donald-trump-gop.jpgThe IRS announced that whistleblower awards paid under section 7623 on or after October 1, 2017 and on or before September 30, 2018, will continue to be reduced by the “sequestration reduction rate”, which has now been lowered slightly to 6.6 percent.  The 6.6 percent fiscal 2018 sequestration reduction rate represents a .3 percent decrease from fiscal 2017’s 6.9 percent.  The sequestration reduction will unfortunately continue to be applied to whistleblower payments unless and until a law is enacted that cancels or changes the sequester or a court decides that it is improper. 

The IRS and OMB have taken the position that whistleblower award payments are subject to the sequestration reductions required by the Balanced Budget and Emergency Deficit Control Act (“Budget Control Act”).  We have asserted that reducing awards under section 7623(b) is contrary to the letter of the law and also makes little if any fiscal sense as awards are paid from collected proceeds.  The IRS believes that reducing whistleblower awards is part of spending caps that are imposed on defense and non-defense spending by the Budget Control Act.  If those caps are exceeded, spending is cut across-the-board, a consequence that neither Republicans nor Democrats want. 

This is a year that we could see some meaningful change in or even elimination of the sequester because President Trump has called for substantial increases in military spending in his budget request.  The House and the Senate passed their respective versions of the annual National Defense Authorization Act (“NDAA”) which authorizes budget appropriations for the Department of Defense.  Both houses passed bills that exceed the President’s budget request and smash through the statutory caps on defense spending established by the Budget Control Act.  Breaking these statutory caps triggers the across the board cuts commonly referred to as “sequestration.”  Congress must either raise the spending caps or eliminate sequestration altogether to avoid the cuts that are despised by both parties.

In fact, Senator Tom Cotton (R-AK) attempted to repeal the sequester spending cuts for both defense and non-defense discretionary spending back in September but his amendment to the 2018 NDAA failed to receive votes and eventually died due to a lack of quorum.  Democrats are taking the position that they didn’t support Cotton’s amendment because it only applied to discretionary spending and would not have repealed the automatic sequester of mandatory spending.

In early September the House and Senate voted on a continuing resolution which funds the federal government through December 8, 2017.  As with years passed, we are likely to see increased political maneuvering between the parties as December approaches and the Senate and House budgets are reconciled.  We are watching this year very closely with the hope that reduction of whistleblower awards becomes a thing of the past.  We further understand that there are docketed cases in the U.S. Tax Court that are challenging the legality of the sequestration reductions to whistleblower award, but these cases have not been resolved yet.  Stay tuned.

Tom Herman had an interesting article in today’s Wall Street Journal about the low chance of getting audited by the IRS. It was nice to see Tom back to writing for the Journal, he used to be the WSJ Tax Report columnist and covered IRS whistleblowing. Tom starts the article off with a bang by saying:

Those who like to be, well, creative when filing out their federal income-tax returns may take cheer from the following.”

The article goes on to cover the seemingly ever decreasing rate of enforcement by the IRS.  IRS Commissioner John Koskinen is quoted as stating that the IRS budget is down $900 million from 2010.  Koskinen stated that “Exam rates are continuing their downward trend in all categories – individuals, small businesses and large corporations….”  These are great facts if you are a tax cheat; not so great for everybody else.

Now, more than ever, the need for tax whistleblowers is vital to the efficient enforcement of tax.  People with high-quality information about the underreporting of tax are an amazing resource to the IRS, especially in these tighter times.  Issue identification, the part of an audit where the IRS determines what issues to fully examine can eat up an audit budget fast.  The IRS is constantly working to reduce issue identification cost.  The creation of Schedule UTP and the recent announcement of LB&I Compliance Campaigns are a couple examples.  When an insider can point out the areas where an audit is most likely to bear fruit, the IRS is able to hone in and make the most of its enforcement budget. 

