by Tobias Burns and quotes from Dean Zerbe Former Senior Counsel to the U.S. Senate Finance Committee; Partner at ZMF Law
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An IRS program with a 6-to-1 return on investment is withering from a lack of resources, lawmakers and tax experts told The Hill.
The IRS whistleblower program rewards people for coming forward with information about tax cheats and typically pays rewards between 15 and 30 percent of the money the government collects using the whistleblower’s information.
However, the program has seen a decline in both funding and revenue brought in by its efforts in recent years, according to a report released from the Senate Finance Committee this month.
Experts say that its rejuvenation can help to close the critical tax gap — the amount of money owed to the government each year that is not collected.
The Finance Committee report found that since 2007, the whistleblower program has brought in almost $6.5 billion while paying out just over $1 billion in rewards.
Despite those soaring returns, the number of investigations opened by the IRS as a result of the program has fallen from 43 in 2014 to just six in 2020, according to the report.
Revenues from the program have also been falling, down to $245 million collected from noncompliant taxpayers in 2021 from $1.4 billion in 2018.
“Congress and Treasury should strengthen the IRS Whistleblower Office and better utilize incentives available for whistleblowers to come forward with information to detect offshore tax evasion,” the Finance Committee recommended. “Whistleblowers can serve as effective partners for the federal government to unpack sophisticated tax evasion schemes used by wealthy taxpayers and large corporations.”
Tax advocates say that a high-functioning whistleblower program could be a more efficient way of increasing revenues from wealthier Americans and corporations, which the Biden administration has said is its intended target for increased IRS enforcement.
President Biden this summer signed Democrats’ Inflation Reduction Act, which has allocated a whopping $80 billion to the IRS to be spent over 10 years. Of that $80 billion, $45 billion was carved out for the tax collection agency to increase its enforcement activities.
Democrats and Republicans have been at each other’s throats over the funding boost. Republicans say the money will be used for more audits of the middle class and small businesses, and Democrats insist the money will be used to audit wealthier Americans and corporations.
“The justification that this report makes for hiring a bunch of new auditors is actually, I think, undercut by the other arguments that are made in favor of more whistleblowers,” Pete Sepp, president of the National Taxpayers Union (NTU), a Washington lobbying group, said in an interview. “That recommendation is certainly a good one, because as the report rightfully points out, audits are costly.”
The Finance Committee’s report echoes a bipartisan plan to refurbish the program outlined in the 2021 IRS Whistleblower Improvement Act, which was sponsored by both the former and current chairs of the Senate Finance Committee, Sens. Chuck Grassley (R-Iowa) and Ron Wyden (D-Ore.) respectively.
Their proposal increases protections and incentives for whistleblowers, streamlines the process of coming forward with sensitive information and makes public information about common tax avoidance schemes more accessible.
“The IRS whistleblower program has been a genuine success for American taxpayers,” Grassley said in a 2021 statement introducing the bill. “We ought to do whatever we can to ensure its continued success, so tax dodgers and fraudsters pay what they owe. Toward this end, it’s vital that whistleblowers who come forward are protected and treated fairly.”
Wyden said in a statement on the legislation that IRS whistleblowers are critical in finding people who aren’t paying their fair share of taxes.
“It would be far more difficult to uncover these illegal schemes without their courage, and our bill would strengthen protections for these brave Americans when they come forward,” he said last year.
House Ways and Means Oversight Subcommittee Chairman Bill Pascrell (D-N.J.) gave a similar assessment of the value of tax whistleblowers in a statement to The Hill.
“A working IRS also means help for whistleblowers. Whistleblowers are a brave and essential element in helping government function better for the American people. Any efforts to strengthen protections for brave whistleblowers are good practice that I enthusiastically support,” he said.
In an interview with The Hill, IRS Whistleblower Office Director John Hinman said that his department hopes to have more compliance resources at its disposal in order to help reduce the tax gap, which is the amount of money owed to the government each year that is not collected.
Treasury estimates the tax gap is now around $600 billion a year.
“We’ve been asking for additional resources for many years,” Hinman, who started leading the division earlier this year, said. “I knew from the moment I came into this program that one of the key constraints on our program was the very limited compliance resources. And now to see that the agency will have an opportunity to have more resources to do the critical work that we do and … to do everything we can to improve voluntary compliance and reduce the tax gap, it’s wonderful.”
IRS “operating divisions have had very limited compliance resources for many years, and those compliance resources have many priorities for them because they’re so limited. So my goal of getting high-quality, actionable [whistleblower] claims accepted by the operating divisions, to the extent that they do get additional compliance resources, that’s going to be one of the biggest factors helping the whistleblower program here at the IRS,” Hinman said.
Tax and legal experts told the Hill that despite partisan rancor over the new funding for the IRS, members of both parties view the whistleblower program favorably.
“There appears to be solid bipartisan support for whistleblower programs across government and for the tax whistleblower program. There’s equally broad support across Senate Finance. I know Sen. Grassley has spoken glowingly about how the program has functioned and how it can function even better,” Sepp, of the NTU, said.
Dean Zerbe, a whistleblower attorney at ZMF Law and former tax counsel for the Senate Finance Committee under Grassley, told The Hill that the program is valuable because it can target wealthy tax avoiders more directly than generalized audits can.
“I don’t think people realize how much the IRS kind of shoots blanks, meaning that they audit folks and it just kind of comes up to zero or next to a zero. The whistleblower program is much better at really targeting the bad actors,” he said.
“The program itself is designed to go after the big-dollar folks. The way that the law is structured, it kicks in for major corporations, for wealthy individuals and very wealthy individuals,” he added.
Tax analysts and attorneys said that one of the biggest problems with the program is how long the process takes for a whistleblower, from submitting a claim to getting a payout.
“It is extremely frustrating for whistleblowers who come forward because it’s a process that takes on average about eight years from start to finish — if the IRS even collects money at the end of the day,” Jeffrey Neiman, an attorney and a former prosecutor with the Department of Justice’s tax fraud division, said in an interview.
“They should be out there encouraging folks to come forward and then paying folks when they do come forward in a timely way for the information that leads to the IRS collecting billions and billions of dollars,” he said.
Former IRS agent Bob Kerr said that whistleblowers often experience “a deep level of frustration with the program.”
“It’s difficult to march your way through it,” he said. “If you’re a whistleblower, there’s a lot of obstacles between beginning and end. It takes a long time.”
About the Author
Dean Zerbe represented alliantgroup’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform), and the Pension Protection Act. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill. He holds an LL.M. in Taxation from NYU and a J.D. from George Mason University.
