In the nearly 15 years since the passage of the Tax Relief and Health Care Act, the IRS whistleblower program has become a considerable success. Since 2007, the Whistleblower Office has collected over $5.7 billion and made awards in the amount of $931.7 million.
The program was only strengthened with the passage of the Taxpayer First Act in July 2019, which included several crucial reforms including anti-retaliation protections for tax whistleblowers as well as requiring improved communication between the IRS and whistleblowers.
However, while the passage of the Taxpayer First Act will significantly help the administration of the IRS whistleblower program, reforms are still needed.
In July 2020, the National Whistleblower Center wrote to the Senate Finance Committee and House Committee on Ways and Means requesting that committee members support whistleblower protection reforms to further strengthen and improve the IRS Tax Whistleblower Program. NWC strongly urges Congress to pass legislation which addresses these additional necessary clarifications and reforms:
- Clarify judicial standard of review
- Incentivize timely award disbursal
- End sequestration of awards
- Clarify reading of “proceeds based on”
- Clarify Tax Court discovery for whistleblowers and improve protection
- Presume anonymity
- Use whistleblower proceeds to fund Whistleblower Office and reimburse expenses
- Include top tax violations in annual whistleblower report
“Due to the unprecedented amount of public funds provided through tax expenditures to address the COVID-19 crisis, Congress needs to prioritize stopping tax fraud. The best way to do this is to act now to strengthen the IRS Whistleblower Program. Our recommended reforms are essential to encourage more whistleblowers to come forward.” – John Kostyack, NWC Executive Director.
Understanding the Background of the IRS Whistleblower Program Requirements
The whistleblower provisions were originally passed in 1867, and had several key flaws: first, the program did not require whistleblower awards; instead it only said that the government “may pay” whistleblower awards. Second, there was no judicial review for whistleblowers, meaning that an incorrect decision could not be appealed. Third, there was no percentage requirement for awards, such as a floor (minimum) and/or ceiling (maximum) for whistleblowers to receive.
In 2006, the U.S. Congress passed significant and highly important reforms for the program. First, the award became mandatory; if a whistleblower was determined to have given original information that led to a successful conclusion of a case, the whistleblower shall receive an award. Second, the law included meaningful judicial review (although tax courts have interpreted it differently, as noted above). Third, awards must be between 15% and 30% of the aggregate amount of fines or sanctions obtained from the tax violator. Finally, this reform created a defined standard to pay, clearly delineating when whistleblowers should be paid an award: original information leading to a successful action.
In 2019, under the bipartisan leadership of Sens. Chuck Grassley (R-IA) and Ron Wyden (D-OR), Chairman and Ranking Member of the Senate Committee on Finance, Congress passed the Taxpayer First Act, which included important reforms to the Internal Revenue Service (IRS) whistleblower program. While the law is a significant victory for whistleblowers, more reforms are still needed.
Fighting corporate fraud is especially critical in the midst of the combined Covid-19 and climate change crises. Experience shows that fraud proliferates in times of crisis, and it’s critical that corporate whistleblowers have strong protections under law. As an October 2020 poll from the Whistleblower News Network shows, there is broad public support for protecting whistleblowers who expose and help prosecute corporate fraud.
When asked if passing stronger laws that protect employees who report corporate fraud should be a priority for Congress, 82 percent of those surveyed agreed, with 29 percent stating that it should be an immediate priority. This poll should provide Congress with all the encouragement it needs to act on further reforming the IRS whistleblower program.
The National Whistleblower Center is proud to assist in the drafting of these important reforms as well as working to encourage Congress to pass IRS whistleblower legislation. It’s time that we prioritize whistleblower protections and rewards, and make every day a good day for tax whistleblowers and a bad day for big-time tax cheats.
Reform #1: Clarify Judicial Standard of Review
The authors of the IRS legislation intended that tax courts, during any appeals process, be able to conduct a de novo review. As defined by Cornell Legal Information Institute, de novo is defined as,
From Latin, meaning “from the new.” When a court hears a case de novo, it is deciding the issues without reference to any legal conclusion or assumption made by the previous court to hear the case. An appellate court hearing a case de novo may refer to the lower court’s record to determine the facts, but will but rule on the evidence and matters of law without deferring to that court’s findings. A trial court may also hear a case de novo following the appeal of an arbitration decision.
De novo review occurs when a court decides an issue without deference to a previous court’s decision. Trial de novo occurs when a court decides all issues in a case, as if the case was being heard for the first time.
For a recent consideration of the use of de novo review, see McLane Co. v. EEOC.
Meaningful judicial review is only possible with de novo review.
The legislative history appears to clearly indicate that the Congressional sponsors of the legislation, as well as the U.S. Congress which voted in support, were under the impression that the law would in fact require de novo review. This type of review is more comprehensive, and would ensure that whistleblowers are indeed protected through judicial review of their cases.
Yet currently, the tax courts have begun to use a much more difficult standard of review. Tax courts have decided to only review such whistleblower cases under an “arbitrary and capricious” standard. As a result, whistleblowers are much less likely to be successful in their appeals for judicial review and protection.
