IRS Tax Whistleblower Articles

IRS Whistleblower Office Report Cites Lower Submissions, Awards

by Jeremiah Coder

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The IRS Whistleblower Office's fiscal 2011 report to Congress shows a significant drop in the number of claims being submitted to the agency after several years of strong growth following revision to the whistleblower statute allowing higher award amounts.

In fiscal 2011, the IRS received only 314 submissions under section 7623(b), well below the 472 and 422 cases that came in for the 2009 and 2010 years, respectively. The award amounts paid out under all provisions of section 7623 also dropped substantially in fiscal 2011, with the IRS making a total of only $8 million in awards from 97 claims on $48 million in collected proceeds. Only four awards paid in 2011 involved collections of more than $2 million. (For the fiscal 2011 annual report, see Doc 2012-13293.)

Although the IRS made its first award payments under section 7623(b) in 2011, the report said that the agency could not reveal the number of awards made under subsection (b) because the class was so small as to make it impossible to satisfy taxpayer privacy requirements in section 6103.

Whistleblower representatives have claimed that the Service's mishandling of the whistleblower program is driving potential informants away. (For prior coverage, see Doc 2012-10562 or 2012 TNT 98-4.)

In a June 21 release, Senate Finance Committee member Chuck Grassley, R-Iowa, announced that he had placed holds on two Treasury nominees as a result of the IRS's handling of the whistleblower program and intends to maintain the holds until satisfactory responses regarding the program are provided. The move potentially scuttles a vote on the nominees that was expected the week of June 25.

"The way the IRS and Treasury Department have handled the whistleblower program enacted more than five years ago is inexcusable," Grassley said. "Any improvements have been made only under duress and in response [to] holds I've put on administration nominees, and those changes are far less than what ought to be the standard," he said. "The lack of progress is demoralizing valuable whistleblowers who often put their own livelihoods at risk to speak up about wrongdoing."

In response to the annual whistleblower report, Grassley said that "the agency fails to establish accountability measures for its leaders and senior executives to pay out awards." (For the release and a letter to Treasury and the IRS, see Doc 2012-13373.)

Based on the significant decrease in the number of section 7623(b) claims during the last fiscal year, "it appears that the procedural hurdles that whistleblowers face have resulted in the IRS receiving less information about noncompliance despite the growing tax gap," said Scott A. Knott of the Ferraro Law Firm. "We believe that quality representation can help a whistleblower overcome those hurdles, but until the IRS starts actually paying out some large awards, it's hard to convince a prospective tax whistleblower that the risk of coming forward is outweighed by the potential reward," he said.

In tables providing the status of open section 7623(b) claims, the IRS noted that a total of 1,176 submissions are awaiting resolution, covering 8,949 taxpayers and 952 whistleblowers. The average length an open claim has sat waiting for initial review by the Whistleblower Office is 131 days; 299 days for examination by the field; 328 days for review involving a subject matter expert; 200 days for Appeals; 842 days for review by the Criminal Investigation division; and 285 days for an award evaluation.

A memo sent June 20 to all IRS operating divisions indicated that the Service is adopting temporary timelines for acting on submissions while it conducts a review of the whistleblower program. (For related coverage, see Doc 2012-13279.)

New Proceeds Limitation

The annual report clarifies that the IRS does not believe it has the authority to pay out awards under section 7623 for foreign bank account report penalties that might be collected as the result of submitted claims. Section 7623 covers only recoveries of amounts collected under Title 26, and the FBAR penalty is a Title 31 provision, the Service said. Also, Title 31 already has a separate award program covering information that leads to proceeds.

But Dean Zerbe, national managing director at Alliantgroup LP and a former Finance Committee aide who worked on the 2006 revisions to the whistleblower law, disagreed with that conclusion. "The idea that the IRS whistleblower program is limited only to funds collected under Title 26 is wildly incorrect," he said, adding that the law states that the whistleblower is entitled to an award based on the proceeds from any settlement, including any related actions as well as additional amounts based on the information provided by the whistleblower. "I don't know what could be clearer," he said, noting that the Finance Committee didn't limit awards to proceeds collected under Title 26. "The sweeping language was put in there purposely to prevent shenanigans by the government of trying to limit a whistleblower's award," he said.

Grassley chastised the IRS's position of excluding awards for collected FBAR penalties, saying that the agency was "using questionable tactics like the Justice Department did when the False Claims Act was updated 25 years ago to limit whistleblower awards."

Coming Guidance and Staffing

Regarding administrative guidance, the report says that the IRS expects to issue proposed regulations this summer to reflect statutory changes made to section 7623 in the 2006 amendments. The IRS is also working in fiscal 2012 to consolidate the staff that works on section 7623 claims and is in the process of transferring the informant claims examination unit in Ogden, Utah, from the Small Business/Self-Employed Division to the Whistleblower Office. The IRS said that current law does not adequately protect whistleblowers' identities or prevent retaliation. Litigation between taxpayers and the government sometimes raises questions about the involvement of a whistleblower in an examination. The appropriate response by the IRS should be to "neither confirm nor deny informant involvement," the IRS said. However, future adverse judicial rulings in discovery matters could "open the door to fishing expeditions to identify whistleblower involvement," the agency warned.

At the end of fiscal 2011, the IRS Whistleblower Office had 18 staff members and had been given a special counsel from the IRS Office of Chief Counsel. Recommendations from the Government Accountability Office last year will be fully implemented by October 15, the IRS said. (For the GAO report (GAO-11-683), see Doc 2011-19195 or 2011 TNT 176-59.)