Combating Tax Fraud

Despite its success, there are still reforms needed for the IRS Whistleblower Program

The Current Status of the IRS Whistleblower Program

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..

The National Whistleblower Center strongly urges Congress to pass legislation which addresses these additional necessary clarifications and reforms:

  1. Clarify judicial standard of review
  2. Incentivize timely award disbursal

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. Meaningful judicial review is urgently needed.

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.

Understanding the Background of the IRS Whistleblower Program Requirements

The whistleblower provisions were originally passed in 1867. 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. Learn more about the program here.

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. Read more about the law here. While the law is a significant victory for whistleblowers, more reforms are still needed.

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.

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