Tax Snitches Can’t Escape Budget Cuts as IRS Bounties Shrink

Turning in tax dodgers to the U.S. government just got a little less lucrative.

The Internal Revenue Service, in a notice on its website yesterday, said whistle-blower awards will be reduced by 8.7 percent under automatic spending cuts that kicked in this month. The cutback applies to the IRS payout of as much as 30 percent of the additional tax, penalty and other amounts it recovers from scofflaws.

Under budget cuts known as sequestration, the U.S. is trimming $85 billion from federal spending in the remaining seven months of the current fiscal year.

The fiscal reductions may stay in place for weeks as Congress and the administration of President Barack Obama negotiate over a fresh deadline of March 27, when the government’s authority to spend money expires.

“I have more questions than answers,” Senator Charles Grassley, the Iowa Republican who wrote the 2006 law updating the IRS whistle-blower rules, said in an e-mail today. The payments are made by the IRS, using money collected from companies and individuals who committed tax fraud, and cutting rewards would undermine the program, he wrote. “What’s the legal rationale for cutting the whistle-blower payments?”

‘Baffling’

Erika Kelton, an attorney with Phillips & Cohen LLP in Washington who represents tax and other whistle-blowers, called the IRS decision “completely baffling.”

Given the rarity of IRS whistle-blower awards -- fewer than a dozen have been publicly announced out of more than 1,200 claims filed -- Kelton said it’s unlikely the IRS will make any awards before the budget standoff is resolved.

“After all, an 8.7 percent reduction of nothing is still nothing,” she wrote.

Among recent beneficiaries of IRS whistle-blower awards was Bradley Birkenfeld, a former UBS AG employee who received $104 million last year after telling the government the bank helped thousands of Americans evade taxes.

The IRS paid 128 awards worth a total of $125.4 million in fiscal 2012 to whistle-blowers who helped collect $592.5 million in revenue, according to a report on the IRS website.

The Treasury Department, which oversees the IRS, also said it will reduce some awards for the installation of renewable energy sources by 8.7 percent as a part of the across-the-board cuts.

To contact the reporters on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net; Peter S. Green in New York at psgreen@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net