Senator Charles Grassley

Late on November 16th, the Senate Finance Committee voted to approve its iteration of the Tax Cuts and Jobs Act, passing the measure on a party-line 14-12 vote.  The full version can be found here.  Of particular interest to our readers here is one of the amendments that was added to this in committee.  Senator Grassley submitted a number of amendments to this bill including an amendment that:

modifies section 7623 to define collected proceeds eligible for awards to include: (1) penalties, interest, additions to tax, and additional amounts, and (2) any proceeds under enforcement programs that the Treasury has delegated to the IRS the authority to administer, enforce, or investigate, including criminal fines and civil forfeitures, and violations of reporting requirements.  This definition would also be used to determine eligibility for the enhanced reward program under which proceeds and additional amounts in dispute exceed $2,000,000.  Collected proceeds amounts would be determined without regard to whether such proceeds are available to the Secretary. 

This is the latest step by Senator Grassley to ensure that the IRS Whistleblower Program is administered as he intended when he initially drafted and stewarded the 2006 amendments to section 7623 through Congress.  Senator Grassley has consistently stated that this has been his understanding of the term and the intent of Congress in enacting the amendments to section 7623(b).  In fact, Senator Grassley has gone so far as to file an amicus brief in the appeal of Whistleblower 21276-13W v. Commissioner, in which he makes the case that at the time of the 2006 amendments the term collected proceeds was used broadly and the IRS had been interpreting the base on which it could pay award broadly and the amendments sought to further broaden the amounts on which an award could be paid, not restrict the payments.

The mark up made it out of committee, but there is not guarantee that the Senate will pass the bill, as written or at all.  Then it will have to go to conference due to differences with the version from the House.  So stay tuned because there is a LONG way to go before the law actually changes.  

In our experience the IRS is a peculiarly apolitical organization – despite the Lerner email scandal and the targeting of conservative groups for noncompliant tax exempt status claims, almost every position in the IRS is not motivated by or responsive to political considerations – but when we have a change of administration it means we have a new political people in the top tier at the Treasury Department, which runs the IRS.   Yesterday the new administration’s appointee as Treasury Secretary Steven Mnuchin was confirmed by the Senate, so the question you may all be asking is: as current or prospective whistleblowers, what does that mean to us?

Senator Grassley had the opportunity to question the nominee about his thoughts on the Program, and here is what he just said about Mnuchin:

As the author of the provisions improving the incentives for whistleblowers to come forward about large dollar tax fraud, I was glad to receive a commitment from Mr. Mnuchin in support of a strong IRS whistleblower function.   Whistleblowers have helped the IRS recover $3.4 billion that otherwise would have been lost to fraud.  Cracking down on big dollar tax fraud is a matter of fairness to the vast majority of taxpayers who pay what they owe.  The IRS has made progress in working with whistleblowers, but there’s more work to be done.

Previously Grassley said this about the nominee after his Finance Committee nomination hearing: “Mr. Mnuchin gave his assurance that he’ll work with me if confirmed to support tax fraud whistleblowers.” It is a positive sign to whistleblowers that we have such a show of commitment by the incoming administration.  This statute isn’t going to be eliminated, and if anything whistleblowers can expect to see the statute strengthened in the coming years with cooperation by Treasury leadership.

“Support” from the new administration has to be tangible and results oriented to have any meaning.  Words are not enough.  For starters, the leaders at Treasury needs to work with and instruct their attorneys in the office of Chief Counsel to not take legal positions which damage the legitimacy of the Program.  For example, not resisting whistleblowers discovery requests for information from the taxpayer’s administrative file which would show how their information was used beyond what happened to the in the Whistleblower Office’s file; not limiting collected proceeds to be only those monies collected under Title 26 despite rulings by the Tax Court opinions to the contrary; and reconsidering sequestration on awards.  Most importantly the new Treasury leadership should through proper channels instruct IRS operational personnel take a long hard look at allegations of tax underpayments and fraud reported by whistleblowers and treat these losses to the government as the serious threat that they are.  Such claims of large scale malfeasance should not to be taken lightly and dismissed without proper due diligence.  Just because there is a serious limitation on resources at the IRS it does not mean that it is smart or proper to do less with whistleblower claims, to the contrary the data showing the higher return on agent time used in whistleblower cases suggests that the IRS should spend more time prosecuting whistleblower claims because they are one of the most efficient ways to use those precious resources.  Finally, “support” by the new administration is best shown by one thing: putting their money where their mouth is by timely paying awards to whistleblowers.

It is a rare that one can say that something exciting for tax whistleblowers has occurred with the proposed budget. However, today is that day. On March 25th, Senator Wicker submitted amendment S.AMDT.620, which is co-sponsored by Senator Grassley. According to Senator Wicker’s press release, “This amendment calls for the IRS to speed up the award process for those who come forward with information on tax evasion.”

The amendment was formally proposed today, March 27th, and agreed to in the Senate by unanimous consent. The Senate agreed to the budget resolution, with amendments, by a vote of 52 to 46 at 3:19 AM. We will be following the legislation as the budget process continues.

The language of the amendment reads:

SA 620. Mr. WICKER (for himself and Mr. Grassley) submitted an amendment intended to be proposed by him to the concurrent resolution S. Con. Res. 11, setting forth the congressional budget for the United States Government for fiscal year 2016 and setting forth the appropriate budgetary levels for fiscal years 2017 through 2025; which was ordered to lie on the table; as follows:

At the appropriate place, insert the following:

SEC. ___. DEFICIT-NEUTRAL RESERVE FUND TO EXPEDITE AWARDS UNDER THE INTERNAL REVENUE SERVICE WHISTLEBLOWER PROGRAM.

