IRS Whistleblower Office

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

 

The IRS released two documents today on their website, Commissioner Koskinen Statement regarding Whistleblower Program and Deputy Commissioner for Service and Enforcement Memorandum.  

The Commissioner’s statement reaffirmed his commitment and support of the IRS Whistleblower Program.  The Commissioner says that he is “committed to expanding the program’s reach and improving communications with existing and potential whistleblowers.”  I sincerely hope that he follows through with this commitment in real and concrete ways.  One way that the Commissioner could improve the program would be to give whistleblower cases priority for audit.  In making cases where a whistleblower has provided information to the IRS a priority for audit will ensure that more of the information provided by whistleblowers is used by the IRS, which will in turn lead to more collected proceeds and more awards.  After all the way to promote the IRS Whistleblower Program is to pay awards. 

The Commissioner went on to mention that to the extent that statutory changes are necessary to improve the program, he intends to work with Congress to ensure that the changes are enacted.  While the Final Regulations highlighted a number of places where statutory changes could improve the way section 7623 is implemented, the most pressing statutory change should be the addition of anti-retaliation provisions in the statute.  The addition of anti-retaliation provisions would bring section 7623 in line with the other Federal whistleblower provisions. 

The Deputy Commissioner for Service and Enforcement Memorandum is largely an update of the Steven Miller Memorandum, published on June 20, 2012.  The update of this memorandum after two years was necessary.  The memorandum outlines highlights some of the administrative changes that have been implemented in the last two years and incorporates some of the preamble of the final regulations.  These changes do not always make their way into other guidance, so it is nice to have this memorandum updated to reflect the current operations of the IRS Whistleblower Program.  The Memorandum also reaffirms the guidelines how long certain parts of the administrative process should take and adds:

The Office of Chief Counsel has established controls and reporting requirements for its risk analysis opinions.  BPR reports should include data on cases for which a risk analysis has been requested but not received for more than 30 days.  Chief Counsel has concurred in making this area a priority. 

The inclusion of the new guideline should ensure that the Office of Chief Counsel is making its determinations is a timely manner to ensure that the information can be passed along to the field before the information becomes stale. 

While these two documents will not have as large of an impact in shaping the IRS Whistleblower Program as the Regulations will, these documents do show that the IRS is committed to improving the IRS Whistleblower Program.

The IRS has finally released the Final Treasury Regulations that we have all been waiting for. While, there were not as many in the Final Regulations as we would have liked to have seen; the changes that were made were important ones. Some of the pros and cons of the Final Regulations are:

Pros:

Change in the definition of “Proceeds based on.” The final definition is more inclusive and removes the word “only” that had been read in. The new definition provides examples of when the IRS proceeds based on, but does not limit when the IRS will have proceeded based on.

Change in the definition of “Collected Proceeds.” Now includes amounts on amended returns that are filed after the IRS proceeds with and administrative or judicial action based on a whistleblower’s information. The IRS will continue to monitor the taxpayer’s tax account for additional collected proceeds in cases where this is a possibility. This will allow for whistleblower to collect on tax assets that are reduced based on their information, but have not yet lead to additional payments at the time the WBO makes a final determination of tax. There is a downside to this change, the WBO will also monitor timing issues in future years to determine if there are offsetting reductions to collected proceeds.

There is now an administrative review process for the rejection or denial of claims for awards under section 7623(b) that are rejected or denied. Administrative Procedures for denied/rejected claims:

1. WBO sends a preliminary rejection letter that states the basis for the rejection or denial of the claim.

2. Whistleblower has 30 days from the date that the letter was sent to respond with comments.

3. WBO will review the comments and either (a) provide written notification to the whistleblower of the rejection of the claim, including the basis fro rejection; or (b) go through the administrative review process provided for in paragraph (c)(1) through (6) of Treasury Regulation section 301.7623-3.

The administrative review is of the items in the administrative claim file that are not privileged, before it was limited to the “pertinent information.”

