Strong IRS Headwind Blows Whistleblowers Off Course

By Jeremiah Coder — jcoder@tax.org

The IRS has a public relations problem in how it is handling the expanded tax whistleblower program. ‘‘Profoundly disappointing.’’ ‘‘Outright bias.’’ Those frank assessments from practitioners who represent tax whistleblowers reflect the prevalent public attitude toward the Whistleblower Office.

Congress expanded the whistleblower program in late 2006, in theory enabling the IRS to offer insiders at tax-cheating companies a reliable financial incentive to report malfeasance. The program
was meant to help the Service combat tax evasion more aggressively and reduce the tax gap, but critics say the potential is being squandered.

Despite the Whistleblower Office’s early promise, many practitioners now say the IRS has done its best to obstruct the program’s success. The consensus among those working on the issue is that the
IRS needs to get out of the way.

‘‘There are nice people running the IRS Whistleblower Office, but no one seems to want to make hard decisions and ruffle feathers of those in chief counsel or other parts of the IRS opposed to the
program,’’ one practitioner said. Given the necessity of maintaining a working relationship with the Whistleblower Office on behalf of their clients, some of the practitioners who spoke with Tax
Analysts requested anonymity to speak candidly about their experiences and frustrations.

Another practitioner said it seems as if the Whistleblower Office would ‘‘quietly labor in typical bureaucratic fashion with minimal results’’ if it weren’t for the active oversight that Senate Finance
Committee member Chuck Grassley, R-Iowa, and others have brought to it. ‘‘The way the program is being run, you almost suspect that the IRS is trying to make the program fail without being expressly overt about it,’’ the practitioner said.

‘The way the program is being run, you almost suspect that the IRS is trying to make the program fail without being expressly overt about it,’ a practitioner said.

‘‘To say my clients are disappointed is an understatement; there are a number of whistleblowers who have lost everything as a result of doing the right thing, but the IRS is only aggravating their
pain,’’ a representative of a whistleblower said.

Stephen Whitlock, the director of the Whistleblower Office, has tried to defend his efforts against critics who say the IRS is taking too long in making award determinations in submitted claims, and he
has argued repeatedly that the time frame is out of his control.

Acknowledging criticism of how the program is operating, the IRS told Tax Analysts that the program ‘‘plays a crucial role in ongoing IRS enforcement efforts’’ and is ‘‘an important priority for the
IRS.’’ The IRS is ‘‘in the process of developing additional guidance on timing of award payments, tax withholdings of awards, and other issues raised by whistleblowers and their representatives,’’ the
agency said.

The Nondisclosure Excuse

Whitlock emphasized to practitioners in April that the Whistleblower Office is ‘‘dealing with a closed system’’ when an informant provides allegations of nonpayment by a third-party taxpayer.
Because taxpayers have appeal rights, the Whistleblower Office must wait until those rights expire or are waived before it can make an award determination. The sometimes lengthy waiting period for
whistleblowers is regrettable, Whitlock said, but the IRS cannot relay information on a claim status —even when there is public reporting of a taxpayer’s position — until the case is officially closed with a final tax liability determination.

‘‘I sympathize with whistleblowers, but I have section 6103 to deal with, and it doesn’t give me an option’’ to disclose information any sooner, Whitlock said. ‘‘We’re closed until we get to the end.’’

But many critics say the Whistleblower Office is using section 6103 as an excuse and applying it too broadly. Grassley has repeatedly asked the IRS to ‘‘develop communication guidelines that fit within
the privacy restrictions to communicate with whistleblowers at every step.’’ To help build trust in the system, ‘‘the whistleblower should be given an estimate of the time to the next step and also [be]
provided periodic updates as appropriate’’ regarding claim status, Grassley wrote. The Government Accountability Office has made similar recommendations. (For Grassley’s letter, see Doc 2011-19478 or 2011 TNT 178-51. For GAO-11-683, see Doc 2011- 19195 or 2011 TNT 176-59.)

‘‘The IRS and Whistleblower Office seem to hide behind a strict or overly broad reading of 6103 to justify what appears to be a bias against whistleblowers,’’ said one practitioner. ‘‘It seems that every
time they face an issue and they weigh the interests of the IRS against the interests of a whistleblower, they come down completely on the side of the IRS with little concern how such decisions affect the whistleblower or the program in general.’’

Favorable Tinkering

The IRS has relented on some procedural matters in response to the tax bar’s more vehement complaints. It recently finalized regulations on collected proceeds that adopt some language whistleblower representatives had sought allowing calculation of an award amount when a whistleblower’s information prevents a refund payment. However, the IRS still does not allow award payments based on the collection of criminal fines, because the agency believes it cannot override specific statutory directions for how fines are collected and applied. Net operating losses pose another problem, because in the IRS’s view there are no proceeds until the taxpayer specifically recognizes a tax benefit arising from the application of any losses. (For T.D. 9580, see Doc 2012-3531 or 2012 TNT 35-30.)

