End “Repeal by Delay” in the IRS Whistleblower Program

Kohn, Kohn & Colapinto LLP

In 2006 Congress passed a qui tam whistleblower reward law for tax. It covered both tax frauds and underpayments, and also targeted illegal and undeclared offshore accounts secretly held by thousands of U.S. taxpayers. The law promised whistleblowers who turned in major tax frauds compensation modelled on the highly successful False Claim Act. If a whistleblower filed original information that resulted in the collection of taxes he or she would be rewarded based on the amount of the recovery. The bigger the fraud, the bigger the sanction, the bigger the reward. But the biggest winner would always be the honest U.S. taxpayers, who would profit from the sacrifices of the whistleblowers.

The positive results triggered by the new whistleblower law were dramatic and immediate. Swiss bankers turned in their U.S. tax cheats, and billions in fines were collected. But the good times quickly came to an end. The tax whistleblower program was crippled by economic starvation. The IRS Office of the Whistleblower simply does not have the resources to administer its potentially highly effective anti-fraud whistleblower program. It now takes the IRS over ten years to process the average whistleblower case. The IRS Whistleblower Office has reported that numerous whistleblowers have died before their award claims could be paid.

Senators Charles Grassley (R-Iowa) and Ron Wyden (D-Or), the Chair and Vice Chair of the Senate Whistleblower Caucus, introduced the S-2055, legislation designed to fix the intolerable delays and solve other problems that are undermining tax whistleblowers. The IRS Whistleblower Program Improvement Act includes seven provisions necessary to ensure that the tax whistleblower law works. These include:

  • Measures to prevent delays and incentivize the IRS to promptly pay whistleblower rewards;
  • De novo judicial review of the decisions of the IRS denying qualified whistleblowers any reward whatsoever;
  • Establishes a “presumption of anonymity” for whistleblowers filing their whistleblower cases in court;
  • Stops the unprecedented practice of significantly reducing whistleblower rewards below the 15% mandatory minimum reward through the use of “budget sequestration;”
  • If the IRS Office of the Whistleblower fails to pay a qualified whistleblower his or her reward within one year of collecting the sanctions from the fraudster, the IRS must pay interest on the amount owed. This is one of the ways the IRS is forced to address the intolerable delays that are strangling the program.
  • Permits the IRS Office of the Whistleblower to use a small percentage of sanctions obtained in whistleblower cases to cover the costs of administration. This will solve the numerous problems caused by the Department of Treasury’s failure to adequately fund the whistleblower office.

The legislation is strongly endorsed by tax experts and public interest organizations. One organization has issued a “call to action” to gain public support for this extremely important amendment to the IRS tax law. According to one of the most objective and respected Polling companies in the United States, 85% of the American public support stronger laws for whistleblowers. Another 81% of “likely voters” think passing stronger whistleblower laws should be a priority of Congress, with another one in four American voters stating that it voting laws such as the IRS tax amendments should be an “immediate priority.”

Given the massive “tax gap” (estimated at $441 billion in uncollected taxes each year), the need for this legislation is obvious and compelling. The only persons who will benefit if these amendments are not approved are the tax cheats and fraudsters who are currently pocketing hundreds of billions of dollars every year. Given the rising federal debt, and the need for tax income to support the critical infrastructure programs now being endorsed by Congress, making sure the tax whistleblower law is working well should be a high priority for every American, every Member of Congress, the IRS and the Department of Treasury.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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