A former bank executive has filed suit against the Internal Revenue Service for failing to pay him a whistleblower award.

Joseph Insinga, a former executive with the Netherlands-based Rabobank Group, told the Washington Post that he had given documents to the IRS about how his former employer helped seven companies avoid paying hundreds of millions of dollars in taxes by setting up offshore partnerships and other entities. He filed a whistleblower claim with the IRS in 2007, but has heard nothing from the agency. Last month, his attorneys filed suit in U.S. Tax Court saying the IRS should pay him a cut of the proceeds it has collected.

The IRS has expanded its whistleblower program in recent years in the wake of congressional legislation. The Tax Relief and Health Care Act of 2006 allowed individuals to receive an award of between 15 and 30 percent of the proceeds collected from information brought by the whistleblower.

The IRS has set up a whistleblower office, and last April it paid the first award of $4.5 million under the expanded program to an unnamed CPA (see CPA Receives $4.5M Whistleblower Award). It has also paid out awards under an older version of the program that limited awards to 15 percent. However, whistleblowers and their attorneys complain that the IRS has been slow to process whistleblower claims and in many cases refused to acknowledge them. The IRS paid fewer than 100 whistleblowers in 2011, about half the number it paid two years earlier, even though it received more than twice the number of whistleblower cases (see IRS Paid Fewer Whistleblower Awards Last Year).

The case of former UBS banker Bradley Birkenfeld is probably the best known example. Birkenfeld brought information to the IRS about a number of his former clients at the Swiss bank, helping the IRS secure a $780 million deferred prosecution agreement with the bank and negotiate for the release of 250 other names. The U.S. and Swiss governments eventually negotiated for the release of up to 4,450 names. Nevertheless, Birkenfeld was prosecuted for his role in helping his former clients avoid taxes and sent to prison, even as his clients and bosses have avoided jail time (see UBS Client Receives Five Years’ Probation).

Just last month, the IRS finalized its regulations, and perhaps that will help speed up the claims processing (see IRS Finalizes Whistleblower Regulations). But there appears to be some institutional resistance to the whistleblower concept.

The IRS Office of the Chief Counsel has hampered the whistleblower program by putting in place a long list of onerous rules that limit the chances for recovery of whistleblower awards, according to Forbes. Those include narrowing the sources of recovery for the awards and defining “planners and initiators” of the tax scheme to include employees who had little to do with setting up the scheme in the first place. Whistleblowers who bring information to the IRS find out little about the status of their claims, and are discouraged from working with the agency to help investigators track down the leads they have provided.

In contrast, the SEC and Justice Department whistleblower offices work actively with informants. The SEC also pays whistleblowers between 10 and 30 percent for actionable information, according to the Huffington Post.

The IRS prefers to rely on its own investigative methods for uncovering foreign assets hidden overseas, along with the increasing number of agreements it has forged with foreign tax authorities, including Switzerland. A former chief counsel told Tax Notes that he considered the whistleblower program to be “unseemly” as it encouraged people to turn in their neighbors and employers to the IRS.

While there has long been a bias against informants and “tattletales” in society, the IRS still can use the help of whistleblowers in closing up the widening tax gap. Hopefully the newly approved regulations will pave the way to opening up the logjam of cases that await processing.

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