Another reform in the IRS Whistleblower Program Improvement Act is reinstituting de novo review in tax whistleblower award cases. De novo review is a central element of successful whistleblower award programs. Whistleblowers will not continue to come forward if they do not believe they will be given a fair and impartial review of whether they are entitled to an award.

While Congress originally intended for the IRS whistleblower award cases to have de novo review, a 2018 U.S. Tax Court decision in Kasper v. Commissioner instead applies an “arbitrary and capricious” standard of review. This means that instead of basing a review on all the facts of the case, the Tax Court narrowly reviews whether or not the IRS Whistleblower Office’s award decision was arbitrary, capricious, or otherwise an abuse of discretion.

Support for the Reforms

The IRS Whistleblower Program Improvement Act is widely supported by whistleblower advocates who sent a letter to Senators Grassley and Wyden in support of the legislation, which they say “makes several important and much-needed changes and reforms to the IRS Whistleblower Program.”

The reforms offered by the IRS Whistleblower Program Improvement Act were already necessary. The picture of the IRS Whistleblower Program painted by the most recent annual report only heightens the urgent need for the bill’s passage.