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.

The Tax Court’s September 16th opinion echoes what every whistleblower litigating in Tax Court knows; the IRS’s Whistleblower Administrative File is insufficient.  The petitioners in this case moved to compel production of documents and responses to interrogatories that were requesting information at the would show whether the IRS used their information to collect tax, penalties, interest, or additional amounts.  The IRS filed virtually identical responses to both motions stating its sole objection being that the information requested is not contained within the Whistleblower Office’s Administrative File and, therefore, beyond the scope of discovery.  The Tax Court disagreed and granted the motions.

Rule 70 governs discovery in the Tax Court.  Paragraph (b) states that the scope of discovery is “any matter not privileged and which is relevant to the subject matter involved in the pending case.”  The paragraph further provides: “It is not grounds for objection that the information or response appears reasonable calculated to lead to discovery of admissible evidence.”  The Court stated in its opinion that “the standard for relevancy in discovery is liberal.”  The Court went on to note that the information sought by the petitioners is clearly relevant to their case as the petitioners are looking for evidence that will prove that one or more collections of proceeds are attributable to their information.

The Tax Court addressed the IRS’s argument that the information sought is outside of the scope of review by stating that this argument was not a sufficient basis to deny the discovery requests.  The Tax Court stated: “Even were we to agree with respondent as to the scope of review, he cannot unilaterally decide what constitutes an administrative record.”  The Court reasoned that evidence related to whether there was a collection of proceeds and whether that collection was attributable to the whistleblower’s information goes to the very factual inquiries required by section 7623(b), and an administrative file that lacked such information was incomplete. 

While discovery matters are usually handled with the issuance of an order, the Tax Court issued a division opinion in this instance, giving citable precedence for future whistleblowers that are trying to seek discovery relating to what happened with the information they provided to the IRS.  Hopefully, these continued losses in Tax Court, where the Tax Court finds the administrative file is incomplete and opens discovery beyond the administrative file, leading to more complete administrative files within the Whistleblower Office.

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.

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.

Senator Ron Wyden, the current chairman of the Senate Finance Committee, and Senator Chuck Grassley, the former chairman, jointly wrote an article in Politico discussing an important issue to us, the prioritization of whistleblower claims by the IRS.  They said:

[W]e’ve been puzzled why the IRS often snubs whistleblowers who may provide invaluable evidence of wrongdoing, especially when the costs of inaction are only growing. Taxpayers who underpay what is legally owed are shifting the burden to others. And despite efforts by the IRS to narrow the tax gap, noncompliance looms large. IRS commissioners have routinely come to Congress asking for more money for the agency in the face of a $450 billion annual tax gap — the difference between taxes owed and taxes paid. So when Congress writes a legislative prescription to ramp up its whistleblower program, the IRS needs to prioritize programs to follow whistleblower leads.

This is the first time I’ve seen a specific call by Congress for the IRS to prioritize whistleblower claims when they select cases for enforcement action.  We couldn’t agree with these Senators more.  According to a June 2006 report by the Treasury Inspector General for Tax Administration (“TIGTA”), IRS examinations initiated based on whistleblower information are more effective and efficient than examinations initiated using the IRS’s primary method for selecting returns for examination.  It’s high time the IRS recognized this dollars & cents fact and used it to their advantage when deciding which non-compliant taxpayers they should go after.

October 1st 2014 marks the beginning of fiscal year 2015 and a new sequestration reduction rate for whistleblower awards.  According to an OMB Report on the reductions for fiscal year 2015, every award payment made to a whistleblower under section 7623 on or after October 1, 2014, and on or before September 30, 2015, will be reduced by the sequestration rate of 7.3 percent.  That reduction rate is up slightly from fiscal year 2014’s reduction rate of 7.2 percent.

It has been and continues to be the position of The Ferraro Law Firm that whistleblower awards should not be reduced by sequestration.  As a technical matter, the reduction of award amounts paid to whistleblowers is in direct conflict with the statutory language of section 7623(b) which unambiguously states that a whistleblower “shall” receive as an award “at least 15 percent” of the collected proceeds.  The sequestration reduction is illegally defying the language and intent of the statute.  As a practical matter, reducing the amount paid to whistleblowers makes zero sense.  The entire purpose of sequestration is to ensure that tax dollars are saved and the nation’s debt is reduced.  Because whistleblower awards are paid directly from collected proceeds; proceeds that in all likelihood would not have been collected absent the whistleblower’s information; these award payments do not have a negative effect on the nation’s debt.  The whistleblower is actually assisting the government in raising money, not causing government to spend money.  As a matter of equity, whistleblowers came forward in reliance on the 2006 law and trusted that the statute would apply to them as written. The fact that the sequestration reduction can arbitrarily impact awards relating to claims made by whistleblowers many years ago, to us, is a prohibited retroactive change in the law.

Unfortunately, the IRS will continue to apply the sequestration reduction rate unless and until a law is enacted by congress that cancels or otherwise impacts the sequester.  A bi-partisan budget agreement has not yet been reached by congress.  The government will be funded through a Continuing Resolution that was passed by the House and Senate which generally maintains current spending at fiscal 2014 levels until December 11, 2014.    

