IRS Whistleblower Office

Happy New Year! The new year brings a time to reflect back on the past year, on things that went well, things that went not-so-well, and how you would like to do things going forward.  In the spirit of looking back over the last year, the IRS Whistleblower Office released its FY 2017 Annual Report to Congress earlier than usual this year, right after New Year’s. 

In FY 2017, the Whistleblower Office paid $33,979,873 in awards (prior to the sequestration reduction), which was less than the $61,390,910 paid in FY 2016 and the $103,486,236 paid in FY 2015.  The $34 million of awards was spread across a total of 242 awards, 27 of these awards were paid under §7623(b).  The total number of awards paid in FY 2017 falls between the 418 awards paid in FY 2016 and the 99 awards paid in FY 2015. The number of awards paid in FY 2016 was extraordinarily high due to a push by the Whistleblower Office to resolve a backlog of old claims that would be categorized as falling under §7623(a).  Disregarding the number from FY 2016, which is largely attributable to the resolution of the backlog, the IRS Whistleblower Office has continued to grow the number of awards it pays each year.  But more importantly, the number of awards paid under §7623(b) increased by 50% over the number paid in FY 2016.  (The IRS Whistleblower Office paid 18 awards under §7623(b) in FY 2016, which was virtually the same as the 19 awards paid in FY 2015.)

FY2017 Table 1.png

IRS Whistleblower Program has been a success for the IRS and tax administration as shown by the fact that only 6% of claims closed in FY 2017 (down from 7% in FY 2016) were closed because the IRS audited the issue and made no change to the taxpayer’s position.  That means if the IRS acts on a whistleblower’s information there is a very low probability that the IRS will not make an adjustment.  This statistic should be even lower than 6% because the IRS includes adjustments that are made but were non-Title 26 Collected Proceeds – like FBAR penalties within the same statistic.

Nevertheless, the IRS Whistleblower Office should be cautious that the program does not begin to stagnate.  Between the decrease in new submissions, the fact that nearly all new submissions are related to Small Business/Self-Employed Division issues, and the average time to process a claim for an award remained largely unchanged in FY 2017 from FY 2016, which was an increase from FY 2015; the IRS may have trouble making large award payments down the road if the IRS does not address some of the issues within the program and work to build additional support for the program in the operating divisions of the IRS.

The Annual Report made clear that when providing information to the IRS Whistleblower Office, whistleblowers need to ensure that their submissions are specific and credible because more than half (57%) of the claims closed in FY 2017 were closed because the Whistleblower Office found that the allegations in the claim were not specific, credible, or were speculative in nature.  A knowledgeable attorney can help put together a clear and concise submission that will give the whistleblower the best chance of receiving an award.

One final note: The Ferraro Law Firm again accounted for 22% of the §7623(b) awards (by number and by value) of the awards paid by the Whistleblower Office in FY 2017.  We are proud to be seeing success for our clients and happy to see the IRS recognizing the important contribution made by whistleblowers.

On July 28, 2017, the Tax Court denied the April 14, 2016 Joint Motion to Remand the case to the IRS Whistleblower Office.  In the joint motion, the parties represented that the IRS Whistleblower Office had reconsidered its determination.  The Tax Court previously issued an order for the parties to file a status report by October 19, 2016, to report the efforts to resolve the case and held the joint motion in abeyance.  A similar order was issued on October 25, 2016, for the parties to file a status report on or before April 25, 2017.  On April 11, 2017, respondent filed a status report indicating that the IRS Whistleblower Office is prepared to make a revised determination regarding petitioner’s claim and asked the Court to grant the Motion to Remand.  On April 20, 2017, petitioner advised the Court that he believes that remand is unnecessary and would needlessly delay the case. 

The Court walks through an interesting discussion about when remand would be appropriate.  Ultimately, the Court follows what it has previously done in cases where the IRS reopens a claim or reexamines its determination, stating:

We see no reason why remand is required to enable to Office to issue a new final determination letter.  Alternatively, if the parties have resolved all issues in this case to their mutual satisfaction, they may employ this Court’s standard procedures for bringing this case to an end.  This order does not foreclose the possibility of remand, should we determine that we may properly order one, in a future whistleblower case where a remand would serve a useful purpose.

This resolution follows Whistleblower 21276-13W v. Commissioner of Internal Revenue, wherein the Court retained jurisdiction of the claim and required the parties to file status reports while the parties to resolve the case and allow the IRS Whistleblower Office to review, investigate, and evaluate the merits of those whistleblowers’ claim. 

