IRS Whistleblower Claims Processing Far Too Slow, Say Practitioners

The IRS’ Whistleblower Office announced record claims numbers and awards in its annual report to Congress — but practitioners say work is needed to bring down the average 11-year wait for whistleblowers to receive awards.

According to the June 24 report, the IRS paid out $88.8 million in awards to 121 whistleblowers in fiscal year 2023. Information provided by those whistleblowers allowed the agency to pursue 1,234 claims and collect $338 million in proceeds. The top allegations included underreporting of income, overstated and false deductions, and failure to file a return.

The bulk of the awards — $86.6 million — were paid out under Code Sec. 7623(b), which provides for awards of between 15 and 30% of proceeds. To qualify for a 7623(b) award, a whistleblower must submit information that is signed and under penalty of perjury. The information also must pertain to an action where the total proceeds in dispute are greater than $2 million — and if the action concerns an individual, that person’s gross income must exceed $200,000 for the relevant tax year. The remaining awards were discretionary awards paid out under Code Sec. 7623(a).

An influx of claims.

The Whistleblower Office said it received 6,455 submissions and established 16,932 claim numbers in fiscal year 2023 — over 4,000 more claim numbers than in fiscal year 2022 and an increase of 44% over the prior four-year average.

However, according to the report, the office’s goal is not to receive more claims, rather to receive more actionable claims. The office seeks to reduce submissions of speculative claims it says use up significant agency resources — particularly in litigation defending administrative decisions not to pursue the claims.

As of September 30, 2023, the office had over 30,000 open claims. And of the nearly 15,000 claims it closed in fiscal year 2023, 72% were denied for presenting no actionable issue, while 12% were denied for being below the IRS’ threshold for action.

Shayne Stevenson, the head of Hagens Berman Sobol Shapiro’s Whistleblower Practice, said “the IRS, like the SEC, CFTC, and other agencies, of course would like to decrease the percentage of false positives from potential whistleblowers to preserve resources for actionable cases. The role of knowledgeable whistleblower counsel is critical to that effort — good attorneys don’t waste the time of the IRS with speculative cases.”

To meet the demands of increased claims submissions, the report lays out the Whistleblower Office’s four-part plan focused on appropriate staffing, improving systems and processes, better gathering and protecting data, and collaborating with IRS Counsel and whistleblower practitioners. And the office said it will prioritize “non-compliance by large corporations, large partnerships, high-income and high-wealth individuals, and claims related to complex, high-risk, and emerging issues.”

Timeliness of awards.

A top concern with the IRS’ Whistleblower Program among practitioners is the length of time between the IRS’ receipt of a claim and when it pays out an award.

The report highlighted that “7623(b) awards were issued, on average, [within] 67 days of the date when all regulatory requirements were met” in fiscal year 2023. However, it also revealed long delays in getting through regulatory processes — for 7623(b) awards paid out in fiscal year 2023, the average time from claim receipt to award payment was 11.29 years. Timeliness for 7623(a) rewards in that year was only slightly better, at 10.37 years.

For 7623(b) awards, the biggest holdups are the examination and investigation process and collection of proceeds, which took as long as 10.96 and 12.69 years, respectively, for fiscal year 2023 awards.

Stephen Kohn, a partner at Kohn, Kohn & Colapinto and co-founder of the National Whistleblower Center, said, “the IRS Whistleblower Office is making progress, but without a congressional fix targeting the delays, the program will be fighting with one hand tied behind its back. An 11-year wait for payments is simply unacceptable and undermines the public interest.”

Kohn supports the bipartisan legislation introduced last year to address whistleblower awards, the IRS Whistleblower Improvement Act (S 625/HR 1300). That legislation would impose interest on delayed awards payments and exempt awards from reductions due to budget sequestration, among other things. This April, the National Whistleblower Center asked Whistleblower Caucus leaders Senators Chuck Grassley (R-IA) and Ron Wyden (D-OR) for revised rules that would allow for more timely payment of whistleblowers, among other things.

And according to Stevenson, “the long wait for payout to whistleblowers is a frustration and disincentive that results in some good cases not being sent to the IRS.”

Renée Brooker, a partner at Tycko & Zavareei, said that “notably, the IRS report has identified ‘increasing collaboration with program stakeholders’ as ‘critical to our improvement efforts.’ As a whistleblower rewards attorney, I second this motion and cannot overemphasize the point. The IRS needs to take a page out of the Department of Justice’s book. The DOJ has set the gold standard for the public-private partnership and as a result, has recovered more than $75 billion under the False Claims Act qui tam provisions. The IRS needs to catch up, and that starts with improving its own public-private partnership.”

For more on whistleblower awards, see Checkpoint’s Federal Tax Coordinator ¶ T-1030.