Tax whistleblowing took center-stage at the American Bar Association Section of Taxation meeting in Denver last Friday.  I had the pleasure of participating in a round table discussion with fellow panelists, Holly Styles, Senior Counsel in the IRS Office of Associate Chief Counsel, and the Director of the IRS Whistleblower Office, Stephen Whitlock.  Among the topics that our panel discussed were the addition of the 31 new employees to the IRS Whistleblower Office and the implications of the final whistleblower regulations that were released on August 7th. 

Mr. Whitlock expressed that the addition of the new employees in the Whistleblower Office will help to pick up the pace of award payouts, echoing the comments made by IRS Commissioner John Koskinen last week.  Even more exciting for whistleblowers is that Mr. Whitlock stated that award payouts in fiscal year 2015 (beginning October 1, 2014) will be significantly larger than they were in fiscal year 2014.  Between the final regulations, the comments made by IRS Commissioner Koskinen, and the statements made by Director Whitlock, it has been a great couple months of news for tax whistleblowers. 

Kathryn Keneally, Assistant Attorney General, Tax Division of the Department of Justice, acknowledged that the Department of Justice had used information provided by whistleblowers in tracking down unreported offshore bank accounts held by United States citizens while speaking to the Civil and Criminal Penalties Committee of Tax Section of the American Bar Association at its May Meeting on Saturday, May 10, 2014.  Ms. Keneally included whistleblower information along with several other sources of information, including bank disclosures, while discussing the Department of Justice’s Offshore Compliance Initiative.  Ms. Keneally emphasized her quote from a May 9, 2014 Press Release:

As today’s announcement shows, we receive information about U.S. taxpayers with undisclosed accounts from many sources, some of which are not public.  For many accountholders, the time to come forward voluntarily to avoid criminal prosecution has run out.  

Although contributions by whistleblowers frequently go unacknowledged, Ms. Keneally’s statement shows that the information provided by whistleblowers is vital to the continued success of the Department of Justice’s enforcement efforts.  This begs the question of how these whistleblowers will ultimately be rewarded for the information they provide.

Today’s CFO Journal reported that a warning from the Public Company Accounting Oversight Board (“PCAOB”) late last year has resulted in much more stringent external audits being conducted by auditors of public companies.  PCAOB has been auditing the auditors to make sure public companies’ financials are not being rubber stamped.  Increased audit scrutiny can be a great thing for potential IRS whistleblowers.  When auditors take a closer look at uncertain tax positions this can result in far greater detail being in the tax accrual workpapers.  As we have noted in the past, Schedule UTP has done little to change company behavior.  Knowledgeable insiders with access to a company’s tax accrual workpapers could provide extremely useful information to the IRS and be rewarded handsomely.  Large companies maintain billions of tax reserves to account for tax positions where the company believes the IRS is more likely to prevail on the issue than the company.  We know firsthand that IRS whistleblowers with access to information about the tax positions that make up those reserves can successfully present a submission to the IRS.  Now, more than ever, there are great opportunities for a tax department insider to make a meaningful impact on the tax gap.

An order issued yesterday by the U.S. Tax Court in the case of Albert G. Hill, III v. Commisioner of Internal Revenue (No. 25539-10W) gave the Whistleblower (who is the Petitioner in the case) access to documents in the administrative file of the taxpayer who was the subject of a whistleblower claim. The order is a big win for the Whistleblower in the case because the determination of whether the Whistleblower is entitled to an award or not centers on how and when the IRS discovered information that led to collection of taxes from the taxpayer who is the subject of the whistleblower claim.

The question of whether or not the Whistleblower in the case is entitled to an award is further complicated by the fact that the IRS was conducting an examination of the underlying taxpayer at the time the Whistleblower provided information to the IRS. With access only to the documents that the Whistleblower initially provided to the IRS concerning the underlying taxpayer and a single document written by the IRS examiner containing that examiner’s thoughts on the Whistleblower’s claim, the Whistleblower was at a disadvantage in trying to show that it was his information the IRS utilized that led to the collection of taxes from the underlying taxpayer.

Although the IRS took the position that the Whistleblower was not entitled to documents from the underlying taxpayer’s administrative file, the Tax Court sided with the Whistleblower and directed the IRS to submit the underlying taxpayer’s administrative file to the Court. The order also instructed the Whistleblower to submit a list of specific documents or types of documents he sought to obtain from the underlying taxpayer’s administratrive file.  After an in camera inspection of the administrative file, the Court granted the Whistleblower’s motion to the extent of the Bates numbered and redacted documents listed in the order. 

In conclusion, the discovery order is a nice win for whistleblowers going head to head with the IRS on the issue of whether or not the collection of proceeds resulted from the use of whistleblower information.  An even greater appreciation for the discovery order in this case can be obtained when there is pause to consider that if the Tax Court sided with the IRS on this issue and prevented the Whistleblower access to the underlying taxpayer’s administrative file, it would have been tantamount to forcing the Whistleblower to fight for his award with one hand tied behind his back. In that respect, the Whistleblower in this case can keep swinging.