Large whistleblower awards have been making headlines lately. News of a record $108 million award paid out by the Internal Revenue Service in September, followed by media coverage of $38 million and $2 million awards only weeks later, seem almost more akin to reports on lottery jackpots than informant compensation.
These awards -- and recent and pending improvements to an IRS Whistleblower Program that has been in operation since December 2006 -- will likely generate a flood of new claims and questions from potential whistleblowers. Employers, too, are becoming more anxious over the cost of nuisance suits, or worse, that may be encouraged by these whistleblower success stories. Strategies dealing with whistleblower claims require an understanding of what is and what is not possible under Code Sec. 7623(b), as well as the consequences of claims that end up not meeting the varied dollar and procedural requirements for a whistleblower award.
BACKGROUND
The IRS Whistleblower Office was established in 2007 in response to the expanded scope of Code Sec. 7623 under the Tax Relief and Health Care Act of 2006. The 2006 amendments, which created Code Sec. 7623(b), imported concepts used within the False Claims Act proceedings into the Tax Code, enhanced by recoveries from 15 to 30 percent in certain situations. The existing IRS informant program was further enhanced by making qualifying awards mandatory (informant awards had been discretionary on the part of the IRS) and allowing for Tax Court review.
In June 2012, Stephen Whitlock, director of the Whistleblower Office, reported that since 2007, "Thousands of whistleblowers have reported hundreds of millions of dollars in suspected tax compliance issues, resulting in a wide range of audits and investigations. "
TWO AWARDS PROGRAMS
Two types of whistleblower awards exist, as currently described inSecs. 7623(a) and (b):
• A mandatory Code Sec. 7623(b) award: If the taxes, penalties, interest and other amounts in dispute exceed $2 million (and, if the case deals with an individual, gross income for the year of the offense exceeds $200,000 for at least one of the tax years in question), the IRS will pay 15 percent to 30 percent of the amount collected; and,
• A discretionary Code Sec. 7623(a) award: If the disputed amounts do not meet the criteria in 7623(b), the awards are limited to 15 percent up to $10 million, the awards are discretionary, and the informant cannot dispute the IRS's decision in Tax Court.
The amount of the award under the Whistleblower Code Sec. 7623(b) provision has a 15 percent statutory minimum. From there, the Whistleblower Office is instructed to apply positive and negative factors, but with the analysis "not reduced to a single mathematical equation." Significant positive factors, considered first, can increase the award from 15 percent to 22 percent or 30 percent. Then significant negative factors may decrease those higher awards to 15, 18, 22, 26 or 30 percent. There are no dollar caps to an award under Code Sec. 7623(b).
A claim under either program must be submitted on IRS Form 211, Application for Award for Original Information. Form 211, among other information, requests the facts and all supporting information in the claimant's possession pertinent to the alleged violation, how the information was obtained, and the amount owed. Attachment of an explanation of facts and supporting documentation is required and other attachments are permitted. The Paperwork Reduction Statement on the back of the form claims that the average time to complete Form 211 is estimated at 35 minutes. Taking considerably longer to file a claim would certainly be advised, particularly since the IRS is not obligated to ask the whistleblower for supplemental information before rejecting a claim.
While submissions that do not qualify under Sec. 7623(b) will be processed under Sec. 7623(a), that section is far less advantageous. Under Code Sec. 7623(a), the award is at the discretion of the IRS, there is no statutory award percentage, and there is no appeal to the Tax Court or elsewhere.
Under either Sec. 7623(b) or (a), the IRS requires "specific and credible information" that results in the "collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer." Whistleblowing is allowed only if there is substance behind the claim. The IRS will not act on "unsupported speculation." The IRS Web site, www.irs.gov, advises, "This is not a program for resolving personal problems or disputes about a business relationship."
All awards are considered taxable income. Attorney fees and court costs deductible above the line in the year the Sec. 7623(b) award is paid may qualify the recipient of the award to reduced withholding. The IRS has emphasized, however, that the reduced-withholding program is not an opportunity to determine a whistleblower's tax liabilities.
ACCELERATED TIMELINES
As late as 2011, Sen. Charles Grassley, R-Iowa, expressed concern about the timely processing of whistleblower claims by the IRS. The lack of timeliness on the part of the service in processing an award from start to finish has been a major complaint leveled by those representing whistleblowers. The IRS continues to warn applicants, "The process, from submission of complete information to the service until the proceeds are collected, may take several years." The Whistleblower Office reported that the first case under the 2006 act had been processed in fiscal year 2011.
Effective Aug. 1, 2012, the IRS implemented a new set of internal rules for its whistleblower program designed to streamline the award process. These new guidelines to internal IRS personnel (IRM 25. 2. 2) are a direct response to the many complaints leveled over the length of time it had been taking from filing an initial claim to receiving an award. Pending permanent rules, IRM 25. 2. 2 requires IRS personnel to follow this timeline:
Claims should be initially evaluated by the Whistleblower Office within 90 days;
Review by subject matter experts in IRS Operating Divisions and Criminal Investigation should be completed within 90 days of receipt from the Whistleblower Office; and,
Whistleblowers should be notified of an award decision within 90 days of when collected proceeds can finally be determined.
Whitlock has reiterated that timely and comprehensive evaluation of information provided by whistleblowers is essential to the success of the Whistleblower Program and that timeliness is the shared responsibility of the Whistleblower Office, the Operating Divisions, and Criminal Investigation. He also has admitted, however, that circumstances may not always permit action within this timeline, but that those situations should be the exception to the rule. The nature of the award itself also guarantees a significant wait between a claim and IRS notification of an award, since payment of the targeted tax liability by the taxpayer and expiration of refund and appeals periods are first required.