Cons:

The Final Treasury Regulations kept the fixed percentage award structure and still start the evaluation at the statutory minimum.

The Final Regulations failed to adopt the “principal architect” standard for planned and initiated. This remained section of the Final Regulations remained largely unchanged from the Proposed Regulations. However, using this test is functionally reinventing the wheel.

In the general rule for “Administrative Record,” the administrative record definition is still limited to the information that is relevant to the award determination. By limiting the administrative record to what the IRS deems to be relevant, whistleblower and their representatives will forever be fighting about what is relevant and what they are not being provided when there is concern that monies or circumstances are not being properly considered.

Collected Proceeds still does not include criminal fines or FBAR penalties.

The United States Tax Court released an opinion today, Whistleblower 22231-12W v. Commissioner of Internal Revenue, which continues to piece together the bounds of the Tax Court’s jurisdiction.  The Tax Court held that the IRS Whistleblower Office could not have made a determination under section 7623(b)(1) until it has completed its review of all elements specified in that paragraph, which had not happened in this case at the time the petition was filed.

In this case, the petitioner submitted third claim for an award on August 23, 2011 relating to Taxpayer 1.  Taxpayer 1 agreed to pay a multimillion-dollar civil penalty for failing to report his foreign bank and financial accounts and a relatively small amount of restitution to the IRS reflecting the unpaid Federal income tax due on income earned from the Swiss bank accounts.  Petitioner filed a petition with the Tax Court on September 6, 2012, claiming that the IRS had made a de facto determination, even though petitioner’s claim was still open.  The IRS filed a motion to dismiss for lack of jurisdiction asserting that the IRS had not yet made a determination. 

In analyzing how section 7623(b)(4) applies to these facts, the Court noted that the labeling of the communication is not dispositive in determining if the communication is a determination.  The Court concluded that under the standards set in Cooper v. Commissioner to the email exchange between Ms. Stuart and petitioner’s counsel did not constitute a determination of the Taxpayer 1 claim.  The Court notes that Ms. Stuart’s email expressly stated that the claim remained open and that petitioner would be informed of a determination in official written correspondence once a determination was made.  The Court determined that because the IRS Whistleblower Office had not yet made a final administrative decision, that the Court lacked jurisdiction to hear petitioner’s claim.  The Court notes that the statutory language “cannot possibly have intended that this phrase would embrace every subsidiary finding of fact or conclusion of law that enters into the Office’s ultimate decision as to whether an award is appropriate and (if so) the amount thereof.”

This decision adds yet another piece to the puzzle that will ultimately define the Tax Court’s jurisdiction to review the IRS’s administrative decisions.  While this case appears to foreclose Tax Court review of certain de facto decisions, it provides more guidance on what is a determination for purposes of section 7623(b)(4).

The IRS Whistleblower Office has released its Annual Report to Congress for Fiscal Year 2013.  We had a good year with the IRS Whistleblower Program because they paid one of our clients a $38 million award, but overall the report certainly shows that there is a lot of room for improvement.  While fiscal year 2012 gave many whistleblowers a lot of hope for the program with its first big award payout, fiscal year 2013 was somewhat flat.  Some of the highlights from the Fiscal Year 2013 Whistleblower Office Report are:

  • The number of submissions in fiscal year 2013 (355) remained relatively stable from fiscal year 2012 (332).  

 Submissions Fiscal Year 2013.jpg 

  • Four awards were paid under section 7623(b) in fiscal year 2013.  However, one award was $38 million, leaving $15 million to be shared among all other award recipients (including those receiving awards under 7623(a)).

