IRS Whistleblower Office

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The IRS 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 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).  

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  • 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)).

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  • 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. 

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.”