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Will Whistleblower Tax Reforms Produce Results?

The Federal False Claims Act has been recognized as the government’s most effective tool for combating fraud and waste in government programs. According to the Justice Department, false claims act recoveries for the fiscal year 2006 exceeded 3 billion dollars. Unfortunately, the whistleblower reward program utilized by the Internal Revenue Service can hardly be characterized as being so successful. Since new IRS reward reform measures were enacted by Congress, we have been giving thought to the crucial question of whether the IRS will be successful in implementing its new informant reward program. Statistics available from the IRS are hardly encouraging. Between fiscal year 2001 and 2005, a paltry $27.3 million was paid by the Internal Revenue Service to informants as rewards. The average individual reward was around $24,000.00. When we compare this to the results achieved under the Federal False Claims Act, obviously, the disparity in results is staggering which is probably why it is that Congress recently acted to encourage the Internal Revenue Service to reform its whistleblower program. The real question is whether the Internal Revenue Service is up to the job and whether it will learn lessons from the success of its other federal agencies in combating taxpayer fraud and abuse.

The IRS has estimated that there may be as much as $300 billion annually in unpaid taxes based on schemes to evade or simply under report income. That being the case, one would think that the Internal Revenue Service could collect more than it has over the last five years which recoveries barely approximate $30 million. The problem may be the types of ion that the Internal Revenue Service seemingly requires be provided before a reward is forthcoming for an informant.

No one knows yet exactly how the Internal Revenue Service will set up its revamped reward program but we would suggest that it is unrealistic for the IRS to assume that informants possess detailed accounting information concerning taxpayer fraud. While an informant may know the taxpayer’s identification and/or social security number and may know the general and broad outlines of a business scheme designed to conceal income and/or fraudulently under report earnings, the informant may not have access to esoteric and detailed accounting information which typically any revenue agent would desire. This being the case, the question is whether the Internal Revenue Service will loosen some of its internal requirements to encourage whistleblowers to come forward and thereafter give out ample rewards as an inducement for them to do so.

Another problem with the IRS informant reward program has been the length of time it takes for an informant to be paid. Some of the articles I have read on the subject indicates that the Internal Revenue Service averages seven and a half (7 ½) years to pay an informant for information concerning taxpayer fraud. This is a long time to wait for an average reward of only $24,000.00. Thus, reform is clearly needed. The hope is that it will be implemented per Congress’ directive within the next twelve (12) months, not only in a fashion that is designed to reduce the fraud but also reward those individuals who bring to the government’s attention the under reporting of income. As taxpayers, we are certainly hoping that the IRS will take lessons from the Federal False Claims Act and implement procedures and regulations which encourage persons to come forward where tax fraud is involved.

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