IRS Tax Whistleblower Articles

4 Tips On Scoring Big For IRS Whistleblowers

By Ama Sarfo Law360, New York
August 18, 2014

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The Internal Revenue Service recently issued final rules detailing how tax whistleblowers can collect rewards, but the process for actually receiving a payout remains shrouded in mystery for informants with cases before the agency.

The IRS Whistleblower Office is notorious for keeping a curtain over its operations, since it handles sensitive taxpayer information and documents. But this can be frustrating for whistleblowers who want to collaborate with the agency, says Erika Kelton, a partner with Phillips & Cohen PC.

“You want to prepare the case thoroughly to give the IRS the best case possible, as it's not a situation where there will be a lot of dialogue,” Kelton says.

Below, attorneys share four tips for successfully counseling tax whistleblowers.

Act as if Appeals Don’t Exist

An appeal process does exist where whistleblowers can take their cases before the U.S. Tax Court. However, the body of Tax Court whistleblower cases is fairly small, since the IRS whistleblower program is still young, and appeals are always an uphill battle. So whistleblowers and their attorneys should act as though their initial submission is their first and only shot, attorneys say.

“The best strategy is not having to go there in the first place,” Kelton says.

Whistleblower appeals fall into two camps, according to Michael Sullivan of Finch McCranie LLP and Scott Knott of the Ferraro Law Firm. Some are filed by whistleblowers whose claims have been completely denied by the IRS and who want the agency to review the matter again. Others are filed by whistleblowers who have been given awards but think the amounts are too small.

Whistleblowers in the first camp have almost no chance of success, experts say.

“The court can’t force the IRS to act on an issue — your chance of success is zero, and you can’t make them do it,” Knott says.

But whistleblowers who’ve already received money and simply want more have a better chance in court, attorneys say.

“The whistleblower has the important evidence, so he or she can show the judge that the IRS didn’t consider all of the relevant evidence and can be successful for sure,” Knott adds.

Provide a Roadmap

While it's always important for lawyers to present clear and organized work, this is especially true when dealing with the IRS, which is overworked and underfunded. Otherwise, the beleaguered agency will quickly trash a whistleblower claim, attorneys say.

“When the IRS receives a claim, something has to jump out at them, because they’ll be thinking, ‘Why should I extend my limited resources on this matter as opposed to using it on the stack of matters that I need to address but don’t have time to get to?’” Sullivan says.

Knott emphasizes that whistleblowers need to be sure their claims involve tax issues that would prompt the IRS to start an enforcement action.

As for evidence, whistleblowers need to provide a solid catalog of items, such as email communications about illegal tax positions, evidence of intercompany transactions that were hidden from the IRS, invoices, and books and records, Knott adds. Although whistleblowers don’t need to provide all of the necessary evidence, they need to have something substantial to stand upon.

“If the whistleblower doesn’t have anything to back up a submission, the IRS could say that the whistleblower only provided a tip and they would have discovered the illegal activity anyway on their own,” Knott says. “In that instance, the whistleblower could still get a discretionary award, and that’s also good. But in that circumstance, the whistleblower doesn’t have the right to review the documents and evidence the IRS looked at when making its determination.”

According to Sullivan, the whistleblower's submission should sum up the case, lay out the facts and the reasons for liability, and even suggest an investigative approach.

“The submission basically has to be a prosecution memo,” Sullivan said.

Talk to Experts

While killer evidence is key in a whistleblower case, Kelton says experts should also be an integral part of a whistleblower’s due diligence process, as they can lend authority to his or her claim.

“In advance of submitting a claim, we often consult with experts in the whistleblower’s field, flesh out all of the facts, and then also prepare a list of potential witnesses for the IRS to speak to, which includes documents they should request, the nature of the information contained in those documents, what areas of expertise the experts have, and what they would likely say,” Kelton says.

This step is important, because the IRS’ due diligence process is quite lengthy and involved. The first evaluation step can take upwards of a year, Knott says, and the agency goes through several levels of review before it acts on a claim.

File a Draft Award Determination

It takes months for whistleblowers to receive an award amount once the IRS determines that they are, in fact, entitled to money. The most proactive whistleblowers and attorneys use that time period to suggest amounts of their own, Knott says.

Knott uses the strategy with his own clients and maintains that it helps speed up the claim resolution process, as it gives the IRS months to consider a whistleblower’s position.

“It’s not really provided for in the regulations, but there’s nothing saying you shouldn’t do it,” Knott said. “Anything you can do to make the IRS’ job easier, you’ve got to do it.”