IRS Whistleblower Report

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.)

FY2017 Table 1.png

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.

The IRS Whistleblower Program took center-stage again, this time at the Federal Bar Association Section on Taxation’s 2015 Law Conference in Washington, DC.  Scott led the lively panel discussion about the IRS Whistleblower Program with Kevin Gillin, Special Counsel in IRS Office of Chief Counsel (Small Business/Self-Employed); Robert Wearing, Branch Chief in IRS Office of Chief Counsel (Procedure & Administration); and George Clarke, Partner at Baker & McKenzie, LLP.  The panel covered recent program and litigation updates, and touched on confidentiality concerns. 

The update on the administrative program covered the Treasury Regulations that were finalized last August and the various audits and inquiries of the program.  Of great interest was the preview of the yet-to-be-released 2014 IRS Whistleblower Office report to Congress by Mr. Gillin:

On a general level, in terms of the number of submissions, the number of claims that result from those submissions, and the amounts that have been paid are going to be similar … to the 2013 report.

This is consistent with Director Whitlock’s statements at the Denver meeting of the ABA Section of Taxation in September, where he said that award payouts in Fiscal Year 2015 will be larger than the payouts in Fiscal Year 2014.  Scott noted that he believes that the number of submissions that are technically sound and do not face limitations on collection or evidentiary issues have remained steady as well, even though these numbers are not reported. 

The litigation updates provided a capsule review of the opinions of the Tax Court to date.  Mr. Wearing noted that the United States Tax Court has been “very methodical” and that “we see the court moving toward standard of review … we’re not really at the point of substantive fights over the meaning of terms in [section] 7623 or whether the award was an appropriate amount.”

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

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

 Submissions Fiscal Year 2013.jpg 

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

Awards Fiscal Year 2013.bmp

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

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

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