IRS should use whistleblowers, not collection agencies, to close the tax gap
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Once again, the IRS finds itself in a controversy over its use of private debt-collection companies to go after relatively small overdue tax payments – often with limited results and a history of abuses.

What is overlooked in the debate, however, is that the IRS has failed to take advantage of an existing enforcement tool that is cheaper, more effective and would collect much more money than private contractors ever will. The IRS whistleblower program is the most powerful tool that the IRS has for closing the massive tax gap, yet despite its enormous promise, it has never been allowed to flourish because of institutional resistance and hostility.

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As Sen. Chuck GrassleyCharles (Chuck) Ernest GrassleyFord's lawyer: Hearing doesn't appear to be designed for 'fair', 'respectful' treatment GOP opens door to holding Kavanaugh committee vote this week Press: Judge Kavanaugh must withdraw MORE (R-Iowa), a staunch whistleblower advocate, noted in 2013, many at the IRS “have undermined the program” and “refuse to fully utilize the whistleblower’s knowledge and expertise to identify and expose tax cheat.”

 

Dozens of whistleblowers have made submissions to the IRS concerning improper schemes alleging losses of tax revenues in the tens and hundreds of millions of dollars. Yet despite the significant amounts at issue in whistleblower cases, many (if not most) of these matters languish for years and grow stale. In 2016, the average time it took for a whistleblower claim to be processed was over seven years. As a whistleblower lawyer, I have seen the strong resistance whistleblowers face at the IRS and the IRS obstacles that derail or block these cases.

But it is not just that cases take a long time to process. IRS agents also have frustrated whistleblowers and their lawyers with their reluctance to give credit to whistleblowers for identifying tax fraud, which can lead to a reduction or outright denial of rewards.

Now, as ordered by Congress, the IRS has to turn to private collections agencies to pursue about 140,000 individuals for amounts of $50,000 or less. The difference in magnitude between the cases the IRS is chasing and the matters that whistleblowers are bringing is staggering and raises serious questions about the IRS’s enforcement priorities.

It is obvious that if the IRS were to embrace, rather than ignore and resist, its whistleblower program, there would be much more returned to the U.S. Treasury than the amounts private companies can ever collect by targeting relatively small underpayments.

In fact, Congress already tried outsourcing tax collection twice before, and both times the private efforts were money-losing ventures for the government after the costs of administering the program were considered. The most recent effort lost $4.5 million before the IRS discontinued it, according to a 2014 analysis by the Taxpayer Advocate Service.

In contrast, other whistleblower programs have been shown to be extremely successful at recovering funds efficiently and successfully. An analysis of whistleblower-initiated healthcare fraud cases found that the government collected $20 for every $1 it spent on investigation and prosecution of the cases. And just recently, the state of New York recovered $40 million from a single tax whistleblower case.

Instead of sending private contractors after delinquent taxpayers, Congress should engage in robust oversight to ensure that the IRS takes full advantage of whistleblower information and expertise. Those efforts would garner significantly more recoveries for the U.S. Treasury than any results from the work of debt-collection companies.

Erika A. Kelton is a whistleblower attorney and partner at Phillips & Cohen LLP.


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