Awards Fiscal Year 2013.bmp

  • The IRS planned to finalize the proposed regulations in the second quarter of fiscal year 2014, which ended on March 31, 2014.  We are expecting these to be finalized shortly.
  • The IRS Whistleblower Office increased the number of senior analysts in fiscal year 2013 by three and is actively recruiting four additional staff members.  This increase in staff for the Whistleblower Office is good news for the IRS Whistleblower Program because it shows that the IRS believes that by increasing the staff of the Whistleblower Office it can increase collection of tax in other operating units which are still suffering from hiring freezes.
  • There has been an overall decrease in “collected proceeds” last year from $592 million in FY2012 to $367 million in FY2013.  However, we are aware of much larger cases working their way through the process and those kinds of large corporate cases often take longer than that to resolve.  This is consistent with what the Whistleblower Office has said many times before: it takes on average five to seven years to analyze, investigate and/or audit, and collect proceeds; and that the larger the amount at issue the greater the incentive is for the taxpayer to exercise all of their rights to challenge the IRS determinations.  However, even $367,042,420 of collected proceeds is a drop in the bucket compared to the $385 billion tax gap, or the $191.7 billion of tax reserves for uncertain tax positions set aside only by the top 500 U.S. companies, which demonstrates that the IRS still needs all the help with enforcement of the law that it can get.
  • The Fiscal Year 2013 Whistleblower Office Report indicates that the IRS has developed a communications plan to address outreach to both the public and IRS personnel on changes to the program.  It states that the communication plan “includes efforts to identify opportunities for improvement and potential barriers to change.”  Hopefully the communication plan will allow the IRS staff in the operating divisions to become more comfortable with whistleblowers in general.  Additionally, this may improve the relationship between the public and the IRS and give the public an opportunity to have their concerns heard and addressed by the Whistleblower Office.  
  • The Fiscal Year 2013 Whistleblower Office Report outlines some areas that are likely ripe for litigation, including the definition of “collected proceeds” and amount in dispute.  The report also outlines some areas that need additional guidance or legislative changes, such as providing statutory protection for whistleblowers that provide information to the IRS.
  • The Fiscal Year 2013 Whistleblower Office Report states that Subject Matter Expert review is still on average 190 days.  This means that more than 6 months is lost on average before the field even sees the information.  Depending on the years at issue, this delay could cause the field not to open an audit due to lack of time. 

One of the numbers in the Fiscal Year 2013 Whistleblower Office Report that may require some explanation is the number of claims listed with a current status of “Whistleblower Office – Case Suspended: Whistleblower Litigation Regarding Award Determination” found in Table 4 of the report.  The report shows that only five 7623(b) claims are in suspended status while the whistleblower challenges their award determination in the U.S. Tax Court, but in reality more than 50 whistleblowers have sued the IRS so far.  Many more than five cases are still active, and even more cases have been filed that are still under seal by the Court and will therefore be invisible until they become unsealed by the Court.  We are representing whistleblowers in both sealed and unsealed cases before the Tax Court, and there are a lot of interesting things going on in discovery, but we’ll save that discussion for another day.  The five cases in Table 4 are apparently those cases where the whistleblower is contesting the amount of the award, rather than contesting the denial of an award.  Hopefully, the administrative review process for denied claims in the proposed regulations will be in the final version.  We believe that this administrative review will save the IRS, the whistleblower, and the U.S. Tax Court time and resources by not having cases filed in the U.S. Tax Court that are dismissed once the parties exchange discovery.

Fiscal Year 2014 looks as though it will be a more productive year for the IRS Whistleblower Program.  The Tax Court is preparing for what is supposed to be the first whistleblower case to determine if the whistleblower’s information should result in an award.  The proposed regulations are expected to be finalized soon.  These are both large milestones that will help shape the program.  The IRS Whistleblower Program is taking shape and, hopefully, fiscal year 2014 will bring better news than fiscal year 2013. 

