Our nation's balance sheet is abominable. In a feeble attempt to address our runaway deficits, Congress passed the Budget Control Act of 2011, which laid the foundation for the sequester that recently took effect. The sequester cuts $85 billion in spending this year and is designed to trim $1.2 trillion over the next decade. Many debate whether these particular cutbacks are beneficial to the economy and our long-term financial health. One that clearly is not is an 8.7 percent reduction in awards by the IRS under its whistleblower program.
The Tax Relief and Health Act of 2006 established the tax whistleblower program and provides a 15-30 percent award to those who provide information leading to large-scale IRS collections. The IRS estimates that it is underpaid by hundreds of billions of dollars and counting annually. Yet, its whistleblower program has yielded paltry recoveries and rewards to date. In fact, the only noteworthy award in six years has been the $104 million paid to Bradley Birkenfeld for blowing the whistle on the massive tax fraud at UBS. Many hoped that would be the tip of the iceberg. Instead, the IRS is heading in the wrong direction by preposterously asserting that the sequester will lead to award reductions.
Other than tax cheats, every taxpayer and business in the country have a vested interest in the success of this program. That is what makes the IRS's arbitrary cut so perplexing. Why would an institution whose mission is tax collection try to undermine a legislative mandate to facilitate that mission? The IRS announcement is especially perverse when one considers that Congress does not need to budget for paying whistleblowers. Awards can be paid directly from amounts collected by the IRS -- essentially "found" money that is a direct result of the whistleblower's acts. That means that there is a no adverse budget impact by paying whistleblowers awards -- the direct contrary actually.
Bear in mind that the program is not for small-scale tax cheats. Fear not that your neighbor will rat on you if you write off a bit more than you are entitled to for your home office or car -- the program is for tax collections of over $2 million only. In that sense, it actually incentivizes the IRS to shift resources away from small-scale audits and towards more institutionalized tax fraud. Yet, the IRS seems resistant to that move and apparently would rather grind the small fish.
As a multi-time successful whistleblower and somebody who has been personally sued by the institution, I am particularly interested in this development and the bureaucracy's hypocritical posture towards the program. In 2010, the IRS sued me in federal court for penalties, interest, and principle for an 11-year old lien stemming from gambling debts. That wasn't the problem. The problem was that I actually tried paying them, but they refused to accept payment! Seriously. Rather than taking payment in full satisfaction of those liens, the IRS spent countless dollars flying government lawyers from DC to Chicago for unnecessary hearings.
This is an institution that outsources most of its mission to the American taxpayer to begin with. After all, employers are required to withhold employees' federal taxes, and taxpayers file returns based on an "honor" system. No institution is big enough to collect tax from hundreds of millions of Americans, and so the private sector actually does most of the heavy lifting when it comes to bringing in tax revenue. The whistleblower program is a smart way to further utilize the private sector to identify tax evasion. Yet, the IRS appears to be so obtuse and that it cannot appreciate how it benefits from the program.
Republican Senator Charles Grassley has rightly lambasted the IRS for its lack of transparency and for not fully embracing the program to date. Nobody has explained why that is the case or the twisted logic behind this latest move. It is time for the IRS to get serious about the whistleblower program. There are many reasons for our fiscal woes and places where we need to cut back. Paying awards to whistleblowers who bring money to the Treasury is certainly not one of them.
Adam Resnick is a whistleblower and an entrepreneur. He is author of Bust (Harper Collins, 2007).