The whistleblower program, if properly promoted and implemented, is good for the enforcement of the tax laws. Perhaps similar to a cheat code for gamers, the IRS can quickly and efficiently conduct an audit rather than deal with the drudgery of going through a long drawn out process which may or may not be successful in the end.
The government should be run efficiently like a successful business, and if it is, then the whistleblower program should be good for the IRS, considering:
That every dollar ($1) the government spends on enforcing tax compliance, it gets 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.
The whistleblower program is a more powerful enforcement tool than the IRS’ power to: (i) summons (obtain documents and testimony without a court order), and (ii) levy (seize property without a judgment), because these two audit and collection tools still require the IRS to uncover the tax avoidance or tax evasion of the taxpayer, while the whistleblower program short cuts that process.
In Whistleblower cases, the IRS is typically approached by an insider (i.e. tax director, CEO, CFO, etc.) of the taxpayer that provides specific and credible information as to the taxpayer’s underreported and underpaid tax liabilities. The underreporting need not be intentional by a taxpayer nor does the IRS need to prove fraud or evasion. The underpayment of tax may be due to: (i) an innocent mistake, (ii) involve a taxpayer pushing the boundaries of the law, or (iii) a taxpayer implementing a tax scheme that has no substance.
The IRS whistleblower program can assist the IRS in addressing the largest challenges it faces today:
The annual tax gap (the difference between what should be reported and paid and what is reported and paid) in the United States is estimated to be in excess of $450 Billion.
As time goes on, the IRS is given more responsibility taking up its limited resources as recently reflected by the implementation of the new tax law, enforcement of Obamacare, more tax returns than ever being filed, etc.
Between 2010 and 2016 IRS funding fell 18%. In addition, the funding has continued to decrease to date, which means the IRS will continue to be have limited resources and be understaffed, both of which have a direct impact on the number of audits conducted by the IRS (see chart below).
The proper use of the whistleblower program can result in the early detection and collection of tax from the taxpayer. The whistleblower program can discourage other taxpayers from aggressive tax planning because there is the threat that its own personnel could be awarded millions of dollars by simply providing the IRS with the necessary information as to the taxpayer’s underreporting and underpayment of taxes.
The whistleblower program allows the IRS to send a message to the lawyers, accountants and others that abusive tax schemes do not work. Traditionally, the IRS only becomes aware of an abusive tax scheme years after the government has lost billions of dollars. The whistleblower program helps the IRS to shorten the time it takes the IRS to discover and stop Abusive Tax and Avoidance Transactions (ATAT) and minimize the losses to the government.
The whistleblower program is self-funding. I.R.C. § 7623 provides that amounts payable to a whistleblower as awards shall be paid from the proceeds collected by the IRS using the whistleblower’s information. Therefore, award payments do not negatively affect the IRS’ shrinking budgets.
The whistleblower program is a win-win for U.S. taxpayers and for the IRS. Billions of dollars of taxes have been collected by the IRS in the last 10 years because of the Whistleblower Program. This does not include future taxes being collected for which the whistleblower’s information caused a change in the taxpayer’s behavior. Therefore, detecting and collecting tax by using information of an insider is efficient and a good use of the IRS’ limited resources. Lastly, as a self-funded program, the awards do not cost the government or the IRS as they are simply being paid from the taxes collected.