IRS Whistleblower Program is a Powerful Enforcement Tool

PREMISE:

Should the IRS be increasing Awards (frequency and amount) to whistleblowers?

Yes. Empirical data shows that whistleblower programs work by increasing the rate of tax compliance and combat the tax gap better than other tools given to the IRS.

BACKGROUND:

VAT:  A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed. VAT is an indirect tax while sales tax is a direct tax.  VAT is levied at the different stages of production and delivery of goods and services. The VAT is applicable for both imported and local products.

Sales Tax: Sales tax, as compared to VAT, is the percentage of revenue imposed on the retail sale of goods.  Unlike VAT, sales tax is levied on the total value of goods and services purchased. Sales tax is paid by end consumers on their consumption.

EMPIRICAL DATA:

In her article, “Consumers as Tax Auditors”, 109 Amer. Econ. Rev. 3031 (2019), Joana Naritomi explores Brazil’s VAT system and its change to pay consumers to monitor proper reporting of VAT sales taxes by manufacturers.  Naritomi’s research concludes that the Brazil’s reporting and whistleblower system generally increased revenue by 21 percent over four years, and that the end consumer whistleblowing engendered compliance by having the manufacturers report 7 percent more sales and increased 3 percent more revenue to the taxing authority after receiving the first complaint.  Naritomi’s research also estimates that the pro-whistleblower/consumer compliance model generated an increase of 9.3 percent revenue, net of the rewards paid by the Brazilian tax service to engender compliance.

APPLICATION TO IRS WHISTLEBLOWER PROGRAM:

Naritomi’s research can be applied to the IRS’ Whistleblower Program because Naritomi’s research reflects that when a whistleblower program and tax reporting system is supported by the taxing authority, the returns are greater than without the support from the taxing authority.  The research shows that tax revenues increase, and tax compliance increases when the taxing authority supports whistleblowers and fosters tax compliance. 

Contrast the research with the current IRS whistleblower program, where the IRS does not foster compliance and does not communicate with whistleblowers about the status of their claims, such that it takes approximate 9.32 years for payment of an award.  As previously mentioned in this Blog, if the IRS fostered the whistleblower program by utilizing/enacting the following changes to the IRS whistleblower program:

• ·                     Prioritizing the whistleblower claims.

• ·                     Providing better communication with the whistleblowers.

• ·                     Utilizing the whistleblower information.

• ·                     Imposing set deadline to process IRS whistleblower cases.

• ·                     Permit rejected cases to utilize administrative appeals.

• ·                     Eliminate sequestration of awards paid to whistleblowers.

• ·                     Pay interest on whistleblower awards.

The IRS would achieve greater tax compliance and increased tax revenues.

Each of the previously enumerated changes to the IRS Whistleblower Program would foster the program and ensure that whistleblowers are supported by the IRS, as is done in Brazil.  This support and utilization of the IRS whistleblower program would help the IRS collect more revenue and would foster tax compliance.  Taxpayers would have to reconsider aggressive tax planning, gray areas of the law, abusive tax shelters, etc., if they truly believed that their own personnel would be awarded 15% to 30% of the tax collected by providing such information to the IRS in a whistleblower claim.  The IRS should reconsider its attitude to giving lip service to the whistleblower program by doing the minimum.

CONCLUSION:

Congress and the IRS should be actively changing/enhancing the IRS whistleblower program to foster a more positive culture for whistleblowers, because, as Naritomi’s research shows, this leads to more revenue and higher tax compliance. With an estimated $500 million annual tax gap, it’s time Congress and the IRS begin implementing the changes to the whistleblower program outlined above