Audit finds flaws in tax whistleblower program

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By Sean Lengell

An Internal Revenue Service program designed to encourage tax fraud whistleblowers is riddled with "deficiencies," creating a backlog of claims that could jeopardize the program, a government watchdog said.

The audit released Wednesday by the Treasury Department's inspector general for tax administration found major flaws in the program that include "inadequate procedures and processes" for administering whistleblower claims, the failure to process whistleblower claims in a "timely" manner and a loophole in the law that can result in employees being retaliated against for filing whistleblower claims to the IRS.

Congress passed a tax law in 2006 intended to make it easier for potential whistleblowers to turn in tax scofflaws. It also beefed up the rewards given for tips that lead to the arrest and conviction of violators.

Since the law went into effect, the IRS says it has received a significant increase in tax fraud tips. In 2008, the agency received about 1,890 claims detailing more than $65 billion in underreported taxable income, up from 83 claims for $8 billion in unreported income the year before.

But the audit said the program was plagued with "inaccuracies and inconsistencies in the control and tracking" of reported fraud cases and failed to include proper timelines to process the claims.

"Without effective control over and timely processing of these claims, the success of the IRS Whistleblower Program could be diminished," the report said.

Sen. Charles E. Grassley, Iowa Republican and a longtime advocate of whistleblower rights, said Wednesday he found it troubling "that several hundred claims appear to be sitting on an analyst's desk instead of being worked on by examination or criminal investigation personnel."

"Good-faith whistleblowers often have very valuable things to say," said Mr. Grassley, who added that he believed the program had been a success. "The IRS should see them as a valuable resource in fighting the tax gap and put their knowledge to good use."

The IRS' system of investigating tax fraud is so cumbersome and inefficient, it often takes several years for a case to be completed. And because whistleblowers aren't eligible for reward money until the conclusion of a case, the process may discourage potential tipsters from coming forward, Mr. Grassley said.

No whistleblowers who participated in the program since 2006 has received a reward.

"Now is the time for leadership from senior IRS officials to end the naysaying bureaucrats who keep trying to find new ways to hamstring the whistleblower reward program," said Dean A. Zerbe, special counsel for the National Whistleblowers Center. "Billions of dollars have been brought forward by whistleblowers, but not a dime of reward has been paid out."

The audit also said the whistleblower law was flawed because it failed to provide employees adequate protection against retaliation from employers they accuse of tax fraud.

Sen. Claire McCaskill, Missouri Democrat, last week introduced legislation to beef up whistleblower protections.

"Whistleblowers are our first line of defense against waste, fraud, and abuse," she said. "We've got to do everything possible to protect them."

The IRS, in a written response to auditors, said it agreed the report's recommendations to streamline its claims system and to establish timelines.

"The IRS clearly recognized that those processes and systems [in place before the 2006 law] would not be adequate to manage the claims receipts under the new law and used them only as stopgap until the new program would be designed and implemented," said IRS Whistleblower Office Director Stephen A. Whitlock.