We believe that allowing the parties to work to resolve the case this way is similar to allowing taxpayers, who have not already gone to Appeals, to go to Appeals after filing a petition with the Tax Court.  Ultimately, this allows the parties to find a resolution while preventing whistleblower cases from being unnecessarily delayed.  

The IRS released the IRS Whistleblower Program Fiscal 2016 Annual Report to Congress recently. There were some interesting statistical revelations, some surprising and some not.  Among the more important, if not surprising, takeaways was the fact that nearly 60% of all cases are rejected for not being specific, credible, or for being too speculative.  Getting over this hurdle should be the number one goal of all IRS whistleblowers.  The best way to get over that hurdle is to have experienced tax lawyers working for you.  We have over a hundred billion dollars in active submissions to the IRS.  I have only seen one case where one of our submissions was initially rejected for being perceived as too speculative and we got the IRS to reconsider that position. 

A surprise from the 2016 report was that we represented nearly a quarter of all 7623(b) awards made by the IRS last year.  We are proud to be seeing success for our clients and happy to see the IRS recognizing the important contribution made by whistleblowers.

Today the Treasury Inspector General released a Report titled “The Whistleblower Program Helps Identify Tax Noncomplicane; However, Improvements Are Needed to Ensure That Claims Are Processed Appropriately and Expeditiously” about the IRS Whistleblower Program.  It contained some interesting statistical analysis of various processes relating to the inner workings of the Program but a quote from page 7 of the Report stuck out:

[A] majority of claim closures in FYs 2015 and 2016 (83 and 85 percent, respectively) are rejected or denied before going to an operating division field group for an investigation or examination, with only a small portion (2 percent each year) resulting in an award. Most claims were rejected because the allegations were not specific enough for the IRS to take action or denied because the allegation was below the threshold to justify resources for compliance action.

We understand that about 85% of the submissions that the IRS Whistleblower Office receives are pro se filings, and the problem is that often those claims are speculative or are not developed enough for the IRS to use them as a basis for taking action.  Of the remaining 15% on which the IRS does take action and passes the whistleblower’s information to the field agents for examination, approximately 2 out of every 15 are getting an award.   We believe a whistleblower’s odds of getting an award can be significantly higher [than 13.333%] for a thoroughly vetted submission with good facts and good law that are clearly laid out.  The hurdle of getting the IRS to take action in the first place is certainly a high one but then you have to deliver your information in a way that helps them win their case.

The TIGTA Report spent a lot of time looking at the procedures for the debriefing intake and the claim rejection processes, but in our view that is not the most material weakness of the IRS Whistleblower Program.  The biggest weakness is that under the current claim processing system it is still far too easy for the IRS field examination divisions to simply walk away from a good case even when the facts and the law are on their side.  Often people have a difficult time convincing the IRS to take even a slam dunk case, no matter how much it costs taxpayers if they give it up.  Our mission is to set forth a whistleblower’s information in such a way that it not only convinces the IRS to take action, but it forms the solid foundation of a winning case once they do decide to take action.

Today the IRS Whistleblower Office released their Annual Report to Congress for Fiscal Year 2015.  According to the report, which has been substantially made-over in both appearance and content, the total amount of awards paid in fiscal 2015 was $103,486,677 before sequester’s 7.3% reduction.  That number is impressive when compared to fiscal years 2014 and 2013 which were approximately $52 million and $54 million respectively.  Based on that information, the award amount paid out in 2015 is almost double what it was for the year prior.  As should be expected, more award payouts comes with more amounts collected by the IRS.  According to Table 1 of the report the IRS collected over $501 million which was up from 2014’s $309 million collected.  In even more good news for whistleblowers, awards paid as a percentage of amounts collected was 20.6% – the highest it has been in three years with 2014 and 2013 paying out 16.9% and 15.7% respectively.  While 2015 was a welcomed increase in award payouts from prior years, 2016 could be even better. According to Table 2 of the report, there are 176 section 7623(b) claims currently in Preliminary Award Evaluation, a number which is up from the 11 reported in 2014’s annual report. 

The report for 2015 is updated both in presentation and content.  For example, this year’s report contains a “Message from the Director” as an introduction and summary of the year’s results which is a departure from the report’s historically rigid “Executive Summary.”  The Message from the Director piece also includes a picture of Director Lee D. Martin set off beside the article-style recap of notable 2015 numbers, explanation of improvements (including the new style for the annual report), and calls for Congressional action.  Even the cover of the annual report, which typically is just font on a blank page, incorporates a stars and stripes design below the title of the report. 

