IRS Whistleblower Program, if Properly Utilized by the IRS will Reduce the Tax Gap.

BACKGROUND: TAX GAP

As explained by the IRS, the tax gap is the difference between true tax liability for a given tax year and the amount that is paid on time. It is comprised of the non-filing gap, the underreporting gap, and the underpayment (or remittance) gap.  The Internal Revenue Service (IRS) estimates that over the past 30 years, the tax gap has fluctuated in a narrow range—15 to 18 percent of total tax liability.  In 2016, the IRS provided data for 2008-2010, showing a tax gap of $458 billion.  For 2006 the tax gap is estimated to be $450 billion.

BACKGROUND: AUDITS AND ENFORCEMENT INCREASE AND FOSTER TAX COMPLIANCE.

In Leandra Lederman’s article, “Does Enforcement Reduce Voluntary Tax Compliance?”, 2018 BYU L. REV. 627, Ms. Lederman examines the effect audits and enforcement of tax laws have on voluntary compliance.  Her article looks at both lab tested results (empirical data) and data provided by IRS (field data).  She concludes, “audits increase tax compliance,” and “enforcement fosters compliance.”  She also states, “the IRS finds a positive ‘shadow’ effect on tax collections from each dollar collected via enforcement, and field studies generally find positive effects of audit threats and of audits with prior notice.”  Finally, Ms. Lederman concludes that increasing the “audit rate would increase overall tax compliance,” especially in the United States.

IRS WHISTLEBLOWER PROGRAM ENHANCES AUDITS AND ENFORCEMENT:

As previously noted in this Blog, the IRS whistleblower program is good for the IRS.  Also, as previously stated, the IRS whistleblower program assists the IRS in audits and enforcement and costs the IRS less money than the IRS’ standard audit procedures.  Specifically, the prior blog stated:

  • That every dollar ($1) the government spends on enforcing tax compliance, it receives six dollars ($6) back in recovered revenue; and

  • According to the IRS, pursuing whistleblower cases cost slightly over 4 cents for each dollar collected compared to a cost of over 10 cents per dollar collected for all other enforcement programs.

Additionally, the prior blog noted that there has been a steady decline in enforcement staff since 2011, and a corresponding audit reduction in the audit rate over the same period of time:

Based on Ms. Lederman’s research and analysis, these are bad trends to ensure voluntary compliance by the public and to minimize the tax gap.  Her position is that audits and enforcement actions have a positive effect on voluntary compliance with the tax laws.  To reverse the downward trend of enforcement personnel and audits conducted by the IRS since 2011, the IRS should be taking advantage of the IRS whistleblower program.  As noted above, the costs for utilizing the IRS whistleblower program is considerably less (4 cents per dollar collected vs. 10 cents per dollar collected).   By prioritizing whistleblower cases and by utilizing whistleblowers, the IRS can close the tax gap and reverse the trend noted by the IRS’ data, namely, insufficient resources to conduct audits and to enforce the tax laws.

Additionally, as mentioned in the prior blog, the whistleblower program is a more powerful enforcement tool than any other tool currently available to the IRS (i.e. summons enforcement and levy), because the other tools require the IRS to independently first initiate the audit before they can be utilized by the IRS.  In contrast, the IRS can immediately start building an audit case against a target taxpayer using information from a whistleblower.

CONCLUSION:

Both empirical data and IRS data show that more audits and enforcement will lead to increased voluntary compliance by taxpayers and will help to close the tax gap.  However, in this current climate, IRS funding for audits and enforcement personnel appears to be limited or reduced.  Given these constraints, the IRS should be utilizing the IRS whistleblower program because the benefits (increased enforcement and audits) clearly out weight the costs.  Yet, given this data, the IRS does not appear to be fully utilizing the Whistleblower program.

If you have substantial and credible information about a taxpayer that has failed to pay their substantial tax liabilities, please call us to discuss your potential tax whistleblower claim.


Author, SHINE LIN strives to present a balanced yet focused claim which allows the IRS to concentrate on the key facts, legal issues, law and legal analysis so that the IRS may successfully pursue the alleged wrongdoers.