The 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that they didn’t support Cotton’s amendment because it only applied to discretionary spending and would not have repealed the automatic sequester of mandatory spending.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.

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.  

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

 

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.