IRS Whistleblower Program - IRS, Revisit the 2-Year Waiting Period!!

Introduction.  The Whistleblower Statute (I.R.C. § 7623(b)) mandates the IRS to pay Whistleblowers 15% to 30% of the proceeds collected.  Unfortunately, the IRS still self-imposes a two-year waiting period before making payment of the award to the Whistleblower. 

Congress and Whistleblowers had every reason to believe that awards would be paid within a reasonable time.  Waiting two additional years for an award is detrimental to the whistleblower program because:

  • it unnecessarily increases the time in which payment is made to the whistleblower.  (currently it takes on average between five and seven years for the IRS to pay an award);

  • it can be avoided by offering taxpayers a closing agreement; and

  • the IRS chooses not to pay interest on the award withheld from the Whistleblower.

IRS’ Position.  Beginning the summer 2010, the IRS unilaterally decided it would wait an additional two years, after collecting  tax, before making payment of  an award to the whistleblower.  Thus, the IRS does not pay an award until there has been a “final determination of tax,” which occurs after the statutory period in which the taxpayer may file a claim for refund (i.e. two years after collection) has expired.

AnalysisEliminating the two-year waiting period will encourage whistleblowers to file claims by reducing the typical 5-7 year wait to receive payment of an award.

It is unlikely that since the current Whistleblower Program began in December, 2006,  that any taxpayer in a whistleblower case ever filed a successful claim for refund.  This alone makes the IRS self-imposed two-year wait unnecessary, unjustified and should be cause for the IRS to eliminate this rule.  

However, if the IRS justifies the necessity of two-year rule based upon the facts, the waiting period could be addressed fairly, as follow:

  • Closing Agreement - The IRS could allow all taxpayers to enter into a “closing agreement” in which the taxpayer and the IRS agree to the finality of the tax and the taxpayer waives the right to file a claim for refund.  While such closing agreements are often only used with large corporate taxpayers, expanding the use would further shorten the waiting period and speed up the payment of an award.  (Finality is important and seldom, if ever, does a taxpayer successfully file a claim for refund after an audit nor does the IRS perform a second audit.  An option to enter into a closing agreement at the close of all examination cases is sensical and contributes to overall efficiency).

  • Interest - Although the payment of interest is not statutorily required on the delay of whistleblower awards, the IRS pays interest in other situations when the IRS delays payments (See I.R.C. § 6621).  Similarly, IRS requires taxpayers to pay interest on underpayments of tax due to the IRS.  (See I.R.C. § 6621).  Because the two-year wait in receiving an award is a delay based solely on the IRS, the IRS should pay interest for the unnecessary delay. 

Conclusion:  The IRS should be encouraging whistleblowers to come forward and promote the program by shortening the waiting time for a whistleblower to receive an award.  Therefore, the IRS should reassess the necessity of certain rules (i.e., the two-year waiting period) and/or should modified existing practice (i.e., paying interest and offering all taxpayers a closing agreement).  Alternatively, the IRS should outright eliminate the two-year waiting period if they determine history shows taxpayers in whistleblower claims have not been successfully filing claims for refunds as to the whistleblower’s issue.

Author Thomas C. Pliske is a former IRS attorney.  He established the Tax Whistleblower Law Firm in 2008 whose sole practice is representing whistleblowers before the IRS and the U.S. Tax Court.