The IRS just completely revised the Application for Reward for Original Information, better known to us as Form 211.  The procedures for filing the Form 211 have changed as well.  The revised and significantly expanded Form 211, attached at the bottom of this post, was posted on the IRS Forms page yesterday and features 10 more sections than the original Form and asks far more detailed questions of whistleblowers.  For example, the new question 10 lists eight specific areas of tax law asking the whistleblower to check off the area that applies to the information.  Similarly, the new question 14 asks the whistleblower to check off the applicable relationship status the whistleblower has with the non-compliant taxpayer listing categories such as: current employee, former employee, and relative, or “attorney” and “CPA”, which should help the IRS conduct their taint reviews.

The new Form 211 inverted the familiar sections by moving information about the non-compliant taxpayer to the top of the form and the whistleblower’s information to the bottom.  Meanwhile, other familiar sections are now followed up with more specific questions.  For instance, the “amount of tax owed” in question 19 is now followed by five spaces where the whistleblower is to indicate, in question 20, the tax year and the amount owed for each year.  It’s important to note here that although the form lists five spaces for tax years, whistleblowers should always keep in mind that under section 6501, absent an exception, the general rule is that the tax shall be assessed within three years after the return was filed.  

Procedurally, the new Form 211 reflects a big change in how the Whistleblower Office processes newly filed forms 211.  First and foremost, the new Form 211 will not be sent to the Whistleblower Office in Washington, D.C.  Instead, Form 211 is now being sent to an office in Ogden, Utah.  A second procedural change comes by way of new question 9, which asks the whistleblower to specify whether it is a “new submission” or a “supplemental submission.”  This question suggests that a new Form 211 should be completed anytime a supplemental submission is filed.  On that point, tax partners Scott Knott and Gregory Lynam have routinely wondered why new submissions had to be made under penalties of perjury yet supplemental submissions did not.

At first glance, the new Form 211 appears very different from the original and potential whistleblowers should take their time reading the instructions before attempting to answer the questions.  As always, The Ferraro Law Firm tax team is here as a resource.

Form 211.pdf

Director Whitlock spoke along with Christopher Ehrman, the Director of the Commodity Futures Trading Commission’s whistleblower program, and Sean McKessy, the Director of the Security and Exchange Commission’s whistleblower program, at a webinar put on by the ABA Criminal Justice Section and Center for Professional Development.  During this webinar, Director Whitlock gave a bit of a preview of what will be in the annual report to Congress when it comes out.  First, Awards.  Director Whitlock said that the IRS Whistleblower Office paid approximately $50 million in whistleblower awards in fiscal year 2013.  While this number is not final, it should be a good estimate.  This make fiscal year 2013 the year with the second highest payouts in the history of the program.  Roughly, three quarters of that amount was paid to our client.  Also, they are working on finalizing the regulations that were proposed in December of 2012. 

Finally, Scott Knott’s question about the IRS Whistleblower program’s ability to act as a deterant prompted Director Whitlock to acknowledge that the actions of whistleblowers have been recognized, particularly in the case of offshore compliance, internally, in press releases, and in sentencing.  It is great to hear that the contributions of whistleblowers are being acknowledged, especially internally at the IRS.

John Koskinen, President Obama’s nominee for Commissioner of the IRS, testified today before the Senate Finance Commitee at a hearing on his nomination.  As part of his testimony, Koskinen laid out his plans to “make the IRS the most effective, well-run, and admired agency in government.”  His comments were in large part, a recognition of IRS funding troubles, staffing shortages, and the loss of the public’s trust.  Seemingly eager to meet these challenges, Koskinen said that if nominated, he would turn the agency around by regaining the public trust and improving employee morale.  He added that “the realistic goal is to find problems quickly, fix them promptly, make sure they stay fixed, and be transparent about the entire process.”  To accomplish this goal, Koskinen said that it is important to listen to the front line employees and also others who are likley to know about the challenges the agecy faces.  Koskinen added that “[T]he IRS benefits from the information and perspective generated by the Office of the Taxpayer Advocate and the Whistleblower Office.”