The IRS whistleblower program works (perhaps we will do a future blog on the number of millionaires we have helped create).  If you have information on tax underpayments we encourage you to seek assistance from a tax lawyer who can help you present it to the IRS in a way that shows the issues you have identified are a smart place to put the IRS’s enforcement dollars.  Together, we can help reduce tax underpayments even in the face of fewer IRS boots on the ground.

The 2015 IRS Enforcement and Service Report issued this week reveals that both individual and corporate audit rates are declining, with the respective audit rates at a record low .84% and .60% of returns filed.  This not only leaves tax dollars on the table for past years but also risks future taxpayer  non-compliance by not spending adequate resources to enforce the tax laws as they are currently written. 

Lots of well written articles have been released about the Report that are worth checking out:

 CNBC: IRS Audit Rates of Large Corporations Hit 10-Year Low.

 The Wall Street Journal: IRS Focuses Its Audits More on 1 Million Incomes.

 CBS: Afraid of an IRS Audit? Here’s One Reason to Chill. 

As it relates to whistleblower claims, we and the Treasury Inspector General for Tax Administration’s Office (“TIGTA”) continue to shout the message that pursuing information from whistleblower claims is among the most efficient uses of scarce enforcement resources.  TIGTA’s own studies show that every dollar spent by the IRS on enforcement for whistleblower claims yields $6.88, whereas the normal enforcement return is four to one according to a November 2015 speech by Commissioner Koskinen.  However, the reality is that there are less agents now than there were 10 years ago to audit more returns than ever, and the IRS is being very picky about what cases they select for audit and what issues they move forward with in those audits.  This means that it is more important than ever that your whistleblower submission to the IRS be tight, concise, thorough, and persuasive to convince the IRS to take action in your case.  

Today the United States Government Accountability Office (“GAO”) released a report on the IRS Whistleblower Office titled “IRS WHISTLBLOWER PROGRAM – Billions Collected, but Timeliness and Communication Concerns May Discourage Whistleblowers” for which we were interviewed last year.  Communication with whistleblowers is certainly an issue with the program almost by default due to the taxpayer information confidentiality requirements imposed on the IRS by section 6103 of the Internal Revenue Code, and the report does hit a few hot button topics including some issues with timeliness of awards and the processing of submissions, but as with any report there were fertile grounds for improvement that were not covered.

The GAO Report describes more than $315 million of awards paid between October 1, 2010 and June 30, 2015 on $1.882 billion of collected proceeds, which shows that the program has been successful in raising more revenue for the government.  However, the reported statistics of claims denied does not show just how much additional revenue the IRS is leaving on the table by not bringing enforcement actions on more whistleblower claims.  It also shows as we already know that the IRS is paying out the required award percentages (between 15 and 30%) to whistleblowers on those collected proceeds, notwithstanding the effects of sequestration.   We believe though that the IRS should reconsider its award determination process of starting from the bottom of the 15-30 percent range and working their way up, and instead use the middle of the range as the starting point and vary from that number based on the positive or negative factors of a whistleblower’s contribution in each case.  The IRS is apparently worried about consistency in applying award percentages to whistleblowers with high-dollar claims in the future because they expect the volume of those cases to be increasing, which is at least a hint at some good news in the future.

Because the IRS does not track the expiration of the period of limitations on refunds in every whistleblower case that resulted in the payment of additional tax, the IRS is setting itself up to fail to properly pay out awards in a timely fashion.  Let’s hope the GAO follow up Action Items pressure gets the IRS to utilize their E-TRAK system to better monitor this critical data so that in the future claims are paid out on a more timely basis.

During the 2015 filing season, John Oliver, the host of HBO’s “Last Week Tonight” argued on the program that the IRS is not only a necessary agency with a difficult job to do but is also a smart investment of public money.  Oliver makes some great (and funny) points about why the IRS budget should be increased rather than decreased.  The whole segment is imbedded below.




A consequence of several years of budget cuts at the IRS is a decline in their enforcement efforts.  The Wall Street Journal has recently run several stories detailing these statistics, noting new data that shows an overall decline in IRS audit rates for individuals as well as a decline in the number of large corporate tax audits.   The context for all the press releases and news stories on this topic is the current debate on Capitol Hill regarding the future budget of the IRS.  Commissioner Koskinen has been asking for a budget that at least brings the IRS back to where it was in 2010.


