IRS Tax Whistleblower Articles

New IRS Whistleblower Report Shows More Awards, Fewer Dollars

By Andrew Velarde

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The latest annual report from the IRS Whistleblower Office shows a substantially higher number of awards paid in comparison to the previous year, along with a significantly lower total award amount.

According to the Whistleblower Office's fiscal 2016 report , released January 12, the office made 418 awards to whistleblowers in fiscal 2016 under section 7623, a dramatic increase from the 99 total awards paid the previous year. At the same time, the award total before sequestration amounted to $61 million, falling from $103 million the previous year. As a percentage of proceeds collected as a result of whistleblower information, the amount of awards fell from 20.6 percent to 16.6 percent, the latter being more in line with other previous fiscal years.

The number of awards under section 7623(b) fell from 19 in fiscal 2015 to 18 in fiscal 2016. Section 7623(b) includes a "shall pay" provision, dictating payouts between 15 and 30 percent of collected proceeds for claims meeting the relevant thresholds.

Senate Finance Committee member Chuck Grassley, R-Iowa, who drafted the 2006 revisions to the whistleblower law to include the "shall pay" provision, welcomed the report but warned that the IRS and Congress shouldn't rest on their laurels. He argued that the IRS could be faster in considering whistleblower information and that making the IRS interpret the whistleblower statute in "a more favorable light toward whistleblowers" is another challenge.

"I look forward to working with the new administration on whistleblower concerns," Grassley said. "As I mentioned to Treasury secretary nominee Steven Mnuchin during our meeting, it's required a lot of oversight to maintain the momentum at the IRS Whistleblower Office, and I'd like to see a Treasury secretary who will build on the progress."

'A Transformative Year'

Scott A. Knott of the Ferraro Law Firm said that the 322 percent increase in awards paid year over year demonstrates the IRS's commitment to "making changes to improve efficiency in its award program."

In a letter within the report, Lee Martin, director of the IRS Whistleblower Office, called fiscal 2016 "a transformative year," because the office fully addressed or eliminated inventory backlogs and changed the process flow to avoid backlogs in the future. The reduction in backlog came despite a reduction in workforce. Partly as a result of a realignment of the Whistleblower Office into the IRS Small Business/Self-Employed Division in July 2016, the office shrank to 37 employees, down from 61 the year before.

Dean Zerbe of Zerbe, Fingeret, Frank & Jadav PC commended Martin and the IRS for cleaning up the case backlog and for the speedier processing of initial filings. He also praised Caroline Ciraolo, principal deputy assistant attorney general in the Justice Department Tax Division, for her leadership in "putting out a big welcome mat" for whistleblowers at the DOJ.

"There is no question the IRS senior management has the opportunity to ensure that next year's annual report talks about more tax dollars collected, more award payments made, and an increase in good whistleblower filings," Zerbe said.

The number of open claims fell from 35,670 in fiscal 2015 to 29,835 in fiscal 2016. The Whistleblower Office nearly doubled the number of claims it closed in comparison to 2015, to 21,124 -- an amount also far greater than the 13,396 it received in 2016. Of these closures, 73 percent were from claims received in the last two years. By far the most common reason for a closure, representing 59 percent of the total, was a rejection of allegations that were not specific, not credible, or speculative. Only 4 percent of claims were closed as a result of an award paid in full. According to the report, however, both section 7623(a) and (b) claims still take over seven years to process.

Knott acknowledged the administrative burden that accompanies dismissal of claims that are not specific, not credible, or speculative, saying they should be dismissed "as efficiently as possible."

"However, from the perspective of taxpayers as a whole, we believe that a much larger problem is when highly specific, highly credible large-dollar whistleblower claims supported by evidence are not pursued by the IRS," Knott added.

Martin's letter touts his office's Publication 5251, The Whistleblower Claim Process and Timeline, which outlines best practices and a timeline for each step in the claim process. That publication sprang from a recommendation in a November 2015 Government Accountability Office report (GAO-16-20), in which the agency was critical of the Whistleblower Office's timeliness, lack of communication with stakeholders, and potential for award inconsistency. The Treasury Inspector General for Tax Administration, in an August 2016 report (2016-30-059), also was critical of the office's claim evaluation timeline despite noting an improvement in the inventory backlog.

Zerbe said that the timely processing of award payments by the office will be key. "Nothing encourages more, and better, whistleblowers than hearing about award payments being made," he said. He pointed to "marked bottlenecks" highlighted in the report's table 3, which shows thousands of submissions under field investigation, awaiting closure of an associated claim or cases that have been suspended, awaiting collection action, or for which payment has been received but is awaiting the expiration of the statute of limitations on a refund claim.

"IRS senior management needs to bring the wood and clear out these bottlenecks," Zerbe said.

Still Looking for Those 6103 Contracts

The Whistleblower Office's annual report states that stakeholders can expect additional updates to procedural guidance during fiscal 2017 to address GAO and TIGTA recommendations. Included in the GAO recommendations was a call for implementation of a staffing plan for streamlining intake and the initial review process, and the development of guidance for examiners in operating divisions to use in determining whether a section 6103(n) contract with a whistleblower would be beneficial and to outline the steps for requesting such a contract.

Regarding section 6103(n), the report states that the statute does not "precisely address the circumstances in which most disclosures to whistleblowers arise" and that the office welcomes legislative changes. The IRS "continues to look for appropriate cases" in which to use section 6103(n) contracts with whistleblowers, the report says.

Section 6103(n) contracts allow for the disclosure of taxpayer information when necessary for "the providing of other services, for purposes of tax administration." Practitioners have repeatedly called on the IRS to make greater use of those contracts. Investigative disclosures under section 6103(k)(6) have been used as an alternative, but that authority is also not directly on point with whistleblower circumstances, the report argues.

"It is disappointing that 10 years on, we still haven't seen an IRS contract with a whistleblower," Zerbe said. "While the IRS [Criminal Investigation division] and Department of Justice in many cases work closely, and successfully, with a whistleblower, it is still rare to see IRS civil divisions bring the whistleblower in to help pull the oars."

He added, "There needs to be a commitment from senior management on encouraging IRS contracts with whistleblowers, particularly in [the Large Business and International Division] and SB/SE."

The GAO also recommended that Congress consider legislation providing protections for tax whistleblowers against employer retaliation, a change that the IRS would welcome, according to the report. The report also notes that additional taxpayer protections are necessary, given that the effectiveness of confidentiality agreements and protective orders issued by the Tax Court in conjunction with section 6103(h)(4) disclosures in administrative proceedings are limited.

"There is no restraint on whistleblowers re-disclosing return information following the completion of the administrative and judicial processes," the annual report explains.

Knott said it would be great to see legislative changes in 2017 that would provide greater protections for both whistleblowers and taxpayers. "In particular, extending the application of section 6103 to specifically cover certain disclosures of information to whistleblowers and to apply penalties for unauthorized re-disclosure should help save all parties the cost of unnecessary litigation because of the very limited disclosures that are currently occurring," Knott said.