Senators Call for IRS Whistleblower Reforms to Help Catch Major Tax Fraud

by Jocelyn McNamara and Rrita Osmani

Overview

In 2006, the Internal Revenue Service (“IRS”) established their Whistleblower Program. The program aims to diminish tax fraud by empowering individuals to come forward and report this potential fraud within their organizations. The program is structured to protect these individuals, or tax fraud whistleblowers, from retaliation, and provide compensational rewards for their contributions if their whistleblowing does lead to the discovery of tax fraud. Since its inception, the program has led to over $7 billion in recovery.

This program however, has experienced bureaucratic issues in recent years that temper its effectiveness. Payouts to whistleblowers have gotten smaller, and experience frequent and significant delays. There is also a 30,000 case backlog. These issues threaten to disincentivize potential whistleblowers from coming forward, and stunt the benefits this program can provide. If less whistleblowers come forward, this also lessens the preventative impact this program can have, as organizations may lose fear of whistleblower actions and become emboldened.

Potential Reforms

In an effort to revitalize the program, democratic and republican senators alike are encouraging the Senate to include several reforms in the One Beautiful Bill Act currently slated for review. The reforms include the following:

Imposition of interest on delayed awards
After a year, a small interest fee will take effect on the awards owed by the IRS to incentivize a quicker turnaround on payouts.

Institution of de novo review in award case appeals
Whistleblowers will be able to challenge award denials in Tax Court and conduct discovery into the circumstances of their denial.

Removal of budget sequestration for whistleblower awards
Currently, awards are reduced based on budget sequestration rules, at times below the 15% of funds collected by the IRS in the action that is statutorily required to be awarded. The proposed reforms will prohibit this reduction.

Establishing the presumption of anonymity for whistleblowers
Establishing a presumption of anonymity for whistleblowers will further protect these individuals from potential retaliation.

Who Is Eligible to File as an IRS Whistleblower?

Any individual, other than anyone covered by the criteria listed below, is eligible to file a claim for award and to receive an award:

• An individual who is an employee of the Department of Treasury or was an employee of the Department of Treasury when the individual obtained the information on which the claim is based;
• An individual who obtained the information through the individual’s official duties as an employee of the federal government, or who is acting within the scope of those official duties as an employee of the federal government;
• An individual who is or was required by federal law or regulation to disclose the information or who is or was precluded by federal law or regulation from disclosing the information;
• An individual who obtained or had access to the information based on a contract with the federal government; or
• An individual who filed a claim for award based on information obtained from an ineligible whistleblower for the purpose of avoiding the rejection of the claim that would have resulted if the claim was filed by the ineligible whistleblower.

What Must an IRS Tax Whistleblower Application Contain?

A prospective whistleblower must use IRS Form 211 and include:

• A description of the alleged tax noncompliance.
• Information to support the narrative, such as copies of books and records, ledger sheets, receipts, bank records, contracts, emails, and the location of assets.
• A description of documents or supporting evidence not in the whistleblower’s possession or control, and their location.
• An explanation of how and when the whistleblower became aware of the information that forms the basis of the claim.
• A complete description of the whistleblower’s present or former relationship (if any) to the subject of the claim.
• The whistleblower’s original signature on the declaration under penalty of perjury (a representative cannot sign Form 211 for the whistleblower) and the date of signature.

Protections for Whistleblowers

The Taxpayer First Act (“TFA”) of 2019 was enacted to establish protections from retaliation for employees who report underpayment of taxes or other potential Federal tax law violations. Retaliation includes, but is not limited to:

• Firing or laying off
• Blacklisting
• Demoting
• Denying overtime or promotion
• Disciplining
• Denying benefits
• Failing to hire or rehire
• Intimidation
• Reassignment affecting promotion prospects
• Reducing pay or hours
• Making threats