The report also significantly changed the way data is shown by now reporting data for the preceding three years on a fiscal cycle.  The new data reporting measure will make year to year comparisons easier and more reliable.  Typically, past annual reports included an “Appendices” section that was made up of six or so tables that showed data in a simple chart format.  This year’s report forewent the “Appendices” in favor of tables and figures under the heading of “Fiscal Year 2015 Whistleblower Program Statistical Results.”  Although the data shown in this year’s report overlaps the data provided in past reports, this year’s report simplifies the way data is shown by using bar graphs to depict certain data and consolidating information within certain tables such as the “Status of Open Section 7623(a) & 7623(b) Claims” in this year’s Table 2 as compared to 2014’s Table 4.  Another noteworthy addition to this year’s report is the “Glossary” found at the end of the report which provides definitions of terms and phrases used throughout the report such as “Intake/Classification,” “Final Review,” and “Interim Award Assessment.” 

This year’s report noted that over half of the rejected claims are rejected because the allegations made in the submission are “not specific, credible, or are speculative in nature.”  This ties in with part of the Message from the Director which stated that although the IRS gets thousands of submissions each year, many of them are not actionable because the submission itself is not specific or credible.  This fact highlights the importance of submitting whistleblower submissions to the IRS that are factually detailed and include on point and concise legal analysis that conveys credibility.

The IRS Whistleblower Office announced August 7th that they finally updated two sections of the Internal Revenue Manual (“IRM”), IRM 25.2.2, Information and Whistleblower Awards – Whistleblower Award and IRM 1.1.26, Organization and Staffing – Whistleblower Office.  The updates, which were made by the IRS “to reflect changes related to the issuance of the final regulations” that were implemented August 12, 2014, provide much more comprehensive guidance under the whistleblower program and largely track the language of the Treasury Regulations.  The good news for whistleblowers is now that the IRS has finished updating the IRM, they can now turn their attention back to making award determinations and processing awards.  We understand that several awards were delayed due to the IRS’s need to update their procedures to conform with the final regulations, but now that these have been issued, 7623(b) award determinations are again being processed. 

Some highlights of the changes made to the IRM are presented below and the new IRM can be reviewed here

The IRS’s announcement briefly summarized the changes made to IRM 25.2.2:

  • 25.2.2.1   Added additional overview of IRC 7623(a) and 7623(b)
  • 25.2.2.5   Added guidance for examining a whistleblower claim
  • 25.2.2.6   Added clarification of Form 11369 Requirements
  • 25.2.2.10  Added guidance on the Whistleblower Withholding Program

As mentioned, the changes made to the IRM largely came right out of the regulations.  For example, the IRS added IRM section 25.2.2.1.3, Definitions which is verbatim from Treas. Reg. § 301.7623-2 and even includes the same exact examples.  Similarly, IRM 25.2.2.3, formerly titled Submission of Information for Award under Sections 7623(a) and (b) was retitled Eligibility for Award and is exactly the same as the language under Treas. Reg. § 301.7623-1.

IRM 25.2.2.5, formerly titled Grounds for Not Processing Claims for Award, was re-titled Examining a Whistleblower Claim.  That section now covers whistleblower indicators used for returns, how tainted or privileged information submitted by a whistleblower should be handled, debriefing the whistleblower, corroborating whistleblower information with independent information, the whistleblower claim file, prohibitions on sharing information with the whistleblower under section 6103, and procedures for transferring a whistleblower case to another group or area. 

It is notable that Form 11369 is now the title of IRM 25.2.2.6 which was formerly titled Processing of the Form 211 7623(a) Claim for Award.  That section, which now includes three subsections, details how the Form 11369 is used and what is included in the Form 11369 package for examined claims, surveyed claims, and transferred claims.  The Form 211 processing information which was previously under that section was moved to IRM 25.2.2.4.

The Whistleblower Withholding Program is now detailed in IRM 25.2.2.10 which was formerly titled Appeal Rights under Section 7623(b).  The Appeal Rights section is unchanged from its previous form and is now under IRM 25.2.2.11.

Also noteworthy was IRM 25.2.2.12 formerly titled Funding Awards has been retitled Confidentiality of the Whistleblower.  That section covers the extent to which the IRS will protect the whistleblower’s identity as confidential.  It notes that in some rare circumstances where the whistleblower is an “essential witness in a judicial proceeding” it may not be possible to pursue investigation without revealing the whistleblower’s identity.  That section adds a note at the end that states “In all instances prior to any disclosure of a whistleblower’s identity, Counsel must be contacted.”