The IRS is trying to improve how exam teams handle case files that include whistleblower submissions. According to the IRS, field office staff are instructed to keep whistleblower information separate
from other case material. Examiners cannot mention the existence of a whistleblower claim in any communication with a taxpayer, and they should not respond if the taxpayer inquires whether
a whistleblower claim is involved. Whether a whistleblower claim is the underlying basis for the IRS’s interest in a tax issue is deemed irrelevant to the exam.

When a case goes to Appeals, the file is separated so that the Appeals officer sees only the information relied on in making a tax adjustment and Appeals does not learn of any whistleblower involvement.

All About Timing

Gregory S. Lynam of the Ferraro Law Firm said the IRS as an institution is not inclined to hurry. ‘‘When I asked a subject matter expert why it took so long to get the debrief meeting set up, his
response was ‘This has only been on my desk for a year,’’’ Lynam said, adding that the answer ‘‘boggles the mind.’’ It shouldn’t take multiple years to determine whether a submission has merit,
he said.

The problem with prolonged investigations is that there is no mechanism in place to prevent the statute of limitations from expiring while the case undergoes review by a subject matter expert or the
Office of Chief Counsel, Lynam said. ‘‘If the IRS cannot review whistleblower material in a timely manner, at the very least, the IRS should seek statute extensions and prevent audit closures while
reviewing whistleblower claims,’’ but that hasn’t been happening, he said.

Part of the problem stems from design flaws in section 7623, said Erika A. Kelton of Phillips & Cohen LLP. For False Claims Act submissions the Justice Department has a statutory responsibility to
investigate and decide within 60 days whether to act on a claim, although the law also allows the government to extend that deadline for good cause. The False Claims Act works well because it provides for transparency and oversight, Kelton said, adding, ‘‘Whistleblowers can go to court when the government is unjustifiably dragging [its] feet on their information.’’

The statutory language for the tax whistleblower program sets no firm deadline for an IRS response, much to the chagrin of whistleblowers and their representatives. With only one publicly announced
high-dollar award payment made since the enactment of section 7623(b), whistleblowers who entered the queue early are growing agitated. One informant recently sued the IRS in Tax Court over
the agency’s delay in making an award determination on his submission. (For prior coverage, see Tax Notes, Mar. 12, 2012, p. 1353, Doc 2012-4670, or 2012 TNT 45-1.)

‘The IRS will be in for a rude awakening if the court finds that there has been constructive denial of cases under the Administrative Procedure Act and takes decisions out of the hands of the IRS,’ Zerbe said.

Practitioners and academics have suggested that IRS inaction may violate Administrative Procedure Act requirements. The Tax Court has asked the IRS to respond to the petition before it rules on the
government’s motion for summary judgment to dismiss the case. Several practitioners and whistleblower organizations are expected to submit amicus briefs in support of the informant.

Noting that frustrated whistleblowers and their attorneys are seeking alternative avenues of resolution for their claims, Dean Zerbe, national managing director at Alliantgroup LP and a former tax counsel to Senate Finance Committee Republicans, said, ‘‘The IRS will be in for a rude awakening if the court finds that there has been constructive denial of cases under the Administrative Procedure Act and takes decisions out of the hands of the IRS.’’ Courts have been clear that an agency cannot delay endlessly in making a decision, he said, adding, ‘‘The Tax Court’s decisions have been extremely
informative and thoughtful on the whistleblower law — I strongly anticipate that frustrated whistleblowers will get a good hearing when seeking payment.’’

The fact that other agencies have successfully launched their own whistleblower programs hasn’t cast the IRS in a good light. As part of the Dodd- Frank Wall Street Reform and Consumer Protection
Act, a whistleblower office was established in the SEC. Charged, like the IRS’s Whistleblower office, with producing an annual report, the SEC’s Office of the Whistleblower submitted its analysis to Congress less than two months after the end of the agency’s fiscal year.

Perception Problems

A tax whistleblower told Tax Analysts that informants get a decidedly unfriendly vibe from the IRS. ‘‘Websites are the outward manifestation of how an organization communicates with the outside
world and promotes what is important to that organization,’’ the whistleblower said, adding that the IRS Web page for the whistleblower program offers ‘‘the absolute bare minimum, designed to discourage whistleblowers from the very beginning.’’ The information provided ‘‘reflects the vague, diffident, inefficient, and ambiguous process with which the IRS operates the whistleblower
program,’’ the whistleblower said.

