Fewer Whistleblowers Coming to the IRS

The Internal Revenue Service has released a report on its recently expanded whistleblower program which now offers higher awards, but the report indicated that the number of taxpayers coming forward to report tax fraud has declined in the past two years.

In fiscal year 2012, 671 taxpayers submitted whistleblower claims that appeared to meet the necessary criteria, compared to 734 in fiscal 2011 and 5,545 in fiscal 2010. There were 332 submissions from whistleblowers in fiscal 2012, a slight increase from the 314 submissions in fiscal 2011, but less than the 422 in fiscal 2010 and 472 in fiscal 2009.

The IRS noted that a relatively small number of submissions account for a large number of taxpayers identified, as they contain long lists of taxpayers involved in the reported activity, or they lead to the identification of a large number of taxpayers. “While the numbers of taxpayers identified for FY 2011 and FY 2012 are substantially lower than prior years, experience has shown that these numbers are likely to rise as the information submitted is further analyzed,” the IRS added.

The IRS has been making efforts to streamline the whistleblower program in anticipation of more whistleblower claims as awards increased to 15 to 30 percent of the tax revenue recovered (see Tax Strategy: IRS Whistleblower Program Ramps up for Increased Activity). New regulations were proposed in December in response to complaints from whistleblowers, their attorneys and members of Congress.

The report revealed that the IRS paid out a record level of $125.4 million in whistleblower claims in fiscal 2012, with the bulk of it going to UBS whistleblower Bradley Birkenfeld, who received a $104 million award. The other $21.4 million in awards still exceeded the $8 million paid in fiscal 2011.

However, whistleblower claims continue to take a long time to process. In FY 2011, the Whistleblower Office paid the first claims under Section 7623(b), which expanded the award size. Five claims have been paid so far under the revised law, the report noted. However, the number of payments made under the Section 7623(b) program is not projected to grow dramatically in fiscal 2013.

“It typically takes a number of years to analyze, investigate and/or audit, and collect proceeds," the IRS noted. “At each stage in the tax administration process, taxpayers have rights to challenge IRS findings, including administrative and judicial appeals.The incentive for taxpayers to exercise those rights increases as the amounts in dispute get larger, which can mean a longer timeline for whistleblower submissions alleging larger dollar noncompliance.”

Many of the individuals who submitted information to the IRS last year claimed to have inside knowledge of the reported transactions, often including extensive documentation in support of their claims. The IRS said it does not yet know how many of these cases will result in collected proceeds after examination or investigation, as the amounts alleged reflect only the whistleblower’s estimate of the potential recovery. Twelve of the 128 claims paid in fiscal year 2012 involved collections of more than $2 million.

The IRS noted that the law does not provide for whistleblower protection. Unlike other laws that encourage whistleblowers to report information to the government, Section 7623 does not prohibit retaliation against the whistleblower. “When the whistleblower is an employee of the taxpayer, retaliation can take the form of a job-related action,” the IRS noted. “In other cases, whistleblowers may face threats of physical harm or damage to economic interests. In such cases, whistleblowers reporting information under Section 7623 may have recourse under state law, but federal law does not appear to provide a remedy.”

The IRS noted that it has, as a matter of policy and as an application of the earlier Section 6103, committed to protect a whistleblower’s identity and even the fact that the agency received whistleblower information in a particular case. “This commitment is qualified, however, as the IRS tells whistleblowers it may identify them if they are an essential witness in a judicial proceeding or if ordered to do so by a court of competent jurisdiction,” the IRS noted. “Despite the IRS’s commitment to protect whistleblower identities, litigation has highlighted a tension between the IRS’s commitment to whistleblowers and its obligations in civil discovery. Certain litigants have sought information on informant involvement in tax matters even in cases where the government did not identify the whistleblower as a potential witness at trial. The appropriate response to such a request should be to neither confirm nor deny informant involvement, because a truthful denial in some cases will allow individuals to draw a conclusion in other cases. The authority to take this approach is premised in case law, however, and an adverse ruling on a discovery request could open the door to fishing expeditions to identify whistleblower involvement and targeted requests to determine whether particular individuals made whistleblower submissions.”

Senator Charles Grassley, R-Iowa, who formerly chaired the Senate Finance Committee and whose legislation led to the 2006 expansion of the IRS whistleblower program, reacted with dismay to the report.

“The report shows a drop and then a leveling off in the number of whistleblowers coming forward in the past two years from prior years,” he said in a statement. “That’s alarming. Instead of rushing to raise new revenue through tax increases, as the President wants, the government should work with whistleblowers to collect taxes that are due under current tax levels. I’m concerned that the delay in awards and the way the IRS treats whistleblowers might be contributing to the leveling off of whistleblower cases.  Unfortunately, the regulations proposed in December are likely to contribute to a drop-off in whistleblowers coming forward. The IRS has made some progress in processing and tracking claims, but whistleblowers are still left in the dark for years. The IRS needs to do a lot more to give whistleblowers the confidence they need to take the risk of coming forward to expose tax fraud.”

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