BY TIM GRENDA, J.D.

A recent change in how the Internal Revenue Service rewards whistleblowers who help expose tax cheats may leave some tipsters holding the bag.

Whistleblowers often play key roles in taking down tax-evasion schemes and other elaborate financial crimes. In many cases, the crimes would go undetected by tax collectors if not for the person coming forward with vital information and documents.

For that reason, the IRS has long rewarded whistleblowers with a portion – up to 30 percent – of the proceeds of unpaid taxes collected by the IRS as a result of the tip. Some whistleblowers, represented by labor and employment law lawyers, have received millions of dollars for exposing large tax schemes.

But the IRS has amended its manual to in some cases stop whistleblowers from being paid at all, prompting some to wonder why workers would risk their jobs by exposing tax fraud committed by their employers, for example.

The manual now states that if the whistleblower’s tip to the IRS results in the agency stopping a tax refund or reducing a credit instead of yielding a payment, the person who provided the tip is not entitled to financial compensation.

The revised IRS manual also says rewards cannot be paid based on criminal fines, even though federal whistleblower laws say tipsters are eligible for rewards based on “penalties . . . and other amounts collected as a result of any administrative or judicial action resulting from the information provided.”

Sen. Charles E. Grassley, the ranking Iowa Republican on the Finance Committee, has raised “serious concerns” about what effect the new IRS manual rules for compensating tax cheat tipsters will have on the government’s ability to uncover such crimes. Grassley has urged the Treasury Department, which oversees the IRS, to rethink the new policy.

The IRS has so far refused to answer reporters’ questions about the changes in whistleblower compensation, saying only that “… the Whistleblower provisions are an important and valuable tax administration tool that can help to improve tax compliance” and that “we are fully committed to using these provisions for the benefit of all taxpayers in this country who pay the taxes they owe.”

Read more about whistleblower protections in LawInfo’s Labor and Employment Legal Resource Center.