The Internal Revenue Service has introduced new regulations aimed at encouraging more whistleblowers to report on corporate tax problems by making it easier for them to collect on their claims.

In December 2006, Congress amended Section 7623 of the Tax Code to establish the IRS Whistleblower Office and created new procedures for granting rewards to individuals whose whistle-blowing activities led to the collection of additional taxes. It allows whistleblowers to claim up to 30 percent of the amount of taxes collected as a result of the whistleblower claim. Since the legislation was enacted, the IRS Whistleblower Office has received claims seeking rewards based on more than $10 billion in taxes, with many of the claims reportedly involving Fortune 500 companies.

The whistleblower improvements were modeled after the successful 1986 whistleblower amendments to the federal False Claims Act.  Senate Finance Committee ranking member Charles Grassley, R-Iowa, was the Senate author of the whistleblower amendments in both the False Claims Act and the 2006 amendments to the Tax Code. However, Grassley found that the IRS has been slow to make awards under the improved law. Last June, he wrote to the agency, expressing his concern that agency procedures were limiting whistleblowers’ abilities to claim rewards, contrary to congressional intent.

For example, the agency determined that the whistleblower was ineligible for a reward if the whistleblower simply prevented the IRS from issuing a refund or if the claim reduced the amount of the refund the taxpayer was claiming. The IRS filed proposed regulations with the Office of the Federal Register on Friday that will be published on Monday.  The new IRS regulations would reverse these limitations. 

“These regulations are good news for whistleblowers,” said Grassley in a statement. “The Commissioner made the common-sense decision of ensuring that individuals who blow the whistle on improper refund claims will be rewarded, as I intended when I wrote the law. These new regulations will help the IRS target tax fraud. This is an issue of fairness for honest taxpayers. I hope these new regulations mean the IRS has turned the corner on encouraging whistleblowers and that this program will be a success. Next, the IRS needs to finalize these regulations quickly so they will apply to all the whistleblowers who filed claims after the 2006 law and have been waiting for their awards.”

“This doesn’t have to arise to fraud,” said George Clarke, a member of the law firm Miller & Chevalier. “It could just be a good-faith disagreement with the Service about a refund claim. … Anything you’re doing a claim for refund for can be subject to the whistleblower provision, the same as the original tax return can be.”

For a podcast of Clarke’s commentary on the whistleblower provisions, listen to IRS’s New Whistleblower Rules.

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