Where does this leave prospective whistleblowers?  There is no doubt that a climate of reduced IRS enforcement leads to a lack of accurate self-reporting and more aggressive tax return positions being taken by individuals and even by large corporations, even in a post SarBox world.  While this means that there will be even more fodder for potential whistleblowers to blow the whistle on, it also means that the IRS has less resources to pursue claims.  In such a case, we believe it is more important than ever before that your submission to the IRS be concise, that your allegations be factually and legally accurate, and most of all your submission must compel the IRS to act.  The IRS considers itself fully busy, especially now, and your submission must convince them that it is worth acting on instead of doing something else.   That’s a tough challenge to face when considering making an IRS whistleblower submission… but we like challenges.

As we have written about in the past, for the last few years IRS whistleblower awards under section 7623 have been subject to sequestration reductions of between 7.2% and 8.7% (currently 7.3% for fiscal year 2015 awards) pursuant to the Balanced Budget and Emergency Deficit Control Act.  We believe these cuts are contrary to law, and furthermore make bad fiscal sense, much like cuts to the IRS enforcement budget.  However, the budget that President Obama released today would put an end to these automatic across-the-board spending cuts.  He said:  “I’m not going to accept a budget that locks in sequestration going forward. It would be bad for our security, and bad for our growth.” 

Now a budget proposal is pretty far from law, and with the Republicans in control of both chambers of Congress they are really calling the shots on the budget, but it is a good sign that an end to sequestration is on the table.  We believe that the legality of sequestration cuts to whistleblower awards under section 7623 is currently being disputed in the US Tax Court, but it would be great if that issue became moot through legislation.

If there was ever a question whether IRS Commissioner, John Koskinen, believed in the IRS Whistleblower Program, that question was answered affirmatively in his remarks before the Taxpayers Against Fraud Education Fund.  At one point, Koskinen even referred to the information provided by whistleblowers as “a godsend.”  The remarks, given September 15th in Washington D.C., focused on IRS support of the whistleblower program and, of course, budget concerns.

Notably, Koskinen acknowledged concerns about the pace of whistleblower award payouts and said that he expects the pace of awards to pick up in the coming year.  To back up that prediction, Koskinen pointed to his decision to increase staffing for the whistleblower program by more than 70 percent even in the face of tight budget constraints.  Moreover, Koskinen said that the additional 31 employees will “help us continue implementing the 2006 law and working to increase the pace of award payouts.”  Added to this, Koskinen said that the delegation order issued in August, which allows smaller awards to be approved by a senior manager in the whistleblower office, should help pick up the pace of award payouts because everything doesn’t have to flow through to the Director’s office. 

Koskinen also praised the IRS Whistleblower Office and Director Steve Whitlock for paying out over $186 million in awards and collecting more than $1 billion based on whistleblower information over the last three fiscal years.  Professing his support for the program, Koskinen said:  

“By helping the IRS improve tax compliance, the whistleblower program also helps to ensure the integrity and fairness of our tax system.” 

He also noted that while being a whistleblower is not always supported in our society, “if people are cheating on their taxes, it is a public service to let us know.”

Understandably, Koskinen closed his remarks by voicing his concern over the decreased IRS budget he has to work with.  The House passed legislation that would reduce the IRS budget by more than $1 billion below 2014’s budget, forcing the IRS to make “extremely difficult choices on both services and enforcement.”  Specifically, Koskinen said that if the House’s budget were enacted, the IRS would face “a very serious shortfall in personnel, in taxpayer services, in enforcement, and in information technology.”  That shortfall makes the assistance of tax whistleblowers that much more important to successful enforcement actions. Tax Partner, Scott Knott’s comments on Comissioner Koskinen’s speech appear in a recent Tax Analysts article in which he emphasizes that whistleblower information is key to efficient IRS enforcement as supported by data in a TIGTA study