IRS Tax Whistleblower Articles
Whistleblower Award Processing Continues to Lag
by Andrew Velarde
Tax Notes Today
Problems persist for the IRS in its processing of whistleblower award claims, and while some practitioners and lawmakers found encouraging signs in the IRS Whistleblower Office's fiscal 2013 report to Congress released April 3, reaction to the report was mostly ambivalent.
"Today's report serves to remind everyone that pigs-in-pythons have nothing on how long it takes for a whistleblower claim to work its way through the system," said Dean Zerbe, a partner at Zerbe, Fingeret, Frank & Jadav PC. "The Whistleblower Office has to make a priority of improving communications to whistleblowers -- even limited communication -- during the long wait period."
But Zerbe also acknowledged that the amount of payouts was encouraging, saying that the IRS continues to make "strong awards" to whistleblowers and that Whistleblower Office Director Stephen Whitlock "isn't shy about writing big checks."
The IRS paid out $53 million in 2013 on 122 separate awards, of which only six were on collections over $2 million, according to the report. By comparison, fiscal 2012 had more than $125 million in awards, although that amount was skewed by the $104 million award in September 2012 to former UBS banker Bradley Birkenfeld. The 2013 Problems persist for the IRS in its processing of whistleblower award claims, and while some practitioners and lawmakers found encouraging signs in the IRS Whistleblower Office's fiscal 2013 report to Congress released April 3, reaction to the report was mostly ambivalent. The amount is also skewed by a single payment of $38 million awarded to a whistleblower near the end of calendar 2012.
"The total payment of awards is defined by the outliers," Scott A. Knott of the Ferraro Law Firm said, adding that aside from those large payments, the amount paid out "seems flat."
Other practitioners were encouraged by the amount of payments. "This is heartening," Zerbe said of the amounts awarded, "especially as we see more and more knowledgeable, sophisticated whistleblowers willing to come forward after the payment to Brad Birkenfeld."
The amount of awards paid as a percentage of amount collected fell to 14.6 percent, its lowest rate since 2010, according to the report. Sequestration had a modest effect on the reduction of claims paid, with the IRS reducing payments last year by 8.7 percent.
Only nine awards in total have ever been paid under section 7623(b), enacted in 2006 to supplement earlier whistleblower legislation. The 2006 changes to the statute added a mandatory "shall pay" provision, dictating payouts to whistleblowers of 15 to 30 percent of collected proceeds when specific thresholds are met. Section 7623(b) also added an option for whistleblowers to appeal award decisions to the Tax Court.
Good News, Bad News
According to the report, the number of payments is not projected to grow dramatically in fiscal 2014.
Senate Finance Committee member Chuck Grassley, R-Iowa, who spearheaded the 2006 amendments to section 7623, saw both positives and negatives in the report.
"The good news is the IRS continues to get whistleblower tips and is making some payouts," he said in a statement. "I'm glad to see that, and I appreciate the IRS' work to make the program a success."
Grassley continued, "The bad news is the progress in making pay-outs is slow. The agency should do everything it can to make these cases a priority."
The average number of days section 7623(b) claims spent in the investigation process improved in several stages of the process, compared with 2012. Claims spent 64 days in initial review, 317 days in review during the Operating Division field examination, and 190 days in subject matter expert review. According to the 2012 report, the review time for the initial review, the field examination, and the subject matter expert review averaged 117, 424, and 260 days, respectively.
The report states that in total, it typically takes five to seven years for a whistleblower to collect a claim. While it has improved, the IRS has yet to completely accomplish its goal of adhering to 90-day timelines for several steps in its review of whistleblower claims, including for subject matter expert review. Steven Miller, then-IRS deputy commissioner for services and enforcement, outlined that goal in a June 2012 memo.
Zerbe said the report shows that the IRS needs to be reminded of the guidance Miller provided. "There should be a sit-down meeting with a whistleblower within 90 days of the submission. There are a growing number of slips between cup and lip," Zerbe said. Knott noted, however, that in his practice, he has seen the IRS adhering to the Miller memo's 90-day deadlines. He speculated that the long timeline for subject matter review could be due to cases involving pro se representation.
Grassley sees potential negative consequences from the lengthy review process but remains committed to the whistleblower program. "We can't let up," he said.
"My worry is that the slow progress will cause the tips to dry up. That would harm the whistleblowers who stick their necks out to flag tax cheating and the honest taxpayers who pay what they owe and deserve tax fairness," Grassley said.
If the lengthy review process has occurred because of understaffing at the Whistleblower Office, perhaps some relief is on the way. According to the report, by the end of fiscal 2013, the Whistleblower Office staff had 39 employees, including 15 senior analysts. That is up from the 36 employees and 12 senior analysts that the office had at the beginning of the fiscal year. The office's staff had previously doubled in size in fiscal 2012, primarily because of the January 2012 transfer of the Informant Claims Examination Unit out of the Small Business/Self-Employed Division.
J. Richard Harvey of Villanova University School of Law said the report continues to illustrate that the IRS is "still struggling trying to process and ultimately use whistleblower claims," despite the increase in staff.
As evidence of that struggle, Harvey pointed to the amount of open section 7623(b) claims in 2013, a number that has climbed since 2012. The report says that 11,531 claims were open as of March 6, 2014. The prior-year report said that 9,636 claims remained open as of December 10, 2012.
Knott said growth in the Whistleblower Office was necessary, but didn't know if the additions are enough to address the systemic issues.
"I don't know if adding three people is going to reduce [review times]," Knott said. He pointed to the report indicating a 263-day average for the Whistleblower Office to review results of field action to determine whether there is sufficient information to make an award decision.
The IRS should be able to make an award determination within 90 days after a case is closed, Knott said, asking, "How do you have a 263-day average? Were people from the IRS abducted?" Knott also said that in his practice, he has found the review process at this stage to be significantly shorter, and he wondered if the few outlier cases were skewing the average.
Knott added that the biggest problem with delays in processing claims is not with the Whistleblower Office, but rather getting the information to be used at the examination level.
Harvey said the IRS needs to consider dedicating more resources to the program and making it more difficult for IRS field agents to claim that the whistleblower information provided is of little or no use.
Revised Form 211
The IRS also posted to its website a revised Form 211, "Application for Award for Original Information," on April 2. The revised form reflects a process change in the mailing address for submissions. The IRS now instructs whistleblowers to send the form to its Ogden, Utah, office, where the agency has consolidated claim intake and initial processing operations.
Zerbe questioned the address change for whistleblower submissions, saying he's heard "real concern" that with the transfer of processing of whistleblower submissions to Ogden, "there is a risk that good whistleblower claims will not get the attention and focus they deserve."
"One of the great strengths of the Whistleblower Office has been the case management system where there is a capable and experienced long-term IRS employee responsible for and shepherding a whistleblower submission. IRS senior management and the Congress need to keep a sharp eye on this [transfer] decision," Zerbe said.
The revised form also asks more specific questions to gather information that the IRS would request as part of a debriefing, if it was not provided with the initial submission.
"They are asking for a breakdown of the tax by year, which I think has always been a problem getting that information in a straight way out of people," Knott said. Knott sees the revised form as an attempt to ease the IRS's processing of claims, saying that the IRS is changing the way it keeps track of these cases and that "the form> is a part of that."