Finally, IRM 1.1.26, was updated to reflect the current structure of the Whistleblower Office, not because new personnel or positions were added.

The IRS announced this afternoon that the Acting Director (Office of Professional Responsibility) Lee Martin has been selected to be the next Director of the Whistleblower Office, effective August 3, 2015. Director Stephen Whitlock will remain with the IRS and has been named the new Director of the Office of Professional Responsibility, effective August 3, 2015.  Acting Director Martin brings an ethics background to the Whistleblower Office from his time with the Office of Professional Responsiblity, as well as project and IT operations management experience with the IRS, AT&T, and SBC Interactive – SmartPages.com.  We hope that Acting Director Martin will make paying awards a high priority as this is what will ultimately attract knowledgable insiders to come forward.

We would like to wish Director Whitlock the best of luck in his new position leading the Office of Professional Responsibility and welcome Acting Director Martin to the Whistleblower Office.

The Tax Court released Whistleblower 21276-13W v. Commissioner of Internal Revenue, 144 T.C. No. 15 today.  While this decision is positive news for some whistleblowers, it is also a reminder of the importance of following best practices when filing a whistleblower case.

The facts of this case are interesting and a read of the full opinion is definitely worth the time, if you are so inclined.  This case arises from the rejection of Husband and Wife’s Forms 211.  Husband had provided information to Government agents, including IRS agents, that a foreign business, referred to as “Targeted Business,” was assisting United States taxpayers in evading Federal income taxes in order to reduce his punishment after Husband was arrested for taking part in a conspiracy to launder money.  Husband did not have the necessary documents, but he knew someone who did.  As the individual with the necessary documents was outside of the United States, Husband and Wife induced the individual to return to the United States.  Upon entering the United States, the individual was arrested.  While in custody, the individual agreed to assist in the Government proceeding against Target Business.  When the individual was released from custody and tried to back out of his agreement, Husband convinced him to follow through.  In part because of that individual’s assistance the Target Business was indicted, pleaded guilty, and ultimately paid the United States approximately $74 million.  However, the IRS Whistleblower Office rejected their Forms 211 because they were not received until after the payment was made by Target Business. 

The Court limited its opinion to whether petitioners are required, as a matter of law, to file Forms 211 with the Whistleblower Office before providing information to the IRS to qualify for an award under section 7623(b).  The Court held they do not.  The Court stated that the statutory text makes clear “that the Whistleblower Office is charged with being the central office for investigating the legitimacy of a whistleblower’s award claim, not necessarily the underlying tax issue.”  The Court looked to the Form 211 itself, which requests information about who the whistleblower first reported the violation to. 

While this case provides good news for whistleblowers who have provided or will provide information directly to the operating divisions of the IRS, we continue to believe that the best way to preserve your award eligibility and to ensure that the information provided to the IRS is given full and complete consideration while is to provide the IRS Whistleblower Office your information as early in the process as practicable, concurrently with an operating division if necessary, and to submit a Form 211 at that time.

The IRS Whistleblower Program took center-stage again, this time at the Federal Bar Association Section on Taxation’s 2015 Law Conference in Washington, DC.  Scott led the lively panel discussion about the IRS Whistleblower Program with Kevin Gillin, Special Counsel in IRS Office of Chief Counsel (Small Business/Self-Employed); Robert Wearing, Branch Chief in IRS Office of Chief Counsel (Procedure & Administration); and George Clarke, Partner at Baker & McKenzie, LLP.  The panel covered recent program and litigation updates, and touched on confidentiality concerns. 

The update on the administrative program covered the Treasury Regulations that were finalized last August and the various audits and inquiries of the program.  Of great interest was the preview of the yet-to-be-released 2014 IRS Whistleblower Office report to Congress by Mr. Gillin:

On a general level, in terms of the number of submissions, the number of claims that result from those submissions, and the amounts that have been paid are going to be similar … to the 2013 report.

This is consistent with Director Whitlock’s statements at the Denver meeting of the ABA Section of Taxation in September, where he said that award payouts in Fiscal Year 2015 will be larger than the payouts in Fiscal Year 2014.  Scott noted that he believes that the number of submissions that are technically sound and do not face limitations on collection or evidentiary issues have remained steady as well, even though these numbers are not reported. 

The litigation updates provided a capsule review of the opinions of the Tax Court to date.  Mr. Wearing noted that the United States Tax Court has been “very methodical” and that “we see the court moving toward standard of review … we’re not really at the point of substantive fights over the meaning of terms in [section] 7623 or whether the award was an appropriate amount.”

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.