Koskinen’s mention of the Whistleblower Office at the hearing and acknowledgement of the value it adds to the IRS bodes well for IRS whistleblowers going forward.  Perhaps Koskinen is acting on Senator Grassley’s letter, requesting him to embrace the IRS Whistleblower program. In any case, Koskinen is expected to be confirmed as the next head of the IRS, and his view of the Whistleblower Office as an asset to the IRS is good news for tax whistleblowers.

Last week Senator Charles Grassley (R-Iowa) wrote a letter to John Koskinen, former chairman of Freddie Mac, congratulating him on his nomination as the Commissioner of the Internal Revenue Service.  After congratulations were out of the way, Senator Grassley got right down to business by asking for Koskinen’s help in encouraging the IRS to use the “tools” it has been given to efficiently collect revenue.  The letter read like an offer to work as a team, with Grassley listing problem areas in IRS enforcement and asking Koskinen for his support, thoughts and feedback.  Specifically, Grassley emphasized his displeasure with the way the IRS has treated the private debt collectors program (PDC) and the IRS whistleblower program, asking Koskinen to reinstate the PDC and to “review the work and role of the IRS Whistleblower Office.”

In the letter, Grassley stated that “before increasing taxes on the millions of law-abiding Americans who voluntarily comply with the tax law, Treasury and IRS should make every effort to collect the billions of dollars in taxes that currently go uncollected.” To that point, Grassley’s frustration with the IRS and Treasury came through in the letter as he noted, “Over the past decade I have sought to provide the IRS with additional tools to track down tax cheats and collect funds through the enactment of the Private Debt Collection program and the expansion of the IRS whistleblower program.  Unfortunately, both programs have been fought every step of the way by some within Treasury and IRS who have an ideological disposition to oppose any program that seeks to utilize “private” or non-government resources to reduce the burden on the IRS.”

Grassley pointed out the success that the whistleblower program has had when it has been utilized by the IRS but said that “despite this success, many at the IRS, and especially Treasury and Chief Counsel have undermined the program and have discouraged whistleblowers from coming forward.” Grassley noted four problems: (1) payouts under the program are few and far between; (2) the IRS agents refuse to fully utilize the whistleblower’s knowledge and expertise; (3) whistleblowers “who put their whole career on the line frequently have to wait for years in the dark with no information as to whether or when the IRS will act on their claim”; and (4) Treasury is proposing regulations that will undercut the whistleblower program “with a shortsighted view that will save a penny today and lose the Treasury much more in the future due to discouraged whistleblowers not coming forward.”

Grassley pointed out that the Department of Justice has found success “to the tune of billions of dollars” that were recovered under the False Claims Act by working with whistleblowers and their representatives. He said that the IRS would find similar success by working with whistleblowers and their attorneys “if it would only get out of its own way.”  Grassley said that the fact that the IRS has delegated its authority to request whistleblower assistance solely to the IRS filed offices that have no understanding, guidance or support is “inexcusable.” Grassley even requested that the IRS implement a recognition program that would reward those IRS agents and examiners who work with whistleblowers to achieve “superior accomplishments.”

To finish up the letter, Grassley specifically asks Koskinen for several showings of support and follow-ups, including Koskinen’s commitment to affirm the Whistleblower Office’s authority to contract with whistleblowers and their representatives and to provide clear direction that contracting is “encouraged and should be a priority.”  Expressing the need for the IRS to reassure whistleblowers that they are valued and will be treated fairly, Grassley said that the proposed regulations would have the effect of discouraging whistleblowers and giving comfort to tax cheats. Grassley said “Time and time again the writers of the proposed regulation turn a blind eye to the plain meaning of the statute I wrote, the policy of the statute rewarding whistleblowers, and the precedence of the False Claims Act.”  Since the regulations would require Koskinen’s approval before made final, Grassley asks Koskinen to review the proposed regulations, Grassley’s correspondence with Treasury and the IRS on the matter, and the comments on the regulations by the leading whistleblower representatives.  Taking that concern a step further, Grassley asks Koskinen to provide him with his thoughts on the whistleblower program along with the steps that Koskinen intends to take to “ensure success is realized – particularly those steps you can take under your own authority such as improved communication with whistleblowers during the process – and your views on the proposed regulations – especially on the issues of “related action,” “collected proceeds,” and “planned and initiated.”

