Change Is Needed To Catch Big-Time Tax Cheats

The Biden administration has made a smart move by proposing to give the IRS $80 billion to enforce the tax code and go after wealthy and corporate tax cheats.

But an even smarter move would be for the administration to shift the neglected IRS whistleblower program into high gear so that the IRS would be forced to act on the valuable, detailed information that whistleblowers are submitting about tax fraud and evasion.

Since Congress created the IRS whistleblower program in 2006 to tackle major tax fraud, the IRS has made minimal effort to capitalize on most of the valuable whistleblower information it has received.

With a gap between the amount of all taxes owed and collected estimated at $1 trillion per year, the IRS has collected an average of barely $438 million per year in whistleblower cases since 2007. In contrast, the Department of Justice, which handles whistleblower cases under the False Claims Act, has collected an average of $2.5 billion per year during that same time period for cases involving fraud against the government, excluding tax fraud.

The problem for the IRS is not a lack of good information from whistleblowers – the IRS gets several thousand whistleblower submissions each year. The problem is that the IRS resists pursuing whistleblower cases because of an institutional dislike of whistleblowers, and most of those cases it does pursue involve small-time tax fraud.

Much like it does with the taxpayer audits it performs, the IRS has been focusing on whistleblower information about fraud by small taxpayers rather than by larger ones where the bang could be much bigger for the enforcement buck invested.

This can be seen by looking at the number of whistleblower awards the IRS makes based on the number of small collections (less than $2 million) versus whistleblower awards based on larger collections.

For the past five years, the average annual number of total whistleblower awards was 246. Only an average of 10 percent of those annual awards was due to whistleblower cases where proceeds collected exceeded $2 million.

Another indication of the Service’s resistance to whistleblowers is the lengthy time the IRS takes to make whistleblower rewards: The average time to process a whistleblower award in large cases has increased from 9.3 years to 10.89 years.

The IRS’s failure to take advantage of whistleblower information about large-scale tax fraud and abuse is disgraceful and inexplicable.

The other three agencies that handle whistleblower reward programs – DOJ, the Securities and Exchange Commission and the Commodity Futures Trading Commission – tout the importance of whistleblowers in their enforcement efforts.

At DOJ, former Acting Assistant Attorney General Jeffery Bossert Clark said earlier this year, “Whistleblowers with insider information are critical to identifying and pursuing new and evolving fraud schemes that might otherwise remain undetected.”

SEC officials have called their whistleblower program a “game changer” for enforcement. CFTC officials estimate that 30% to 40% of their active investigations involve whistleblowers.

Sen. Chuck Grassley, who authored the legislation creating the IRS whistleblower program, has decried the failure of the IRS to take advantage of the whistleblower program to help with tax enforcement to the extent it should.

In written questions to Janet Yellen as part of her confirmation process to become Treasury secretary, Grassley noted that “over the past two years awards to whistleblowers have markedly declined while award-processing times have continued to steadily climb” and asked what steps she would take to improve the IRS whistleblower program.

“Whistleblowers are an important asset to the integrity of the agency and tax system more generally, and I will work to create an agency culture that respects whistleblowers and the laws that protect them,” Yellen said in a written response.

That would be an important start. But changing that culture requires immediate action to demonstrate that the status quo is no longer tolerated and that this administration truly is committed to working with tax whistleblowers.

If Congress approves Biden’s increased funding for the IRS, a sizeable share should be directed to boost enforcement efforts based on whistleblower information. The return on that investment would be an effective way to help reduce the tax gap.

Biden is the fourth president to take office since Congress strengthened the IRS whistleblower program in 2006. The previous three administrations neglected the IRS whistleblower program, missing out on opportunities to collect billions from wealthy and corporate tax cheats. Taxpayers are counting on this administration to change that.

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