IRS Tax Whistleblower Articles
Whistleblower Report Is Good News, Bad News Situation
By Andrew Velarde
Tax Notes Today
The IRS Whistleblower Office on July 6 released its fiscal 2014 report to Congress, to what has become a common refrain of mixed reactions from practitioners.
The report "underscores the good news that the IRS continues to have a firehose of information coming in from whistleblowers. Unfortunately, the bad news is that it shows only a trickle of awards going out to whistleblowers," Dean Zerbe of Zerbe, Fingeret, Frank & Jadav PC said. "However, what I'm seeing firsthand from my clients is that finally the spigot is opening up a bit this year with awards."
According to numbers reported as of May 14, 2015, open section 7623(b) claims have seen significant delays in some parts of the review process compared with numbers reported in fiscal 2013. The average number of days a claim spends awaiting review by IRS Appeals, in Criminal Investigation division initial review, and in operating division field examination has increased from 250 days, 96 days, and 317 days to 419 days, 395 days, and 544 days, respectively. Turnaround time has improved when it comes to operating division subject matter expert review, falling from 190 days to 80 days. The report acknowledges that it takes five to seven years to analyze, investigate, audit, and collect proceeds, but it also states that the number of payments under section 7623(b) is expected to increase in fiscal 2015.
"Something is going on over there that's causing a backlog" of section 7623(b) award determinations, Scott A. Knott of the Ferraro Law Firm said. The 2014 report states that 11 claims have been paid under the revised law, only two more than had been reported in the prior year's report. In written responses to followup questions posed after a February Senate Finance Committee hearing, IRS Commissioner John Koskinen said the Whistleblower Office estimates six to 12 additional awards would be paid out under section 7623(b) in fiscal 2015 and that the IRS had paid 12 awards as of the time of his response. Knott said he hoped that based on The IRS Whistleblower Office on July 6 released its fiscal 2014 report to Congress, to what has become a common refrain of mixed reactions from practitioners. Koskinen's comments, the logjam would be broken soon.
Knott added that the backlog could be attributed to the time it takes for Whistleblower Office award evaluation, which averages 215 days, up substantially from last year's 90day timeline. Memoranda from the IRS establish goals of 90 days for several whistleblower review processes, including evaluation by the Whistleblower Office following the receipt of claims, review by operating divisions and CI subject matter experts, and notification of an award decision by the Whistleblower Office of when the collected proceeds can be finally determined. Knott criticized the time it took for final award processing, arguing that it shouldn't take more than a few weeks.
Erica Brady of Ferraro noted that because there were two section 7623(b) claims in the final award processing phase and 11 claims in the preliminary award recommendation letter phase, it is entirely possible for the Whistleblower Office to pay out six to 12 awards by the end of the fiscal year.
"If the Whistleblower Office is able to do so, it would be the clearest sign yet that the IRS has embraced the program and is fully committed to its success," Brady said.
Potential section 7623(b) whistleblower claims are identified during initial review of submissions by the Whistleblower Office and then forwarded to subject matter experts in the IRS operating divisions. Those experts decide whether the whistleblower information will be provided to field offices for examination or investigation before being returned to the Whistleblower Office so it can determine award eligibility. Senate Finance Committee member Chuck Grassley, RIowa, who played a pivotal role in the expansion of the whistleblower program in 2006 with amendments to section 7623, has previously criticized how slowly claims are processed.
"The point of the Whistleblower Office changes was to encourage the IRS to work as closely as possible with whistleblowers to rein in tax cheats and return money to the U.S. Treasury," Grassley said in a written statement responding to the new report. "It seems the IRS has made some progress but there's always danger of moving backward if the IRS's focus changes or if whistleblowers stop coming forward out of fear of poor results, such as the seeming lack of urgency in the processing of awards. I'll continue to look for progress and even more evidence that the IRS is offering a welcome mat to whistleblowers."
According to the latest report, only three awards paid in full in 2014 came from claims received in fiscal 2012, with no claims being paid in full for 2013 or 2014. Zerbe said the report makes it clear that the IRS should improve in providing more partial awards to whistleblowers, "instead of waiting for the whole enchilada."
The report for fiscal 2014 was released significantly later in the year than last year's report, released April 3, 2014.
The fiscal 2014 report also highlights how the total claims received and total claims open have continued to grow in recent years. Since 2011, the numbers of received and open claims have climbed to 14,365 and 8,682, respectively, representing an increase of nearly 76 percent and 331 percent over that period.
