IRS Whistleblower Award

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:

  •   Added additional overview of IRC 7623(a) and 7623(b)
  •   Added guidance for examining a whistleblower claim
  •   Added clarification of Form 11369 Requirements
  •  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, Definitions which is verbatim from Treas. Reg. § 301.7623-2 and even includes the same exact examples.  Similarly, IRM, 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, 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 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

The Whistleblower Withholding Program is now detailed in IRM 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

Also noteworthy was IRM 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 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.

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


The IRS Whistleblower Office renewed its position that awards under section 7623 are subject to the automatic sequester cuts, on its website, stating that:

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, whistleblower award payments issued under Internal Revenue Code section 7623 are subject to sequestration. This means that every award payment made to a whistleblower under Section 7623 on or after October 1, 2013, and on or before September 30, 2014, will be reduced by the fiscal year 2014 sequestration rate of 7.2 percent. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.

The sequestration reduction will be applied after the Whistleblower Office determines the amount of collected proceeds and the applicable award percentage to be paid under section 7623. Whistleblowers will be advised of the sequestration reduction in correspondence from the Whistleblower Office concerning a proposed award amount and an award determination.

As discussed previously, we believe that ANY sequestration rate that reduces a 7623(b) award is illegal.  The IRS is confusing its discretion under section 7623(a) with their “shall pay” mandate under section 7623(b) and will almost certainly be successfully challenged by a whistleblower in tax court.  Awards paid under section 7623(a) are discretionary and, therefore, may be reduced by the sequestration reduction rate.  However, awards under section 7623(b) are not discretionary, as their payment is mandated by statute, and are not available for reduction.  Section 7623(b) states that the Commissioner shall pay whistleblowers, who meet the threshold requirements, 15 to 30 percent of collected proceeds.  Under the Fiscal Year 2014 sequestration reduction rate cuts these awards would be limited to between 13.92 and 27.84 percent, effectively precluding the Commissioner from paying an award of 30 percent. 

We hope that the battle over the budget ends soon and the issue of sequestration reduction cuts becomes moot; however, in the mean time we will continue to counsel any client whose award is reduced under these guidelines to challenge the reduction in the United States Tax Court.  

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.”

On March 4, the IRS announced through a two-paragraph statement posted to its website, that under the automatic sequester cuts, any section 7623 whistleblower awards paid between March 1, 2013, and September 30, 2013, will be reduced by a “sequestration reduction rate.” The IRS said that in conjunction with the Office of Management and Budget, it has determined that whistleblower awards will be reduced by 8.7 percent.  

Reducing the amount of any whistleblower awards is a step in the wrong direction and makes little sense if the IRS is looking to attract whistleblowers. However for the purposes of reducing discretionary spending, this position would make sense if it was limited to awards paid under the old Informant Rewards Program of section 7623(a). Because awards under the old Informant Rewards Program of section 7623(a) are discretionary, the reduction in the award amount would be a reduction in discretionary spending. However, award payments under the new Whistleblower Program as enacted by section 7623(b) are not discretionary, they are mandated by statute, and not available for reduction.

Section 7623(b) says that the Commissioner SHALL pay 15-30% awards to whistleblowers who meet the threshold requirements of that section. The problem with this sequestration reduction policy can be seen clearly by analyzing the effect of this policy on awards which are determined to be at the top and bottom of the statutorily required 15-30% scale. A 15% award determination that is then reduced 8.7% is a 13.7% award. The Commissioner has no more authority to pay 13.7% to a section 7623(b) whistleblower than he has to reduce a taxpayer’s child tax credit. On the top end of the scale a 30% award reduced by 8.7% is 27.4%. By effectively announcing that under no circumstance will the IRS pay an award above 27.4%, any award determination made under the sequestration reduction policy is on its face arbitrary, capricious, and unreasonable.

The Ferraro Law Firm will counsel any client whose award is reduced under the sequestration guidelines to challenge the unlawful reduction in the United States Tax Court. With respect, I suggest the IRS focus on using whistleblower information and collect the billions owed rather than waste time on invalid pronouncements that will only cost the government time and money in court.

Congratulations to Brad Birkenfeld for receiving a $104 million award from the IRS for turning in UBS for their offshore banking practices. Kudos to Steve Kohn and Dean Zerbe, his counsel since 2009 on this matter. It appears that Birkenfeld’s award determination was based on the $400 million of “collected proceeds” (tax penalties and interest) that were proscribed to be paid to the IRS pursuant to UBS’s Deferred Prosecution Agreement, dated February 18, 2009, (see paragraph 3).

The IRS’s award determination shows that tax whistleblowers can and do make significant contributions to the enforcement of the internal revenue laws, and will be rewarded for their help. The process works. While the road may be long and sometimes winding, tax whistleblowers can have an impact on tax cheats.

