Congress Works on the Ineffective and Poorly Administered IRS Informants Reward Program

The Tax Relief and Health Care Act of 2006 provides a lot of new tax procedure provisions, such as the Section 6702 frivolous “tax submissions” penalty. This Act also set out a number of changes related to the ineffective and poorly administered (according to the US Treasury Inspector General for Tax Administration) IRS informants reward program.

The IRS had been operating the “informants reward program” under the general authority provided by Section 7623.

Congress has now added four new subsections to Section 7623. These new provisions create a “whistleblowers” program. This “whistleblowers” program entitles informants to 15% to 30% of the tax proceeds that are collected as a result of the informant’s efforts if the efforts “substantially contributed” to the tax collection and up to 10% if the informant’s efforts were “of less substantial contribution.”

The new provisions also specify that informants have the right to petition the tax court within 30 days of receiving an IRS determination with regard to their award and that the tax court shall have jurisdiction to hear such claims.

The new provisions then go on to specify that the “whistleblowers” program does not apply to individual taxpayers whose gross income for the applicable year is less than $200,000 and if the taxes in disputed are under $2,000,000.

The new provisions also instruct the IRS to create a “whistleblower office” and related guidance within twelve months.

Here are some issues that come to my mind when I think about the new and old versions of Section 7623: First, the problem with the old “informants reward program” is that the IRS was very very slow in issuing awards. In many cases informants have spent years trying to get the IRS to issue an award or even to deny the award, but the IRS fails to take any action. How does this legislation address this issue? It doesn’t.

Second, it appears that the old “IRS informants reward program” may still be applicable in cases where the “whistleblowers” program is inapplicable. For example, the old program is not applicable in cases where the taxpayer had gross income of a mere $199,999 or the tax liability is a mere $1,999,999, both of which are $1 below the Congressional dollar amount limits. If the old program does not apply in these cases, then we can assume that the IRS will no longer be making awards for these “small” taxpayer and tax liabilities. This seems curious since there are many more “small” taxpayers and tax liabilities. It seems like it makes more sense to encourage informants to tell on these people as well, as that would increase the tax revenues collected by the treasury.

Also, there is going to be a conflict of interest for the IRS if the old program is still going to be used for smaller tax issues. Specifically the IRS would have an incentive to abate penalties and/or not collect interest where such interest would push the tax debt over the $1,999,999 limit and the IRS would have an incentive to concede tax attributes (such as tax deductions and tax credits) where denial of such attributes would push the taxpayer’s gross income over $200,000. By abating these penalties and interest or conceding the tax attributes the IRS may be able to get out of paying the informant their 10% to 30% cut. I doubt that this is what Congress intended in enacting this legislation.

The bottom line appears to be that the informants reward program, whatever it is called, will continue to be ineffective and underused.