In contrast, the home page for the SEC’s whistleblower office is ‘‘well designed and carefully thought out, [speaking] volumes of the warm and professional reception SEC whistleblowers will receive
and the effectiveness of SEC procedures,’’ the whistleblower said. ‘‘No wonder the number of high-dollar whistleblower claims to the IRS have been in decline the past two years.’’

‘The IRS has frustrated the legislative intent of Congress to the very real detriment of whistleblowers who have acted in good faith during the last six years,’ a whistleblower said.

‘‘The IRS is currently falsely misrepresenting itself to whistleblowers, inducing inside whistleblowers to take personal and professional risks without any real intention of compensating or rewarding
those whistleblowers,’’ said the whistleblower. ‘‘The IRS has frustrated the legislative intent of Congress to the very real detriment of whistleblowers who have acted in good faith during the last six years.’’

Rescue Efforts

Practitioners list many ideas for improvement. For example, whistleblower representatives say they would like to see the Whistleblower Office have designated legal counsel to counter what they
see as animosity toward the program from chief counsel. Noncompliance functions such as the Taxpayer Advocate Service and the Office of Professional Responsibility have their own tasked liaisons
from chief counsel, and the same could be arranged for the Whistleblower Office. However, some practitioners doubt that a designated chief counsel liaison would be sufficient to bridge the gap between the offices.

Whistleblower representatives say the IRS should clearly state its intention to fully support the program and ensure its success. ‘‘There needs to be policy statements from the IRS commissioner and
deputy commissioner (services and enforcement) emphasizing the importance of whistleblower cases to tax administration, as well as procedures implemented to prioritize whistleblower claims in the
exam process,’’ a practitioner said.

The Whistleblower Office now acts as a kind of clearinghouse, accepting informant claims and transmitting the information to the field functions, which follow up on the claims. Practitioners said
that giving the office more staff, particularly for investigations, would allow it to participate more in the exam process and help reduce bias.

Another recommendation is for the IRS to hire senior staff from other government whistleblower programs like the SEC’s. Those individuals would bring both an insider’s understanding of the mission
and an outsider’s perspective of IRS culture. Zerbe said a good start would be for the Office of Chief Counsel and the Whistleblower Office ‘‘to bring in attorneys who understood the whistleblower
law, the qui tam law — on which the IRS whistleblower law I wrote is based — and a general understanding of this field of law and practice.’’ Many of the program’s current problems ‘‘could be
resolved with skilled and knowledgeable attorneys seeking to find productive resolutions as opposed to the easy road of just saying no,’’ he said.

At a May 8 Finance Committee hearing, Grassley expressed deep frustration toward Mark Mazur, the nominee for Treasury assistant secretary for tax policy, regarding the fact that five years after the
Whistleblower Office opened, the ‘‘necessary regulations are not finalized, the annual report is always late, and communication with whistleblowers is essentially nonexistent.’’ Grassley said whistleblowers ‘‘deserve to know at least the month, and hopefully the year, when they can expect guidance.’’ (For prior coverage, see Tax Notes, May 14, 2012, p. 823, Doc 2012-9806, or 2012 TNT 90-1.)

Grassley offered a straightforward solution for repairing the whistleblower program: ‘‘It’s simple — just [have Treasury and the IRS] meet and make awards.’’ He likened the resistance at the IRS to impediments he has seen in other governmental departments working with informant laws, and he laid the blame on ‘‘professionals within the agency who aren’t doing their job and don’t want the
public to know.’’ If government officials admit that whistleblowers are bringing in big tax dollars, that means someone isn’t doing their job, he said.

Leadership Change?

If the IRS Whistleblower Office is merely following orders to be unhelpful, that order comes from the top tiers of management, practitioners said. Noting the strong commitment that the heads of
other agencies have shown in implementing their own whistleblower programs, Kelton said that IRS intransigence on section 7623 is worrisome. ‘‘The tax whistleblower program is enormously promising and can yield fantastic results if only Commissioner Shulman would have the vision and care enough to make it a success,’’ she said.

Zerbe agreed that the office needs a stronger advocate within IRS leadership. ‘‘There is no question that the whistleblower program is at a crossroads,’’ he said. ‘‘The tremendous early success of
the whistleblower program is in jeopardy, as the IRS and Treasury are starving the golden goose. . . . It is only tax cheats that are benefiting from the failure to build on the good beginnings of the program.’’

‘There needs to be a cultural change at the IRS and Treasury regarding the whistleblower program, with Dr. No being replaced with Mr. Yes,’ Zerbe said.

‘‘The bottom line, though, is there needs to be a cultural change at the IRS and Treasury regarding the whistleblower program, with Dr. No being replaced with Mr. Yes,’’ Zerbe said.

One practitioner concluded, ‘‘I believe that the whistleblower program is at the juncture where either heads roll at the IRS for its obstruction, or else the program is going to die because potential informants avoid the hassle of dealing with the current process.’’