As a result, it is imperative for the U.S. Congress to pass legislation which will explicitly require a de novo judicial review in order to protect whistleblowers.
Reform #2: Incentivize Timely Award Disbursal
Whistleblowers who know crucial information and could catalyze IRS enforcement abilities will not be incentivized to come forward without awards. These awards must be paid in a timely manner in order to work as an incentive; no whistleblower wants to wait years, even over a decade, after the successful completion of a case, for their award.
The IRS must issue a preliminary recommendation letter for a whistleblower award within a timely period, or pay the whistleblower the interest accumulated. In the tax code, interest runs. Yet the IRS does not do so for whistleblowers. This current system is unfair, and creates a lack of accountability while also undermining the success of the IRS whistleblower program. This timeline requirement should allow for a reasonable amount of leeway for the IRS, but should not leave whistleblowers without any options to collect their awards.
Reform #3: End Sequestration Of Awards
Congress distinctly established a mandatory minimum for whistleblowers awards of 15%. The 2006 amendments to the IRS Whistleblower Program established the 15% floor for awards to whistleblowers who substantially contributed to the action in question. Under current budget rules, IRS whistleblower awards are subject to sequestration sometimes receiving awards below the mandated 15%. By contrast, whistleblower awards under the False Claims Act are not subjected to the same sequestration.
Sequestration undermines Congressional policy to protect whistleblower awards.
Under the recommended reforms, mandatory awards would be exempted from sequestration. Whistleblowers can not lose out on the critical incentives set in place by Congress to encourage whistleblowers to come forward while placing their livelihoods on the line.
Reform #4: Clarify Reading Of “Proceeds Based On”
Award provisions for whistleblowers need to be clarified to prevent narrow interpretations of award language used to deny rewards to whistleblowers. The IRS is attempting to deny some whistleblower their awards through an improperly narrow reading of “proceeds based on” from the IRS whistleblower statute – i.e. when the IRS uses a whistleblower’s information in an examination and the IRS “proceeds based on the information provided…”
Congress must clarify this language to ensure whistleblowers are properly awarded for providing valuable information regarding tax fraud, waste, and misconduct to the IRS. Whistleblowers who potentially risk their jobs and reputations for coming forward cannot be dismissed based on deliberately limiting interpretations of this whistleblower statute. This term should be clarified in order to guarantee whistleblowers receive deserved awards for their disclosures.
Reform #5: Clarify Tax Court Discovery For Whistleblowers and Improve Protection
Congress should clarify the right to discovery for whistleblowers in Tax Court proceedings. When whistleblowers go to Tax Court, the IRS commonly denies efforts to engage in basic discovery. This denial has led to unnecessary litigation and delays. Clarification of discovery coupled with third-party taxpayer information protections must be implemented to ensure whistleblowers have a meaningful right to judicial review.
Directly, under 6103(h)(4)(B) it should be provided that return information related to the resolution of an issue shall be disclosed by the IRS – striking “directly” before “related.” Presently, the Chief Counsel is seeking to block discovery by an improperly narrow reading of the statute.
Reform #6: Presume Anonymity
Anonymity is a critical safeguard for whistleblowers who come forward with evidence of misconduct or wrongdoing. Presuming anonymity in tax whistleblower cases is important not only for whistleblowers, but also taxpayers who can often be identified because the whistleblower is connected to the taxpayer.
The first and only time that a whistleblower can effectively review the IRS determination when an award is denied is in Tax Court. Now, the IRS is challenging whistleblowers’ right to proceed anonymously – causing significant time delays and burdening whistleblowers as well as the Tax Court – and discouraging whistleblowers from exercising their rights to judicial review.
Congress must establish a presumption of anonymity before the Tax Court for whistleblowers and protect their right to confidentiality.
Reform #7: Use Whistleblower Proceeds to Fund Whistleblower Office and Reimburse Expenses
Under federal False Claims Act, agencies are reimbursed for examination costs initiated by whistleblower disclosures. While the IRS does receive costs under the private debt collection program, a similar reimbursement provision would help change the IRS culture in favor of working with whistleblowers. Collected funds could be then used to help maintain the Whistleblower Office and for additional costs related to investigations and collections.
The recommend reform would be up to 25% of the collected proceeds from whistleblowers shall be used to fund the Office and reimburse IRS examination and collection expenses. This reform is in line with the private debt collection program, which provides that up to 25% of the amounts collected in the program shall support IRS collection efforts.
Reform #8: Include Top Tax Violations in Annual Whistleblower Reports
Finally, the IRS Whistleblower Office should be required to provide an annual report to Congress regarding the top ten violations of the tax code disclosed by whistleblowers. This reform measure would assist and inform Congress of cutting-edge tax noncompliance and abusive tax shelters among other tax avoidance schemes, thus providing lawmakers with real time information on tax scams and abuses.
Presenting lawmakers with the direct examples of how whistleblowers benefit and protect taxpayers can affirm the critical need for whistleblowers in detecting and combatting tax misconduct.