IRS Tax Whistleblower Articles
Speakers Detail Frustrations With IRS Whistleblower Regs
by Jeremiah Coder
The IRS's handling of high-dollar whistleblower claims continues to thwart Congress's objectives in setting up an enhanced reward framework, speakers said at an April 10 public hearing on proposed regulations affecting the agency's whistleblower program.
Treasury and the IRS in December issued a large package of proposed regs (REG-141066-09 ) governing whistleblower awards under section 7623 that detail the rules for submitting information and filing claims for awards, set forth whistleblower administrative proceedings applicable to claims for awards, and address the computational determination and payment of awards.
However, whistleblower representatives at the IRS hearing displayed polite but pointed frustration at the ongoing lack of progress and the conservative positions still consistently taken by the IRS Whistleblower Office since its creation six years ago.
Key Definitions Panned
The narrow approach taken by the government in defining collected proceeds for determining an award amount continues to be a major point of contention for informants and their representatives. The IRS proposed restricting "collected proceeds" to taxes, penalties, and interest, while making some allowance for tax attribute reductions, such as net operating losses. So far, the government has resisted including amounts outside Title 26, such as monies the IRS might collect from foreign bank account report penalties or Title 18 criminal penalties.
Erica L. Brady of the Ferraro Law Firm said that the IRS Whistleblower Office is perceived as being unreceptive to tax informants. That perception is caused in part by how the government has chosen to create in its guidance definitions "that don't follow the plain language" of section 7623, she said.
For example, Brady said, in construing activity leading to an award for which the IRS "proceeds based on" information the whistleblower provided, the IRS ignores the statute's command that an award result from any administrative or judicial action and instead excludes collected tax amounts when the information was useful but did not lead to the IRS initiating a new audit action or expanding the scope of an existing action. The government's approach excludes whistleblowers who might come forward with additional facts that could increase the amount of tax collected, she said, calling that an "illogical conclusion."
The IRS also is acting arbitrarily in setting a cutoff date for how to calculate the reduction in tax attributes when determining the amount of collected proceeds, Brady said. Payments made by a taxpayer months or even years after a final award determination has been made "are just as significant as those paid a day before an award determination is made," she said, adding, "It appears the secretary is placing administrative convenience above all else.That is not an appropriate method to interpret a statute."
Brady urged the IRS to start calculating an award based on the midpoint (22.5 percent) of its discretionary range of 15 to 30 percent of collected proceeds, with the IRS adjusting the percentage upward or downward based on positive and negative factors. The 15 percent initial determination laid out in the proposed regs "sends a message to whistleblowers that [the IRS] is only interested in providing minimum awards, and it continues the belief that [informants] are just not welcome," she said.
Bryan C. Skarlatos of Kostelanetz & Fink LLP said it is problematic to aggregate several taxpayers and tax years into one final award determination because it "generates huge delays in making a final award determination" to the whistleblower. It makes sense for the IRS to adopt an annual accounting concept so that a final award determination is made based on each taxpayer per tax year, he said.
Skarlatos said that in computing proceeds when NOLs are carried forward into future years, the best approach would be for the IRS to continuously monitor the taxpayer to see when an NOL is actually used and to make an award payment then as appropriate. If administrative constraints prevent that method, the IRS should allow a new award claim when an NOL is used in the future, he said. "You can make a final award determination and then put the burden back on the claimant" to show that an NOL has generated collected proceeds, he said.
Regarding communication between the IRS Whistleblower Office and informants, Skarlatos suggested that providing a status update of an award proceeding does not violate taxpayer confidentiality. "I think a distinction can be made there," he said.
Filipe Bohnet-Gomez of Kohn, Kohn & Colapinto LLP argued that section 7623 encompasses all parts of a scheme covered by a whistleblower claim, whether or not directly related to a taxpayer identified by the informant. The IRS should adopt a standards-based approach to related actions drawn from tort law under which "all actions that proceed from the original action in a natural and continuous sequence unbroken by any new and independent causes are related actions," he said. The proposed regs go too far in treating all information obtained by the IRS as independent even if it is clear that it would not have been obtained but for the whistleblower's contribution, he said.
Bohnet-Gomez also took issue with the government's excluding non-Title 26 amounts from the definition of collected proceeds, noting that such provisions administered by the IRS are still clearly relevant in uncovering tax underpayments. Criminal fines and penalties should be included in proceeds because section 7623 kicks in before the Victims of Crime Act of 1984 carves out those amounts, he said, adding that in the event of conflict, the IRS should yield to the newer introduction of specific mandates in section 7623. Also, section 7623 is "self-procreating," Bohnet-Gomez said, because the statute mandates that proceeds "shall be available" for awards.