KEEPING CLAIMANTS INFORMED
The IRS in the past typically would not communicate at all with a whistleblower for years after a claim was submitted. Not until the tax was collected and an award determined was there any subsequent contact, or even acknowledgement of the claim by the IRS. Although Code Sec. 7623(b) authorizes the IRS to request assistance from the whistleblower and their counsel, such contact was infrequent at best. That may be changing as the continued participation of knowledgeable insiders becomes recognized as a valuable asset. In a recent directive to personnel, Whitlock commented that whistleblowers may have insights and information that can help the service understand "complex issues or hidden relationships."
The August 2012 directive advises that debriefing, whether in person or by telephone, is an important component of the evaluation of whistleblower information prior to a decision on whether the information should be referred to the field for audit or investigation. In fact, Whitlock hopes that "debriefings will be the rule, not the exception." He also recognizes that, with appropriate controls, interaction with a whistleblower during an audit "can assist in timely and correct resolution of issues." He goes so far as to recommend a Code Sec. 6103(n) confidentiality contract for services when disclosure of taxpayer information "is necessary to obtain a whistleblower's insights and expertise into complex technical or factual issues."
MORE GUIDANCE COMING?
An August 2011 Government Accountability Office report recommended increased data collection to make the IRS's existing case management system a more effective tool for identifying aging cases, as well as for tracking decisions made by various IRS offices in the evaluation of whistleblower submissions. The IRS response to this report included a commitment to incorporate GAO recommendations into a broader review of user requirements. The IRS committed to full implementation of the GAO recommendations by Oct. 15, 2012, with "additional improvements during the winter of FY 2013." As of the submission of this article, no "implementation" has been made public, but an announcement was expected shortly.
Treasury officials have also promised new proposed regulations under the whistleblower section. They are expected to cover, among other issues, eligibility, the submission of claims and the administrative procedures under which a whistleblower can have a claim reviewed.
AWARD RECOMMENDATION
A claim can be denied if the IRS already has the same information from another source; the taxpayer is not found to be liable on audit, appeals or in the courts; or the taxpayer turns out to have no assets against which the IRS can collect. If the whistleblower is convicted based on their role in planning and initiating the action, the Whistleblower Office will also deny the award.
After the amount collected is fixed and certain, with no chance of refund or judicial appeal, the Whistleblower Office will prepare an award recommendation under its procedures. Prior to any communication regarding the recommendation to the whistleblower, a committee of the Whistleblower executive board is briefed on the recommendation, after which the whistleblower receives a "Preliminary Award Recommendation" package.
The IRM, as revised in August 2012, also allows for the Whistleblower Office to make a final determination on a portion of multiple actions submitted by a whistleblower before all actions are resolved. Specific restrictions apply, however, including an award for "completed actions" to exceed $50,000 and resolution of other actions not being expected within the next 12 months.
TAX COURT REVIEW
The Whistleblower Office will communicate the final claim determination in writing to the claimant. Final determinations regarding awards under Code Sec. 7623(b) may, within 30 days of such determination, be appealed to the U. S. Tax Court. In contrast, decisions under Code Sec. 7623(a) may not be appealed to the Tax Court.
Despite Tax Court jurisdiction in the statute, a whistleblower should not make the mistake of thinking that the Tax Court can force the IRS to act on a whistleblower's claim to pursue the taxpayer. In a case of first impression decided this past October, the Tax Court held that it cannot order the IRS to pursue a claim where the IRS has decided not to pursue any administrative action or collect any proceeds (Cohen, 139 TC No. 12). The court commiserated with the whistleblower's frustration that information that he believed was actionable was not pursued, but said that its hands were tied by statute.
CONFIDENTIALITY
The IRS promises to protect the identity of the whistleblower "to the fullest extent permitted by the law." If the whistleblower is an essential witness in a judicial proceeding, the IRS will inform the whistleblower before deciding whether to proceed in such cases.
To protect the accused taxpayer's privacy, procedures require that, once a claim is submitted, the whistleblower or the whistleblower's representative may be told only the status and disposition of the claim, whether the claim is still open or has been closed, and, if closed, whether the claim is payable or denied (and the amount). Nevertheless, there is no right on the part of the whistleblower to demand a status report.
In announcing the $38 million award in October, counsel for the whistleblower praised the IRS for keeping the identity of the whistleblower confidential and not even telling the taxpayer that a whistleblower had been involved in the case. Recently announced by the Justice Department also was the arrest of a former IRS employee who was charged with disclosure of information that included the identity of an IRS whistleblower.
Some practitioners remain concerned as well that the IRS whistleblower law lacks protections against retaliation, unlike the False Claims Act and the new Securities and Exchange Commission and the Commodity Futures Trading Commission whistleblower programs created by Dodd-Frank.
CONCLUSION
Potential whistleblowers need to know the rules before venturing forth. The likelihood of success when not being represented by a tax professional versed in this niche practice may not be very high, however, given the relative complexity of the procedures involved.
Particularly with respect to filing an initial claim, it is critical that the claim itself clearly identifies sufficient evidence essential to any IRS case against the taxpayer going forward; the IRS is under no obligation to ask for supplementary information to fill in any blanks for the whistleblower's right to an award.
From the perspective of employers or other potential taxpayers, it is becoming an increasingly good business practice to place procedures in place to allow employees and others to file complaints with the employer, without feeling the need to involve the IRS.
Whistleblower claims are certain to increase both in size and number as the IRS becomes more vested in ensuring the Whistleblower Program's success.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
