TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, August 3, 2012

A Critical Analysis of the IRS Whistleblower Program

Karie Davis-Nozemack (Georgia Tech, College of Management) & Sarah J. Webber (University of Dayton, School of Business Administration), Paying the IRS Whistleblower: A Critical Analysis of Collected Proceeds, 32 Va. Tax Rev. ___ (2012):

Congressional changes to the IRS Whistleblower Program were intended to induce more participation in the program by allowing larger incentives and greater certainty that whistleblowers would be paid. Since the Program was amended, tax whistleblower tips have increased 76% and revenue collected due to whistleblowers has increased 79%. Despite a rise in tips and revenue collected, whistleblower payments have not increased. In fact, the number of tax whistleblower awards paid has decreased 44%. We hypothesize that this trend is due to the administration of the program but also to the interpretation of “collected proceeds.” Collected proceeds are tax revenues collected due to a specific whistleblower tip and comprise the pool of money from which a tax whistleblower award is made. While scholarship exists examining the Whistleblower Program amendments and their effects, no scholar has critically examined the crux of the Whistleblower Program: what should constitute collected proceeds.

This article offers critical analysis of both the Service’s interpretation of “collected proceeds” as well as proposals advanced by whistleblower advocates. Neither the IRS nor the whistleblower advocates’ interpretations offer a properly inclusive view of collected proceeds. We suggest an alternative view of collected proceeds that balances the need for an attainable incentive, administrable program, and federal revenue protection. Failing to achieve any one of these needs risks the Whistleblower Program’s viability. We suggest a view of collected proceeds that builds upon the Program’s successes and broadens its scope, which should lead to increased federal revenue.

Part One of this paper discusses the statutory changes to the Whistleblower Program, including the public policy behind the amendment as well as the manner in which the new IRS Whistleblower Office has administered the law. Part Two examines the Service’s interpretation of the basis of whistleblower payments, the “proceeds of amounts collected by reason of the information provided.” This Part uses the prior and current IRS payment policy, statutory interpretation, the 2012 Final Treasury Regulation, as well as conflicts between Service guidance and the Internal Revenue Manual to conclude that the Service’s interpretation of “collected proceeds” is not sufficiently inclusive. Part Three uses similar critical analysis to view the whistleblower advocates’ proposed interpretation of “collected proceeds” and finds that it ignores the tax realities of many alleged underpayments. Part Three concludes that the whistleblower advocates’ proposals for collected proceeds are overly inclusive. Finally, in Part Four, the paper considers a more balanced approach to defining “collected proceeds.”

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