Clearly, Grassley’s frustration with the IRS and Treasury regarding the PDC and the whistleblower program will not be lost on Koskinen.  Grassley’s letter was not just a rant of everything that is wrong with the IRS and the whistleblower program, instead the letter is an invitation to improve the program and increase much needed revenue for the federal government.  What’s more, is that Grassley is giving the top IRS nominee a heads-up on whistleblower issues that will bring him success if they are solved.  Grassley is seeking Koskinen’s commitment to the tools and resources he put in place for the IRS but is also seeking his feedback and thoughts.  In this way, Grassley’s letter is largely a symbol of his support and commitment to the whistleblower program and he is simply asking for the same in return from Koskinen.  After all, as Grassley points out, “it is incumbent on the IRS to work smarter and utilize all the resources currently at its disposal.”

I bet that every person reading this blog – people with an interest in the IRS Whistleblower Program – has seen that the IRS has been under fire this summer due to the exempt organization application processing scandal, and is wondering how this situation impacts their tax whistleblower claim or the IRS Whistleblower Program.

Caveat: I’m not a political person.  Despite having practiced tax law in Washington DC for the first dozen years of my legal career, my interest in politics is largely limited to what changes Congress is going to make to the Internal Revenue Code.  I.e., amending section 7623 in December of 2006 caught my attention!  With that said, my first reaction to the current IRS scandal wasn’t: “how could that noxious but revenue-irrelevant situation have been allowed to develop without someone asking themselves how it would look politically once it came to light.”  No, my reaction was: “uh oh, this is going to cause serious problems the next time the IRS needs something from Congress.”  How right I was.

All tax whistleblower cases, and the success of the IRS Whistleblower Program along with them, are wholly dependent on the IRS enforcing the violations of the Internal Revenue Code that we bring to their attention.  We have said from day one that the biggest risk in any whistleblower case is that the IRS will not act on your information, or they will not act with sufficient tenacity and resources to carry the case through to a successful conclusion.  In short, we’ve said the old analogy applies: “You can lead the horse to water but you can’t make him drink,” and the Cooper and Cohen cases have confirmed that analogy applies here.  If the IRS doesn’t act on your information, you get no award.

Fast forward to this summer… the IRS blunders in the total-waste-of-enforcement-resources exempt organizations area, and now it needs next fiscal year’s budget approved by Congress.  Surprise surprise, now some outraged members of Congress want to cut the IRS budget by 30%.  Never mind the fiscal stupidity of cutting the IRS budget in the first place – because it is the principal collector of the money our civilization runs on –  this cut would decimate the IRS’s ability to enforce the Code.  Whistleblower cases could simply have to be abandoned for lack of enforcement resources, e.g. because there are no agents or lawyers available to prosecute the case. 

Now, most political experts will say that this massive IRS budget cut proposal will not be accepted, and the Senate has proposed a budget that restores the funding the House of Representatives wants to slash, but it still highlights the biggest risk that we all have, that the IRS will do nothing with a whistleblower’s information.  The IRS has unfortunately shown that it is willing to ignore whistleblower cases even while the nation is running huge deficits.  The excuses why don’t really matter, although we continue to believe that some IRS officials will ultimately be held accountable for intentionally ignoring specific instances of large-scale non-compliance, what matters is that to have any chance of success in this landscape a whistleblower has to do everything they can to make their case attractive to the decision makers at the IRS.  Those officials in the IRS who decide how their scarce enforcement resources will be allocated hold your case in their hands, along with many other cases competing for those resources.  Budgets that make those enforcement resources even more scarce are a huge threat to a whistleblower case.  Helping them pick your case in spite of that scarcity is what we continue to strive to do.