Joseph A. Insinga, retired Rabobank Finance Specialist, filed a petition with the Tax Court arguing that the IRS’s continued refusal to issue a formal determination constitutes a de facto rejection of his claim and appeals this de facto rejection.  This filing details five years of interaction between Mr. Insinga and the IRS and has brought the operations of the IRS’s Whistleblower Office to the public’s attention.  Mr. Insinga’s petition also raises several questions that should be looked at closer…

What information is award eligible?

Mr. Insinga goes to great lengths to state that he was the only way the IRS could get the information.  However, this goes above and beyond the requirements of section 7623(b).  The statute does not say that the IRS needs to proceed with an administrative or judicial action based “solely” on information provided by the tax whistleblower.  The statute simply requires the IRS utilize the information.  This is shown clearly in the last sentence of section 7623(b)(1), “The determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action.”  

There are many ways for a whistleblower to make a substantial contribution even if they are not the sole or initial source of information about an underpayment.  The IRM section on Award Computations, (06-18-2010), itself does not require that a whistleblower’s information be the sole or initial source of information in order to be eligible for an award, so long as the case is not based on public information under section 7623(b)(2).  Even if the whistleblower’s information was not the IRS’s original source of information and was public information about the underpayment, section 7623(b)(2)(A) still provides for an award of up to 10% of the collected proceeds “taking into account the significance of the individual’s information and the role of such individual and any legal representative of such individual in contributing to such action.”  

It follows that one does not need to be the sole basis for the action, if you can get an award for “contributing” to an action.  It appears from the Petition that Mr. Insinga’s information went to the Field Revenue Agents directly working on the examination of the taxpayers.  If this is the case, to actually use his help and not pay is both contrary to the statute and so patently unjust that we are concerned for the survival of the program if this position of the IRS is sustained.

When is there a de facto denial of a claim?

The Tax Court faces a new issue in Mr. Insinga’s Petition.  Does the court have jurisdiction when the IRS fails to make an award determination?  The answer must be yes otherwise a tax whistleblower could effectively be denied judicial oversight if the IRS just chooses not to act by simply never issuing an award determination.  In Cooper v. Commissioner, the IRS was taking the position that a denial letter was not an award determination, and therefore the Tax Court did not have the jurisdiction to review their award denial. The Tax Court saw through that charade in Cooper and held that they have jurisdiction over negative award determinations, but Mr. Insinga has the harder argument that when the IRS sits on their proverbial hands, that is a de facto negative award determination.  How long does a tax whistleblower need to wait before there is a de facto determination?  Here, Mr. Insinga alleges there has been an administrative action and collection of tax.  This may be a case where the court can determine that the IRS’s failure to make an award determination is arbitrary, capricious, and unreasonable.

When should partial payments be made?

One of the issues raised in the Petition is that of “partial payments.”  There are two parts to this issue and both appear to be at play in Mr. Insinga’s case.  The first is what years must close for the IRS to make a determination.  Most of the hundreds of submissions made by The Ferraro Law Firm to the IRS Whistleblower Office involve more than one tax year of a taxpayer, and many involve multiple taxpayers.  If a tax whistleblower outlines five years of tax cheating by a taxpayer and the IRS is auditing on two-year audit cycles, when does the award determination get made?  In all other areas of tax law the rule is clear that each tax year stands on its own.  Following that line of thinking, whenever a year is closed and tax collected, the IRS should make an award determination for that year.  To take a different position could cause decades of delays.  Consider an amortization case, will the IRS wait 20 years until all of the years with improper amortization play out?  The even more egregious position would be that in a case involving multiple taxpayers, all taxpayers identified must have all tax years at issue closed before an award determination can be made.  It simply cannot be that case that this is the proper way to make award determinations.  If 999 out of 1000 identified taxpayers close and pay and one tax cheat has one tax year open for unrelated issues the IRS cannot delay payment on the 999 taxpayers it collected from – to do so would be arbitrary, capricious, and unreasonable.

Is the naming the target taxpayers appropriate?

The Tax Court’s proposed rule for redacting taxpayer names would have pulled the target taxpayers names out of this Petition but the rule itself misses the point.  Mr. Insinga is not seeking to file anonymously.  He has a first amendment right to tell the world of the evils he believes Rabobank et al. committed.  Were he to file this Petition after the rule took effect he could provide his redaction index to any and all who would listen.  The Proposed Rule will only be effective in anonymous cases where the Tax Court could already require that redaction as a condition of anonymity.

Is this an example of a larger pattern of Whistleblower Office dysfunction?

We have always said that with tax whistleblower cases you can lead a horse to water but you cannot make him drink.  What would really be dysfunctional would be if the IRS had been offered quality information from Mr. Insinga that it did not otherwise have and failed to use it.  Or if the IRS did in fact use his information and the IRS is failing to make an award determination in order to avoid judicial review of a denial or paying an award even though section 7623(b) requires paying an award.