By Vincent McKnight, Shaun Rosenthal, Erica Roberts, and Savannah Shepherd
As we discussed throughout this series, government agencies like the SEC and CFTC are severely lacking in funds and resources to fully investigate and combat fraud. Despite the history of recovering substantial funds, the government enforcement programs lack the necessary resources to keep up with fraud.
The Internal Revenue Service (IRS)’s budget has been a highly contested political issue. But combatting fraud pays for itself. It should not be political or partisan.
The IRS Enforces Tax Fraud
The IRS initiates both civil and criminal actions to punish tax evasion under 26 U.S.C. § 7201. The IRS Office of Fraud Enforcement (OFE) plays a central role in detecting and investigating tax fraud and uses technology, data analytics, and partnerships to spot fraud, address high-risk noncompliance, and pursue civil penalties and criminal referrals. This office works closely with the IRS Criminal Investigation (CI) Division and National Fraud Counsel to develop cases and ensure all taxpayers pay their fair share.
The IRS CI Division had a 90.6% conviction rate in 2022, with penalties such as imprisonment, fines, and restitution serving as strong deterrents. In addition to criminal cases, the IRS imposes civil fraud penalties of up to 75% of the underpaid tax, which has significant financial consequences. The IRS also has a whistleblower program that allows individuals to report tax fraud and share in the recovery.
Tax Fraud is a Massive Problem
In 2022, the IRS identified over $31 billion in tax fraud schemes and other financial crimes.
But the amount of “discovered” fraud is less than the estimated losses caused by tax cheats. In fact, the IRS estimated that “tax cheats cost the US at least $688 billion in 2021 alone,” most of which is attributable to large corporations and their offshore tax schemes to avoid payment.
The IRS Does Not Have the Resources to Recover Lost Tax Dollars
While the IRS has identified and estimates hundreds of billions of dollars in fraud, it has not been able to pursue all cases. For instance, in 2022, the agency only seized assets valued at approximately $7 billion, compared to the $31 billion in fraud that the agency identified.
Still, this recovery represented a significant return on the investment that Congress allocated to IRS enforcement efforts. In 2022, the IRS had $5.4 billion to spend on enforcement efforts, including determining and collecting owed taxes, providing legal and litigation support, and conducting criminal investigations. Accordingly, the IRS returned an additional $1 billion surplus to the government in FY 2022.
The Inflation Reduction Act of 2022 allocated $80 billion over the next ten years to the IRS, “much of which is dedicated to closing the tax gap by specifically enforcing tax compliance by the wealthiest tax evaders.” While the $80 billion has since been reduced to approximately $58 billion, that total still represents a substantial increase over the $5.4 billion dollars allocated to enforcement in 2022.
The IRS Whistleblower Program Shows Promise
The IRS whistleblower program, since its inception, has recovered over $7 billion in tax fraud and paid out over $1.2 billion in rewards. But there is more work to be done.
In fiscal year 2021, the IRS whistleblower program recovered less than a fifth of what it had recovered a few years prior ($245 million in fiscal year 2021, compared to $1.44 billion in fiscal year 2018) and showed signs of serious programmatic concerns. In 2022, the IRS whistleblower program contributed very little to the overall recoveries of the IRS.
In 2023, there was a bipartisan effort to improve this program with the introduction of the IRS Whistleblower Program Improvement Act, which included specific measures to strengthen this program, including allowing de novo review of award decisions and interest payments on delayed whistleblower awards. Since the bill was introduced, there has been little movement in Congress.
Nonetheless, there are signs that the tide is turning. In September 2024, the IRS paid three whistleblowers a record $74 million award—signifying to all whistleblowers that it intends to compensate whistleblowers fairly for the risks they take.
Also in September 2024, the IRS Whistleblower Program announced organizational changes to improve its processes. The Program expanded its staffing to include the Initial Claim Evaluation team from the Small Business/Self-Employed Division in the hope that the restructuring and increased resources will result in fewer delays and greater recoveries. We are hopeful that the IRS’s increased funding and investment in the whistleblower program begins a new chapter in tax enforcement, where the government begins recovering tens of billions in lost fraud dollars each year.
If you have information about fraud against the government and believe you have a whistleblower claim, please feel free to fill out our online intake form to contact a whistleblower attorney at our firm today.