IRS reverses position, which could benefit whistleblowers

Whistleblowers and their advocates have long complained that they are unappreciated - or downright resented - at the Internal Revenue Service, but the agency gave them a pleasant surprise Friday.

Months after narrowing the circumstances under which whistleblowers could collect rewards for exposing tax evasion, the IRS reversed its position.

"This is really I think the first tangible evidence that the senior leadership [at the IRS] is getting behind the whistleblower program and wants to make it work," said lawyer Dean Zerbe, who represents whistleblowers.

At issue is the IRS's use of a law Zerbe helped write when he was Republican tax counsel to the Senate Finance Committee under Sen. Charles E. Grassley (R-Iowa). The idea was to give people with knowledge of unpaid taxes an incentive to help the government collect the money.

The rewards can total as much as 30 percent of the funds the IRS recoups.

But when the IRS updated a procedural manual for agency personnel last year, it staked out positions that could block rewards to whistleblowers in certain cases. The manual said the tipsters would be shut out if their information merely stopped a refund or reduced a credit.

That could have been a boon for companies that accumulate large credits with the IRS - and a blow to company insiders trying to collect rewards for stopping illegal tax schemes.

Grassley complained that the IRS was undermining the law and that the manual could deter whistleblowers from working with the agency.

On Friday, the IRS issued new rules permitting rewards for reducing refunds or credits.

Though couched in the jargon of tax wonks, the rules could be translated loosely as: "Never mind."

Spokesman Frank Keith said the IRS counsel's officer reviewed the matter and concluded "that the guidance issued today more properly reflects the law as it applies to these payments."

In a statement, Grassley said the IRS made a "common-sense decision," adding, "I hope these new regulations mean the IRS has turned the corner on encouraging whistleblowers and that this program will be a success."