The Chairman of the Committee on the Budget of the Senate may revise the allocations of a committee or committees, aggregates, and other appropriate levels in this resolution for one or more bills, joint resolutions, amendments, amendments between the Houses, motions, or conference reports relating to the processing of award submissions, which may include the Internal Revenue Service whistleblower program, by the amounts provided in such legislation for that purpose, provided that such legislation would not increase the deficit over either the period of the total of fiscal years 2016 through 2020 or the period of the total of fiscal years 2016 through 2025. 

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.

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.”

An interesting letter was released last night from IRS Commissioner Shulman to Senator Grassley.  Commissioner Shulman’s letter says more about what is in the pipeline for large whistleblower case award determinations than any statement the IRS has made to date, much more so than even the annual reports that the Whistleblower Office is required by law to provide to Congress.  Shulman says that: 3 award determinations have already been made (and presumed paid), 3 more award determinations are in progress, 9 cases are closed out and waiting for the statutes of limitation to run, and another 60+ have resulted in audit adjustments already that look like they will result in mandatory awards.  We know of a bunch more cases with proposed adjustments, so the case pipeline is moving slowly but surely.  The IRS is still leaving huge dollars on the table in some cases, and while that’s to be expected as part of the tax controversy process, it still disturbing to see the government lose out on potential revenue in these austere times.

Commissioner Shulman also committed the IRS to a 90 day timeline for making award determinations once the refund statute of limitations has closed on the taxpayer which was set forth in Deputy Commissioner Steven Miller’s June memo.  Shulman added a new twist though – he said that the combined determination and payment timeframe so far has actually been completed within that 90 day period – specifically he said ”With respect to payments made to date, awards have been generally been paid within three months of resolution of legal issues.”  According to my review of the relevant procedures and my discussions with IRS officials, payment processing once the award determination is accepted should be a matter of weeks, so it makes sense that they can get both the determination and payment done within that timeframe.

A month ago on this blog I said “The first tax whistleblower award payments under the enhanced provisions of section 7623(b) are imminent, likely within the next couple months or sooner.”  I got a lot of questions from colleagues and clients about it, and now I can say I told you so.

In the early morning hours of Friday, April 08, 2011, word of the first confirmed payout under the enhanced award provisions of section 7623(b) spread like wildfire.  An APNewsBreak released at 3:16AM declared that:

An in-house accountant who raised a red flag about a tax lapse that his employer then ignored, leading him to tip off the IRS, has received $4.5 million in the first IRS whistleblower award.

The IRS cut a $3.24 million check to the whistleblower, which represents 22 percent of the taxes recovered minus 28 percent tax withholding.  (This is not the last word on the validity of the withholding here, we assure you.)  The underpayment was reported to the IRS Whistleblower Office in 2007.  The IRS did not deem the issues he raised complex; however, the information his client provided pointed out new questions for a routine IRS audit that was already under way.

The award payout is tangible evidence that the program is working and has begun to bear fruit.  The enhanced award provisions, found in section 7623(b) of the Internal Revenue Code, mandating awards of 15 to 30 percent of the collected proceeds for information leading to the collection of at least $2 million took effect in December of 2006.  The program’s slow start has been discouraging to some, including Senator Charles Grassley who was the primary drafter of the enhanced award provisions and long-time champion of whistleblowers.  

Treasury Regulations for section 6103(n), Disclosure of Return Information in Connection with Written Contracts Among the IRS, Whistleblowers, and Legal Representatives of Whistleblowers, were finalized today.  The finalized regulations are essentially what were put in place in March of 2008 with a few slight language tweaks.  The regulation had to be finalized now because the temporary regulation authorizing disclosure contracts with whistleblowers expired on March 24th, 2011.  However, as a practical matter, the expiration of the temporary regulations does not make much of a difference, as the IRS is not entering into these contracts because of either extreme caution bordering on neglect, a failure of internal communication, or both. 

As of March 14, 2011, not even a single section 6103(n) disclosure contract has been entered into with a whistleblower.  Let’s break that down by year since such agreements were authorized in the original Temporary Regulations:

 

2008

2009

2010

2011

Number of 6103(n) Agreements

0

0

0

0

 

The IRS is simply squandering the opportunity to make the best and highest use of the insiders that Congress was seeking when it amended section 7623 in December of 2006.  Some of the schemes we have presented to the IRS are extremely complex, with a labyrinth of layers and steps put in place just to make it harder to figure out. Even though we do our best to break down such schemes factually and legally in our initial submission to the IRS so that they have a roadmap of how to attack the abusive scheme, they have still refused the additional ongoing help we offered.  In several of our cases, the IRS has even gone to the extreme of having the field ask questions to the taint review team, who then asks questions to the tax whistleblower, and then the taint review team relays the answers to the field.  We engage in this grown-up game of operator because no one in the IRS knows who can and should be setting up section 6103(n) agreements.

The complaint that the IRS is squandering the opportunity to work directly with whistleblowers to work through the tax avoidance schemes has been voiced before.  On October 22, 2010, Gregory Lynam and Scott Knott, Tax Partners at The Ferraro Law Firm and contributors to this blog, were interviewed by the Government Accounting Office (“GAO”) as part of an audit they were doing of the IRS Whistleblower Program resulting from Senator Grassley’s scathing letter to Secretary Geithner criticizing the whistleblower guidance published in the Internal Revenue Manual on June 18, 2010.  The main criticism of the IRS Whistleblower Program Lynam and Knott reported to the GAO was the failure to enter into a single section 6103(n) agreement with a whistleblower, which is preventing the IRS from getting the benefit of two-way communications with knowledgeable insiders that Congress had hoped for to prevent tax avoidance.  We’ll see if the results of the GOA audit (which is expected to be completed this summer) or the finalization of these regulations make any difference.