IRS Tax Whistleblower Articles

Chief Counsel Undermining Whistleblower Program, Grassley Says

By Andrew Velarde
Tax Analysts, Tax Notes Today
February 13, 2015

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Senate Finance Committee member Chuck Grassley, R­ Iowa, brought pointed accusations that the IRS Office of Chief Counsel is undermining the whistleblower program in written questions submitted to Commissioner John Koskinen.

"I again find myself frustrated with an IRS Chief Counsel office that seems to wake up every day seeking ways to undermine the whistleblower program both in the courts and the awards," Grassley wrote. "I am especially concerned that Chief Counsel is throwing every argument it can think of against whistleblowers in tax court. It appears at times that the Chief Counsel's office thinks its job is to come up with hyper technical arguments and seek to deny awards to whistleblowers who have risked their lives to uncover big ­time tax cheats."

Following Koskinen's appearance at a Senate Finance Committee hearing the week of February 2, Grassley submitted five questions to be answered in writing by the commissioner. Tax Analysts obtained the questions on February 11 from Grassley's office. In addition to a question about the whistleblower program, Grassley posed questions about the earned income tax credit, tax credits created by the Affordable Care Act, audits of hospitals, and IRS budget constraints in relation to union time.

Grassley played a pivotal role in the expansion of the whistleblower program by spearheading the 2006 amendments to section 7623 and is a staunch proponent of the whistleblower program. During Koskinen's nomination process in 2013, Grassley, in a letter to the future commissioner, expressed his frustration with the chief counsel's office and Treasury as discouraging whistleblowers from coming forward.

Dean Zerbe of Zerbe, Fingeret, Frank & Jadav PC agreed with Grassley's criticism of the chief counsel's obstruction of the program, which Zerbe said needed to be reined in by the commissioner and the Whistleblower Office.

"I am the first lawyer to have a trial in Tax Court on a whistleblower case and have a number of other whistleblower cases before the Tax Court. It is stunning to see some of the arguments being made by IRS counsel ­­ without support in the law (and often contrary to the facts) and completely contrary to the intent of Congress," Zerbe said. "Chief counsel's office with its anything goes arguments seems to be seeing about one foot in front of itself with no recognition to the long­term damage of the whistleblower program."

Zerbe added that often he found that the Whistleblower Office "is completely in the dark" as to IRS counsel's actions. "Commissioner Koskinen has to make it clear that the counsel office's client is the Whistleblower Office ­­ and they work for that office," he said.

Gregory S. Lynam of the Ferraro Law Firm said that it wasn't too long ago that when whistleblowers made motions in court to proceed anonymously, the chief counsel would oppose them, causing practitioners to question whether the chief counsel's intention was to scare whistleblowers out of court. "If you are thinking about it as a true adversary, why wouldn't you use every argument that you had?" Lynam said. Counsel, to his knowledge and its credit, no longer opposes these motions, he noted.

"The IRS should be looking hard in the mirror when counsel thinks it's perfectly acceptable to have the IRS have a whistleblower wear a wire, the IRS puts the whistleblower's life in jeopardy, the IRS collects tens of millions of dollars because of the whistleblower's work, and then IRS counsel cooks up some hoo­ha legal theory after the fact of why the whistleblower who risked her life for this country should be denied an award," Zerbe said. He added that he has two cases currently under seal that fit this fact pattern.

In an interview in 2010 with The Washington Post, Stephen Whitlock, director of the IRS Whistleblower Office, said that whistleblowers are asked to wear a wire in extremely rare circumstances. In its final regulations (T.D. 9687) on the whistleblower award program, the IRS declined to adopt comments calling for maximum award payments when a whistleblower wears a wire.

'Bring the Drano'

Grassley also expressed dissatisfaction with the speed at which payments to whistleblowers are occurring, stating that they "have slowed to a trickle at best." He called on the commissioner to review all whistleblower cases pending payment and "bring the Drano to unclog the holdup." Criticism of the payout rate is hardly fresh, as many practitioners have also expressed frustration.

"The problem isn't in the Whistleblower Office ­­ where they are doing as best they can with a tough hand ­­ but instead the problem of delay is in chief counsel's office and senior officials at the IRS," Zerbe said. "Koskinen needs to send the message that moving and approving whistleblower awards is a top priority across the board. It is indefensible that whistleblowers are having to wait months if not years for an award because an IRS manager can't get through his inbox."

In an August memorandum , John Dalrymple, IRS deputy commissioner for services and enforcement, outlined goals and timeline performances for the whistleblower program, including the establishment of controls and reporting requirements for the chief counsel's risk analysis opinions.

"Our understanding from discussion with the Whistleblower Office is that it is their highest priority to pay awards on award ­eligible cases. I'm not sure how much Drano is going to help," Scott A. Knott of Ferraro said.

Knott noted, however, that the IRS is still following its two­ year rule, even on cases in which there is a closing agreement, which delays the payment of awards until the refund statute under section 6511 has closed on the entire year. "Our view is that that is not consistent with the final regulations that allow for refund netting," Knott said. The closing agreement essentially fixes the amount of the award, he said. The IRS waiting on the closing of the refund statute is the cause of delay for most cases, he said, adding, "They made this [two­ year] rule back in 2008 and my understanding is they never reevaluated it."

The refund netting rule states that if any portion of a claim for refund that is substantively unrelated to the information provided is allowed and used to satisfy a tax liability attributable to the information provided instead of refunded to the taxpayer, then the allowed but non-refunded amount constitutes collected proceeds for purposes of section 7623.

For his part, Koskinen has emphasized the importance of the whistleblower program and has overseen the decision to increase staffing by 70 percent. Zerbe, however, said that while the commissioner has "said many positive things" about the program, there are still those at the IRS that aren't translating Koskinen's support into positive action. Other Senate Finance Committee leaders have also previously expressed concern that the program does not process awards on time and have asked the Government Accountability Office to look into the IRS processes and resources devoted to the program. In a September speech , Koskinen said that he expects the pace of awards to pick up "modestly" in 2015.

Civil Division Not Getting the Message

Grassley also criticized the program for the lack of cooperation between the IRS civil division and whistleblowers, especially in the face of tightening budgets.

"The IRS criminal investigators have had great success using whistleblowers to go after banks and terrorist organizations, but the IRS civil division still hasn't gotten the message of working with whistleblowers," Grassley wrote. "I note that the IRS hasn't been shy about paying outside law firms big money to help it in big examinations, yet ignores the possibility of harnessing whistleblowers and their lawyers who won't cost the IRS a dime from its budget."

Zerbe said that a key policy of the whistleblower law for Grassley was to emulate the success of the False Claims Act, under which the government often works hand­ in­ hand with whistleblowers and their counsel. "Commissioner Koskinen needs to break down institutional cultures ­­ particularly at [the IRS Large Business and International Division] ­­ and encourage the civil divisions to emulate the success of [the Criminal Investigation division] in working with whistleblowers. The IRS has a vital mission, and it needs to maximize the opportunities to leverage the knowledge and work of whistleblowers in order to succeed," Zerbe said.

In a statement to Tax Analysts, the IRS said the agency is reviewing Grassley's questions and will respond to them. "As Commissioner Koskinen has noted before, he is a strong supporter of the whistleblower process," the IRS said.