The total amount of awards paid under section 7623 in fiscal 2014 was $52 million, approximately in line with the awards paid in 2013. The 2014 award amount saw a sequestration reduction of nearly $4 million. Of the 101 awards paid out in 2014, only nine were on collections over $2 million. The total awards paid before reductions constituted 16.9 percent of the proceeds collected, a slight increase from the prior year's 14.6 percent, the lowest rate since 2010.
Zerbe said the report demonstrates not only the need for patience among whistleblowers, but also that the IRS should be more forthcoming with claim status updates, an area in which it has made tentative progress. In March the IRS announced a pilot program in which it sent claim status letters to whistleblowers with open claims, informing them that their claims are still under consideration. The IRS announced that an annual status letter program may yet follow the pilot program.
"Just telling a whistleblower a case is 'open' is not much comfort to a whistleblower [who] has been waiting years and has sacrificed much. In addition, failure to be forthcoming is leading to unnecessary Tax Court litigation," Zerbe said.
'A Lot of Ink' on Discovery
The report states that rules on access to and disclosure of taxpayer information could provide stronger protection for taxpayers. Release of information during discovery in a Tax Court proceeding is not addressed within the court's rules, the report states, leaving the scope of permitted discovery an open question.
"There appears to be no effective sanction, and no effective restraint, when a whistleblower obtains confidential taxpayer information in discovery and chooses to release that information to the public. It is fundamentally unfair to the taxpayer, whose issues with the IRS have been fully resolved, to have confidential information revealed in a situation where the taxpayer is not a party and has no interest other than in the protection of its private taxpayer information," the report states.
Zerbe said that despite the report's "spilling a lot of ink" on the discovery issue, that concern is a red herring. He said the Tax Court has done an admirable job of protecting taxpayer information in whistleblower cases and that IRS chief counsel "has plenty of tools" to ensure that protection.
Zerbe cited the recent Tax Court decision in Whistleblower 2127613W v. Commissioner, 144 T.C. 15 (2015) , in which he was lead counsel for the petitioners, as underscoring the importance of discovery for whistleblowers. "In this case, once we were allowed discovery, it showed that contrary to the IRS claims, the whistleblower and the information provided had been incredibly helpful to the U.S. government in pursuing a largescale case of tax evasion," he said. "Discovery is critical to ensuring whistleblowers are treated fairly and have confidence in the whistleblower program."
In that case, the Tax Court held that the IRS Whistleblower Office does not have exclusive authority to investigate taxpayers that are the subject of an application for a whistleblower award and that a couple is not ineligible for an award because they supplied information to other federal agencies before submitting an application to the Whistleblower Office. Although the targeted business was not named in the case, the fact pattern resembles that of Wegelin & Co., the Swiss bank that pleaded guilty to conspiracy to evade taxes after hiding more than $1.2 billion in secret accounts.
It Comes Down to 2 Numbers
As the report notes, the Whistleblower Office has significantly revised its information system to begin collecting other data to account for circumstances such as the return of a claim for further review. Four new Whistleblower Office case suspension statuses were added as well. Some of the longest periods spent in a specific status were in case suspensions regarding claims still in process, with claims spending an average of 728 days.
"Sometimes forgotten is that this new report, and the information it provides on the whistleblower program, is lightyears ahead of where we were when the first reports were issued," Zerbe said. "The amount of detail, especially on number of days for different actions, is head and shoulders from where we were at the start of the office in 2006."
Zerbe credited Whistleblower Office Director Stephen Whitlock and his team for the improvements, which he said benefit not only whistleblowers but also IRS management.
"Now the commissioner has to have his words of support for the program be matched by action and ensure the Whistleblower Office is provided the resources necessary to address the problems and slowdowns identified," Zerbe said, referring to Koskinen's previous comments praising the program. "Treasury's own studies have shown that one of the most efficient uses of limited IRS exam resources is in harnessing the work and information provided by whistleblowers. Today's report highlights that the IRS has only started to scratch the surface of what is possible in working with whistleblowers."
Knott said that the barometer for the program's success is a simple combination of two numbers: the amount collected and the awards paid.
"After seven years, the IRS has collected more than 2 billion additional tax dollars because of the whistleblower program, and from that paid out over $285 million in awards, but the IRS still has a tremendous opportunity before it to maximize the value of the information coming in from whistleblowers," Knott said.