Whistleblowers and Tax Enforcement: Using Inside Information to Close the "Tax Gap"

This article provides a critical look at the current scheme for rewarding tax informants, and in particular on the relatively new program for so-called "whistleblower awards." Despite enhanced incentives for informants to come forward, tax award programs continue to operate in an environment based on discretion and uncertainty. Additional legislation is needed to clarify uncertainties and to limit eligibility for rewards, including protection of private tax return information from disclosure and preventing the government from incentivizing the breach of confidential obligations through offering rewards. Part II provides an overview of the IRS examination function and examines data involving the utility of informants in selecting returns for examination. Part III explores the statutory scheme for rewarding informants under I.R.C. § 7623, which was recently amended to include a separate whistleblower awards program affecting relatively large tax 20deficiencies.

Part IV discusses some ethical and legal issues presented by the current whistleblower scheme. In particular, it identifies the need to protect professional obligations concerning confidentiality in the context of enhanced compliance goals. It argues for further clarification of reward parameters in order to provide appropriate incentives to help reduce the tax gap, while providing a clear message of deterrence for those who would violate professional or legal standards in making disclosures.