The Internal Revenue Service is set to publish a regulation on Tuesday that would make it more worthwhile for people to report tax cheats to the tax collection agency.
However, the rule change doesn’t go as far as some were hoping, and could prompt legal action by those looking to defend the rights of whistleblowers.
On Tuesday, the IRS will publish a rule titled, “Awards for Information Relating to Detecting Underpayments of Tax or Violations of the Internal Revenue Laws.” The rule will ease current restrictions that make it more difficult for whistleblowers to collect a reward from the IRS in certain cases under a 2006 law.
That law allows rewards as high as 30 percent for tax revenue collected as the result of a tip from a whistleblower.
The IRS declined to offer an explanation of how the new rule changes would operate. But Dean Zerbe, who helped write the 2006 law under Sen. Charles Grassley (R-Iowa), told TheBlaze that the new regulations make two key improvements that should encourage people to report companies that aren’t paying their fair share in taxes.
One of those changes ensures that the IRS will hand out a cash award to whistleblowers who provide information that “substantially contributes” to an IRS investigation. Zerbe said in recent years, the IRS has not always paid these awards if it was already investigating an organization on which someone then provides additional tips.
“It helps, because if you provide the IRS information that is significant — and the IRS uses — the whistleblower can now get an award even if the IRS was already aware of the taxpayer and the issue,” Zerbe said. Zerbe is a principal with the law firm Zerbe, Fingeret, Frank and Jadav, which represents whistleblowers.
The rule change will also allow people to collect awards by providing information that lowers the net operating losses of entities. While a smaller net loss doesn’t mean an entity has to pay taxes, it makes it more likely that it will have taxable income in the coming years, and whistleblowers can get rewards for their tips under the new once the entity becomes profitable.
But the rule doesn’t go as far as Zerbe or Sen. Grassley were hoping. One problem still in the rule is language that allows the IRS not to reward whistleblowers if it decides to use tips as part of a criminal case.
As it stands, the rule only allows for awards in cases where the IRS can extract funds from an entity. But Grassley says more categories of enforcement should come with rewards.
“The more barriers in place, the less law-abiding taxpayers will benefit from the whistleblower function,” Grassley said earlier this year.
Additionally, the rule will not require the IRS to stay in communication with tipsters. Zerbe said the failure of the IRS to communicate with whistleblowers has created some problems, as those who offer information are often unsure how the IRS is using their information, or whether it’s being used at all.
Zerbe said the rule’s failure to address this problem is a “missed opportunity” for the IRS to improve the law. He predicted that the remaining problems with the regulation could prompt a legal challenge from whistleblowers seeking more protection under the law.