Neil V. Getnick, representing the Taxpayers Against Fraud Education Fund, said that the "proceeds based on" definition is overly restrictive and urged the IRS to adopt the model used by the SEC, which looks to whether information significantly contributed to an investigation. In defining what constitutes a related action that creates entitlement to an award, it is contrary to the plain language of the statute to consider related to be only one step removed from information provided by a whistleblower, he said, complaining that the IRS has the "sole discretion to determine how many steps removed an initial action is from a related action."
Mark Scott, a former director of the IRS's Tax-Exempt Bonds Office now in private practice, urged the IRS to revise the proposed prohibition against some government employees making whistleblower claims. Many state and local governments are federal taxpayers themselves, so excluding employees of those governments from being able to make informant claims will limit the potential to uncover significant federal tax noncompliance, he said.
There is no statutory support for broadening the exclusion to cover state and local governments, Scott said, adding that the proposed exclusion adds substantial complexity in determining who is a state or local government employee. He argued that the IRS should permit all employees of nonfederal government entities to file claims except when they rely on confidential information protected by section 6103.
Plea for Greater Communication
R. Scott Oswald of the Employment Law Group PC told the government panelists that the IRS must make greater use of confidentiality agreements in section 6103(n), noting that those agreements are often routine in other whistleblower areas such as the False Claims Act. It isn't clear that the IRS has ever used such an agreement to provide a whistleblower with a case status update, he said.
Thomas C. Pliske of the Tax Whistleblower Law Firm LLC agreed, saying that the IRS is hiding behind section 6103 in not keeping whistleblowers or their representatives informed of where in the pipeline a submitted claim is. It seems to be a common sense idea to use confidential agreements early in the process rather than waiting until a final determination of tax is made, which is when the first communication from the IRS to a whistleblower often occurs, he said.
"I think a confidentiality agreement should be entered into in every case; it should be mandated," Pliske said, adding that whistleblowers want only basic information to know that a case is continuing to get attention.
Speaking on behalf of the National Whistleblowers Center, Dean A. Zerbe said that the IRS must stay focused on the policy goals Congress had in mind in revising section 7623. Employees have a big role to play in helping detect fraud and are in the best position to report fraudulent activity, he said. Zerbe referenced several studies showing that the overwhelming source of fraud referrals is whistleblower tips. Knowing that, Congress wanted to encourage reporting of fraud to the proper governmental authorities, he said.
"I am constantly concerned that the Service views [section 7623] as an orphan in the wind . . . that it sprang from nothing," Zerbe said, adding that the IRS would benefit from recognizing that the statute was based on the False Claims Act. Zerbe, who was a staffer for Senate Finance Committee member Chuck Grassley, R-Iowa, when Grassley spearheaded the 2006 amendments to section 7623, said lawmakers knew that it wouldn't be "angels" coming in to provide details of fraudulent activity, but rather it would be "a rogue catching a rogue."
The whistleblower law "allows the IRS to target its limited resources at bad actors, and that is to the good of not only the IRS but also honest taxpayers," Zerbe said. He cited a 2012 Treasury Inspector General for Tax Administration report finding that the IRS has a much lower no-change rate resulting from audits of cases involving whistleblower tips and a significantly higher return on time worked in those cases. "It is important to the IRS's own policies that we expand this program to make it as effective as possible," he said.
Prospects for Reg Changes
While making pleas for substantial revisions to elements of the proposed regs, the general belief of those gathered at the hearing was that little would actually change in the final regs. That view was somewhat supported by the generally quiet demeanor of the government panelists.
Officials posed only one question during the hearing, asking Skarlatos for further clarification on his view in departing from the aggregation approach.The panel remained silent after all the other speakers finished, prompting Zerbe to quip "What a surprise" when no one responded to his offer to answer questions.
Paul D. Scott of the Law Offices of Paul D. Scott in San Francisco told Tax Analysts that many of the concerns expressed at the hearing "have been raised before repeatedly with the IRS, to little effect." The IRS Whistleblower Office's attempts to implement a successful program "have been throttled time and again by institutional resistance from within the Service," he said.
"With key figures from the old guard retiring or taking on lesser roles, and the more open attitude of acting IRS Commissioner Steve Miller, there had been reason to hope the Service might finally begin to embrace whistleblowers as allies rather than continuing to stave them off like adversaries," Scott said. However, he said, the hearing panel's silence was disheartening. "How the Service ultimately responds to the hundreds of comment letters and testimony, with either a serious reworking or a rubber-stamping of its proposed regs, will truly tell us whether we are entering a new era," he said.