The Internal Revenue Service paid $125.4 million in whistleblower awards in fiscal year 2012, or about 21% of the $592.5 million it collected in previously unpaid taxes as a result of the information supplied by those who came forward to report wrongdoing.
A $104 million award award made to former UBS banker Bradley Birkenfeld helped boost the IRS award total.
The IRS program is separate from the whistleblower program created under the Dodd-Frank Act, which remains a source of controversy. Critics of major awards to whistleblowers say they lead employees to bypass corporate reporting mechanisms but supporters say they encourage the reporting of wrongdoing
Without Birkenfeld’s award, the IRS numbers are more in line with the award payouts from FY11, when the IRS paid $8 million in awards based on $48 million in collections, the agency said in its annual report to Congress, made public Wednesday. The amount of awards paid out in fiscal 2013 isn’t expected to grow dramatically, the IRS said. The agency paid out 128 awards in FY12, which ended Sept. 30., and had 12 cases that resulted in taxes of $2 million or more collected with the help of whistleblowers. Most of the money paid out in FY12 was from cases that were initiated before 2006, the last time the whistleblower rules were revised.
The Birkenfeld award is a great advertisement for other whistleblowers to step forward with information in hopes they may see a large payday. Scott Knott, a tax partner at The Ferraro Law Firm said a lack of publicity about the program had probably limited claims but that ”since the news of the two large awards paid late last year, we have seen a significant increase in activity by tax whistleblowers evaluating potential claims.”
The Ferraro firm represented a whistleblower who won a $38 million award last year, but the total isn’t included in the FY12 report because it wasn’t made until October, after the fiscal year ended.
“This report reveals that over the last five years the IRS has collected nearly $1.5 billion as a result of the IRS Whistleblower Program, and even after paying out just under $200 million in awards, it is still one of the most cost-effective enforcement tools the IRS has,” Knott said. “Based on the claims that we have filed over the last five years, we expect that these collections are just the tip of the iceberg.”
Five cases that resulted in award payments in FY12 came from cases brought forward since the law was revised in 2006, though the report didn’t provide information on how much was paid out as a result of those cases. Federal privacy laws prevent the IRS from making public details about the awards, unless there is a waiver of privacy rights.
“The IRS does not yet know how many of these cases will result in collected proceeds after examination or investigation,” the agency said, adding it can be five to seven years or more for a case to be resolved and an award to be issued. There are 1,126 cases presently in various stages of investigation, review and appeal.
Some critics of the program say the agency has been unresponsive when it comes to maintaining good communication regarding where cases are in the process. The agency cited a June 2012 memorandum put together after meeting with attorneys who represent whistleblowers that established performance objectives for timely evaluation of whistleblower submissions.
Despite those efforts, proposed rules to the IRS whistleblower law are drawing criticism from whistleblower attorneys and U.S. Sen. Charles Grassley, R-Iowa. They say the proposed rules will make it harder for whistleblowers to collect awards and limit the scope of cases that qualify for awards. The IRS is seeking public comment until Feb. 19 on the proposed rules.
Write to Ben DiPietro at ben.dipietro@dowjones.com, and follow him on Twitter @BenDiPietro1.