The U.S. Internal Revenue Service is missing a chance to raise a lot more revenue by turning a cold shoulder to people offering up the inside scoop on tax dodgers, lawyers who represent such whistleblowers said on Wednesday.

At a hearing about new rules for the IRS whistleblower program, officials got an earful of advice from several lawyers who make money representing informants and who, in turn, want to make more of it for themselves and their clients.

“The IRS needs to do a much better job of attracting whistleblowers into the program,” said Erica Brady, of The Ferraro Law Firm, which has a tax whistleblower practice.

There is an impression among some lawyers and clients that whistleblowers “are just not welcome” at the IRS. She said, “These rules really do very little to dispel that impression.”

Criticism of the tax-collection agency’s treatment of whistleblowers has been building for months, led by Senator Chuck Grassley, who has long argued that smarter handling of whistleblowers could bring in substantial tax revenues at a time when the federal government is wrestling with huge deficits.

The Iowa Republican led a 2006 overhaul of the IRS program. Seven years later, the IRS is still working on implementing new rules. Those discussed at the hearing had to do with submitting information and setting rewards for informants.

The next step for the agency is to consider the lawyers’ comments, many of them substantive, and decide what to do, said Stephen Whitlock, director of the IRS Whistleblower Office, in a brief interview after the hearing.

“It’s too soon to say” how long that will take, he said.

BIGGER REWARDS PROMISED

Under the 2006 rules, whistleblowers with valuable tips can get up to 30 percent of additional tax collections resulting from disputes worth $2 million or more. Previously, rewards were made at the IRS’s discretion and were small.

Since 2006, only about 10 rewards have been made under the revamped program, whistleblower attorneys have estimated.

The only one that the IRS has publicly acknowledged was September’s record-setting, $104-million payment to Bradley Birkenfeld. A former banker at Swiss-based UBS AG, Birkenfeld told the IRS about how he helped former clients stash hundreds of millions of dollars in secret Swiss accounts.

The agency has said that hundreds of informants are actively involved in the program, but new whistleblower tips to the IRS fell to 332 last year from a 2009 high of 472 at a time when whistleblowing tips at other agencies have been on the rise.

“The whistleblower office needs to be much more open and much more welcoming to whistleblowers in the future,” said Scott Oswald, managing principal of The Employment Law Group, which represents whistleblowers.

For instance, after it gets tips, the agency needs to inform the whistleblowers more promptly about their cases’ status, said Bryan Skarlatos, a tax lawyer at the firm of Kostelanetz & Fink who represents both taxpayers and whistleblowers.

“A process for getting information to the whistleblowers sooner” is needed, said Skarlatos, who generally praised the IRS for balancing the rights of all involved in the new rules.

The question of tax informants being left in the dark, sometimes for years, by the IRS will come to a head on June 18, when the U.S. Tax Court has a hearing in the case of Joe Insinga, who blew the whistle on his former employer, Rabobank Group, in 2007.

Today, Insinga still does not know whether or not he will get a reward, or even where his case stands with the IRS. He asked the Tax Court – where most people go who want to challenge the IRS – to intervene. Last month it decided it would.

At the June 18 hearing, the court was expected to get from the agency an explanation of its handling of the Insinga case, which could have wide implications if it leads to the IRS being generally more forthcoming with whistleblowers.

(Reuters)