IRS Whistleblower Program Must Drop Fees, Add Interest to Thrive

Since 2006, the IRS Whistleblower Program has allowed the US to recover over $6.6 billion from wealthy tax cheats and corporations non-compliant with tax law, in turn paying $1.1 billion to more than 2,500 whistleblowers. But the program has been plagued by a steep drop in collections and growing delays for whistleblower award claims—up to nearly 11 years.

That’s where the IRS Whistleblower Program Improvement Act of 2023, introduced earlier this year, comes in. The bill’s technical reforms offered by the bill are four key provisions that will help make the program stronger.

Imposition of interest on delayed awards. To help reduce the massive delays in whistleblower award claims, the bill imposes interest on whistleblower awards that are delayed for more than a year. This serves the dual purpose of motivating the IRS to promptly issue awards and compensating the whistleblowers for any delays.

Removal of budget sequestration for whistleblower awards. The IRS has the only whistleblower award program that reduces award payments through budget sequestration. The bill would end this practice, which unfairly diminishes the size of awards issued to whistleblowers.

Ending of double taxation of attorney fees. Likewise, the section of the program designed to compensate whistleblowers who report evasion in smaller cases requires double taxation of whistleblowers’ attorney fees. Congress has recognized that double taxing attorney fees unnecessarily penalizes whistleblowers and has amended other whistleblower award laws, including the Dodd-Frank and False Claims Acts, to remove this practice. The bill would align the IRS program with those others.

Institution of de novo review in award case appeals. The legislation would implement a de novo standard of review in cases where whistleblowers appeal award decisions before the US Tax Court. This allows whistleblowers to challenge award denials on a factual basis, a key element in ensuring that the IRS is held accountable in awarding qualified whistleblowers.

Although these reforms are technical and non-controversial, they’re essential to the proper functioning of the IRS Whistleblower Program.

The practices of budget sequestration and double taxation contribute to a sense among whistleblowers and their attorneys that the program treats whistleblowers unfairly. Tax whistleblowers take immense financial risks in coming forward, and given the massive wait time they face before receiving an award, decreased payouts discourage them from coming forward.

The detrimental effect of delaying whistleblower awards was outlined in 2006 by the Treasury Inspector General for Tax Administration. In a report on the IRS’s use of whistleblower awards (prior to program’s modernization later that year), TIGTA raised concerns that the average 7 1/2 year processing time for awards was undermining awards’ effectiveness as an incentive.

“If the claims are not timely processed, the rewards may lose some of their motivating value,” TIGTA stated. It further noted that cutting processing time “would make the Program more attractive to future informants wishing to report violations of tax laws.”

This helped convince Congress to pass the Tax Relief and Health Care Act of 2006 that overhauled and modernized the IRS Whistleblower Program. The current 11-year delay should likewise spur immediate legislative action.

Additionally, imposing a modest interest on whistleblower awards delayed for over a year is a straightforward way to encourage the IRS to process claims in a timely manner and compensate whistleblowers for hardships caused by delays.

While funding and staffing issues are at the root of the delays, incentivizing the IRS to process claims efficiently is a necessary step to reverse the ballooning of processing times. Other potential solutions, such as statutory deadlines, would burden whistleblowers to fight for a timely award in court.

Along with the other reforms, instituting a de novo standard of review in award case appeals would help restore trust in the IRS program among would-be-whistleblowers. Individuals who don’t think they have a fair chance to appeal award determinations on a factual basis will hesitate to risk their careers to blow the whistle.

The program’s monetary awards are key to its success, so it’s essential to restore the trust of whistleblowers and their attorneys so that the program will fairly and efficiently award those whocome forward with disclosures.

A close look at the IRS Whistleblower Office’s recent annual reports to Congress shows a desperate need for reform. In fiscal 2022, the program collected $172 million from non-compliant taxpayers and issued 132 whistleblower awards totaling $37.8 million. In 2016, by comparison, the agency paid out 418 whistleblower awards. In 2018, the program collected $1.44 billion, and the amount awarded to whistleblowers totaled more than $312 million.

While the IRS Whistleblower Program has struggled, other comparable programs have seen record years. For example, in Fiscal Year 2021, the SEC Whistleblower Program awarded a $564 million to whistleblowers, and whistleblower-initiated False Claims Act cases allowed the government to recover more than $1.6 billion from fraudsters.

As the US tax gap continues to balloon, the need for effective tax enforcement becomes more profound. For the IRS Whistleblower Program to play a central role, Congress needs to institute the essential reforms found in the IRS Whistleblower Improvement Act. The program has demonstrated its worth, and it badly needs these fixes to function effectively.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Stephen M. Kohn is a founding partner of the whistleblower law firm Kohn, Kohn & Colapinto in Washington, D.C., and the chairman of the board of directors of the National Whistleblower Center.

Geoff Schweller contributed to this article.

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