Will I.R.S. Budget Cuts Hurt Tax Whistleblower Claims?

In a speech to the annual Taxpayers Against Fraud conference in Washington D.C. in September of 2014, I.R.S. Commissioner Koskinen declared his full-fledged support for the I.R.S. Tax Whistleblower Program, which rewards to whistleblowers a percentage of tax fraud money collected as a result of blowing the whistle on tax frauds involving $2 million or more. At present, it is estimated that there are potentially billions of dollars in tax whistleblower claims that have been filed with the I.R.S., but few awards have been made to date. Moreover, the I.R.S. has yet to permit tax whistleblowers and their counsel to assist in the analysis of tax returns filed by corporations and individuals that are alleged to have defrauded the Treasury, despite a recent regulation that specifically permits such assistance.

In his September speech, the Commissioner declared that "[T]he deterrence value of the whistleblower program is key..." and then gave the following example. "Let's say you have a corporation with complex tax compliance obligations, and that corporation is contemplating a tax avoidance scheme. With a strong, active whistleblower program out there, the individual running that corporation will know there are people internally and externally who are aware of the company's decisions and have a financial incentive to report the scheme to the IRS....By helping the IRS improve tax compliance, the Whistleblower Program also helps to ensure the integrity and fairness of our tax system."

Commissioner Koskinen touted the addition of 31 employees to the tax whistleblower program in 2014.

However, the current Congress apparently does not have the same focus. Recent budget cuts have been proposed that put I.R.S. staffing far below levels in previous years, threatening to curtail the program. Although Treasury Secretary Jacob Lew has estimated that every dollar received in tax enforcement results in $6 in collections, current Congressional funding proposals will no doubt inflict significant damage to the Tax Whistleblower Program. Editorials in the Washington Post and USA Today have decried the proposed cuts, saying that they will drastically reduce enforcement. "Not only do ordinary taxpayers suffer when service deteriorates, tax cheats have a lower chance of getting caught." (USA Today, December 21, 2014 Editorial). The Washington Post reported that the cuts will result in about a 15% decline in the number of IRS employees working on tax enforcement (Washington Post, December 11, 2014), and it is now reported that the entire agency may be forced to close down for a few days in 2015. (Washington Post, January 16, 2015).

So, should prospective whistleblowers give up and decide not to file whistleblower claims? No. There is no penalty for filing such claims, there are attorneys willing to help on a contingent fee basis, and the identity of the whistleblower is protected by law. Hope remains that at least a few of the many claims that have been filed will result in appropriate repayment of taxes, with interest and penalties. Though they may be outnumbered by corporate adversaries, there are dedicated enforcement agents within the IRS still willing to go the extra mile, if only Congress will let them do their jobs.

As Commissioner Koskinen stated in his speech to the Taxpayers Against Fraud group, "[L]ooking to the future, the IRS needs to do everything possible to strengthen the whistleblower program and build on the progress already made in implementing the law. I am committed to expanding the program's reach and improving communications with existing and potential whistleblowers."