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The IRS wants to shrink payments to tax fraud whistleblowers

by tommyhudson

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FORTUNE -- Hoping to win millions of dollars from the Internal Revenue Service for exposing tax fraud? It's going to get even tougher -- and some powerful people in Washington are not amused.

In January, Sen. Charles Grassley, the 79-year-old Iowa Republican, chastised acting IRS commissioner Steven Miller over his recent proposal to restrict the agency's whistleblower program, already an object of criticism since its creation in 2006. The proposed curbs, Grassley wrote in a letter to Miller, showed one thing: that the IRS and its boss, the Treasury Department, "view whistleblowers with hostility."

What exactly is at issue? The current whistleblower rules say a tipster can collect a reward of 15%-30% of proceeds brought in as a direct result of a tip. The dirt has to involve tax evasion of at least $2 million or tax fraud by an individual making at least $200,000 a year.

Miller's proposed restrictions will likely shrink payouts. Among the curbs: making it nearly impossible for whistleblowers to share in rewards stemming from a company's inflation of losses, and excluding from rewards any money brought in from so-called Fbar fines. These draconian fines, levied on offshore tax evaders, are often dozens and even hundreds of times the amount of actual back-tax an evader must pay.


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But here's the rub in this unusual political fight: Even in its current structure, very few whistleblower claims get paid, thanks to bureaucratic foot-dragging at the IRS, according to lawyers representing whistleblowers. Despite receiving more than 1,960 claims since 2006, the IRS made its first payment only in 2011. In total, it has paid only three claims. The biggest: $104 million to convicted felon Bradley Birkenfeld, the former UBS AG private banker who kick-started the investigation of Swiss banks. Tens of thousands of other claims that the IRS did not put into a prior, far less lucrative rewards system put in place before 2006 have languished; those that did result in rewards produced much smaller bounties for their tipsters.

Still, that's not stopping Grassley, the ranking member on the Senate Judiciary Committee and author of the original bounty regulations. And the senior senator, who criticizes the program for its opacity and "suspension" of hundreds of claims, is not alone in his ire.

A grassroots campaign started by the National Whistleblower Center, an advocacy group, saw more than 670 barb-laden letters from lawyers and ordinary citizens, an unusually high number, flood Miller's desk over the past two months.

One acid-tongued writer who signed himself "Anonymous" wrote that he was trying to decide whether the best metaphor for the IRS's whistleblower program "would be Dickens' Bleak House or Kafka's The Trial. While the program surely has elements of both ... the closest analogy would be to a more modern classic, Seinfeld, because for claimants and their counsel, it has devolved into a program that is really about nothing."

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