Stephen Whitlock, director of the IRS Whistleblower Office, on January 25 acknowledged a generally skeptical attitude of IRS employees toward the section 7623 whistleblower award program but said the program has strong support among senior Service executives.
The IRS in the past has been accused of not being supportive of the whistleblower program and of being slow to pay out awards. But Whitlock pointed to the payment of a $104 million award to former UBS banker Bradley Birkenfeld as evidence that when an informant’s case is supported by the law and facts, the IRS will not hesitate to make a section 7623(b) payment, regardless of the amount. Whitlock spoke at the Administrative Practice session of the American Bar Association Section of Taxation meeting in Orlando, Fla. (Prior coverage.)
Whitlock said that the existing backlog of whistleblower cases is the result of other IRS functions engaging in examinations and that his office acts quickly once award determinations come in for a decision. Information provided by whistleblowers is helpful when IRS resources are being stretched thin and compliance functions curtailed, he said.
Referring to recent proposed regulations (REG-141066-09) that define what constitutes “proceeds based on” to describe how information provided to the IRS may ultimately result in a whistleblower award, Whitlock said his office conducts intense factual development to understand how information provided in a claim relates to actions that ultimately lead to recovery of unpaid taxes. There “must be a meaningful relationship” between the information that the informant supplies and the issues that the IRS pursues, he said. (Prior coverage.)
Whistleblowers “don’t get a patent on the IRS audit guide” simply by filing a claim concerning questionable transactions, Whitlock said. “We look pretty carefully at what the audit plan was before, what was in the audit plan later, what the IDRs [information document requests] were, what the timing of the IDRs were — it gets pretty murky sometimes,” he said.
Whitlock said the IRS is adamant in its position that only Title 26 tax proceeds can be the basis for an award payment. (Prior coverage.)
Alexandra Minkovich, attorney-adviser, Treasury Office of Tax Legislative Counsel, said that whistleblowers who are considered to have planned and initiated a transaction underlying their claim face the possibility of a reduced award amount. But the IRS has set a high bar regarding who is considered to have planned and initiated a transactionbecause there are many individuals involved in the structuring, she said.
“We didn’t think it was appropriate to reduce the award at anything other than the highest levels of folks who really played a critical role in planning the transaction,” Minkovich said.
Gregory S. Lynam of the Ferraro Law Firm said that the Birkenfeld award is a precursor to the IRS making more award payments and that it has increased public interest in the program. According to Lynam, the promise of anonymity is key to making the program successful because individuals must feel confident that the government will protect their identities.
Whitlock agreed that identity protection is an important goal for the IRS, noting that the government will move quickly to take action if protected taxpayer information is released.
Regarding whistleblowers who are denied an award, Whitlock said the IRS is seeking balance in helping them understand why a claim was denied while also protecting a taxpayer’s return information. The IRS’s proposed administrative processes for communicating information regarding denial of an award claim will help bring closure to informants who are simply wanting to be brought into the loop, Lynam said.
Eli Dicker, executive director of the Tax Executives Institute, said that whistleblowers might have a variety of motivations for deciding to divulge company information to the IRS. Tax advisers might start to guess that a whistleblower is involved when the quality of IDRs drastically improves or a new range of tax issues arises in audit that is quitedifferent from those in past examinations, he said.