By Patrick Temple-West

WASHINGTON, June 22 (Reuters) - A report from the U.S. Internal Revenue Service's troubled whistleblower program said tax collections from tipsters fell sharply last year, prompting a U.S. lawmaker on Friday to say he may delay two Treasury Department nominees until the program improves.

The IRS whistleblower office gathers information from people who want to alert the tax-collecting agency about tax cheating. Whistleblowers can get monetary r e wards under the IRS program, which was thoroughly overhauled in 2006.

Over the years, the office has brought in hundreds of millions of dollars in tax revenue for the government that would not have been collected without whistleblower tips.

But in fiscal 2011, the IRS collected only $48 million through the program, down from $464 million in fiscal 2010, the agency reported to Congress on June 15. That level of revenue collection was the lowest since at least fiscal 2004. The federal fiscal year ends on Sept. 30.

The drop in collections coincided with a decline in new whistleblower cases.

IRS and Treasury Department officials did not immediately respond to requests for comment.

Republican Senator Charles Grassley, who wrote the 2006 legislation that overhauled the program, said the report showed the IRS is driving away whistleblowers.

"The way the IRS and Treasury Department have handled the whistleblower program enacted more than five years ago is inexcusable," Grassley said in a June 21 statement to IRS Commissioner Doug Shulman and Treasury Secretary Timothy Geithner.

"The lack of progress is demoralizing valuable whistleblowers," he said.

Grassley is considering delaying the nominations of two Treasury officials, Mark Mazur and Matthew Rutherford, said Jill Gerber, a spokeswoman for Grassley. Both nominations are pending before the Senate Finance Committee, she said.

Mazur has been chosen by President Barack Obama to become assistant secretary for tax policy, while Rutherford was selected by Obama to become assistant secretary for financial markets. Both are subject to Senate approval.

Grassley's 2006 whistleblower reforms lifted a cap on the size of cash rewards whistleblowers can get. The agency paid out $8 million in rewards in fiscal 2011, down from $18 million in fiscal 2010. Award payouts can fluctuate widely from year to year as cases close.

Although the prospect of a big cash reward can be enticing for whistleblowers, they may hesitate in approaching the IRS if they see the whistleblower office as uncooperative.

"The whistleblower program in general is very opaque," leaving whistleblowers in the dark about the status of their cases, said Amy Walsh, a partner with the law firm of Kostelanetz & Fink LLP. "Once you disclose to the IRS your facts and what you know, it goes into a black hole."