Historic Win for Tax Whistleblowers

Mary Jane Wilmoth
National Whistleblower Center
(202) 342-1903

Editorial For Immediate Release

Four-Year Campaign Results In Historic-Win For Tax Whistleblowers

On August 3, 2016 the U.S. Tax Court ruled that tax whistleblowers were entitled to a reward based on monies collected in criminal fines and penalties. This landmark decision reversed the position of the Department of Treasury that severely limited the “collected proceeds” upon which a whistleblower reward could be based.The decision ruled that two anonymous whistleblowers, identified only as Whistleblower 21276-13W and Whistleblower 21277-13W were entitled to a reward of $17,791,607.00, based in part on $54 million obtained in criminal fines and civil forfeitures for which the IRS had illegally claimed were outside the whistleblower reward program.

The decision is the accumulation of four years of advocacy by the NWC, led by its Senior Policy Analyst Dean A. Zerbe and its Executive Director, Stephen M. Kohn, both of whom have actively and effectively represented tax whistleblowers since undertaking the representation of Swiss banker Bradley Birkenfeld in 2009.

Since the rule stripping tax whistleblowers who disclosed evidence of criminal tax violations from obtaining a reward was first announced by the IRS/Dept. of Treasury, the National Whistleblower Center has waged an extensive campaign to reverse this illegal and dangerous ruling. For example:

November 29, 2012: The NWC filed an extensive brief to the IRS strongly urging the Service to reward whistleblowers who exposed criminal tax frauds.
February 19, 2013: The NWC filed an 84-page comment on the proposed IRS whistleblower rules, strongly opposing the criminal disqualification.
April 16, 2013: The NWC testified at the IRS rulemaking hearing opposing the criminal reward disqualification.
June 5, 2014: The NWC provides the Secretary of Treasury with and exhaustive 55 page scholarly article co-authored by Kohn and Zerbe explaining in detail the legal basis as to why the criminal reward disqualification was illegal and should not be approved by the IRS. A copy of this article, published in Tax Notes, is linked here.
Finally, Dean Zerbe and Steve Kohn, through their respective law firms, agreed to work with the legal team representing anonymous whistleblowers 21276/77-13W, in order to ensure that the IRS program properly implemented the whistleblower reward law, and criminal fines and penalties were included in any reward calculation.

The importance of the August 3rd Tax Court ruling, in case 147 T.C. 4, was explained in a June 13, 2014 Action Alert issued by the National Whistleblower Center, calling on the public to strongly oppose the IRS’s plan to block whistleblower rewards, if the tax crimes were so serious as to result in criminal prosecution, and the payment of criminal fines and penalties:

“The Department of Treasury is poised to approve a final rule that will have a devastating impact on the IRS Whistleblower Program. The Treasury Department, along with the IRS office of general counsel, have concocted a rule to exclude whistleblowers from coverage if the violation of law they report is criminally prosecuted. Tax fraud whistleblowers will only receive rewards for information that results in civil or administrative penalties. If a whistleblower has solid evidence of a major fraud that triggers a criminal prosecution, he or she will get nothing.”

“The proposed regulation undermines Congress’s intent that whistleblowers who report tax fraud be protected and rewarded.

This proposed rule, which we have learned is on the verge of final approval, could not have come at a worse time. The IRS and the Justice Department are effectively using the threat of whistleblower disclosures to force international banks to plead guilty to tax fraud violations for illegally harboring non-disclosed offshore accounts. If the proposed rule is approved, the threat that international bankers will become whistleblowers will become toothless.”

What is clear is that the August 3rd landmark ruling, effectively saving the international tax fraud whistleblower program, was the result, in large part, of a long-term campaign of the NWC and its leaders who conducted extensive research into the history and law behind the IRS tax whistleblower program, and thereafter engaged in an extensive public and legal battle to ensure that whistleblowers are fully protected.

This battle is not over. The Department of Treasury can still appeal the Tax Court’s landmark ruling. All Americans who want to hold the millionaires and billionaires who illegally stash an estimated $3 trillion dollars in offshore accounts accountable should join with the National Whistleblower Center in making sure that this key decision is upheld, and that the Department of Treasury change its current regulations to comport with the law.

In addition to the leadership Dean Zerbe and Stephen Kohn gave to this successful campaign, the NWC would also like to thank the whistleblowers who risked all to expose wrongdoing and the attorneys, staff and interns at the NWC who tirelessly worked on this campaign, and the members of the public who strongly supported these efforts.

Related links:

 Tax Court decision in Anonymous Whistleblowers 21276/77-13W, 147 T.C. 4 (August 3, 2016)
Zerbe and Kohn, “The Legality of the IRS’ Proposed Rule,” Tax Notes and Letter to Secretary of Treasury (June 5, 2014).
Sign up to receive updates about the NWC’s Tax Whistleblower Campaign, click here.

Is the IRS retaliating against its own whistleblower?

As found in this article in the Washington Post, the IRS is facing questions as to whether it is retaliating against one of its own attorneys whom allegedly blew the whistle on how the IRS failed to identify "a multibillion-dollar corporate tax credit scheme involving a source of energy informally known as black liquor."

According to the Washington Post, William Henck, an attorney working inside the IRS Office of Chief Counsel for over 26 years, (see the powerline blog for a first person account by Mr. Henck) publically questioned the IRS' policy on refundable biofuels tax credits designed to foster new technologies but were being used by paper companies to receive huge refunds for burning pulp byproducts (known as "black liquor") since the 1930s.  See Washington Post article that quotes Henck.

The latest article and Henck's own account reflect the IRS auditing the Henck's returns and the IRS placing Henck's status at the IRS in limbo with the IRS and Treasury Inspector General's (TIGTA) office failing to properly investigate whether Henck committed any wrongdoing.

This account by an insider at the IRS raises serious questions about the IRS' commitment to investigate tax fraud even when reported by an attorney among its ranks.  It echoes an account by Jane Kim, a 10 year veteran chief counsel attorney in the Small Business/Self Employed Division outlining abuse at the IRS which resulted in tax cheats getting away without paying their taxes.  See this Tax Analysts' article.

This story also raises questions how committed the IRS is to investigate claims raised by whistleblowers under its Tax Whistleblower Program.  Despite Lee Martin's (Director of the IRS Whistleblower Office) statements to the contrary (see this blog on statements made by Lee Martin during Tax Whistleblower Bar call), this account can and may already have a chilling effect on the number and quality of submissions to the Whistleblower Office.

Nonetheless, if you know of tax fraud or tax violations committed by an individual or a corporation, and wish to report the violations to the IRS, contact us to prepare your tax whistleblower claim.  The IRS pays between 15-30% of the collected proceeds (tax, penalties, interest and additional amounts) for specific and credible information the IRS uses to prosecute the alleged tax violators.

GAO Issues 2015 Report on IRS Whistleblower Program

Today, November 30, 2015, the U.S. Government Accountability Office (GAO) issued its report on its audit of the IRS Whistleblower Program.  The title of the Report is simply “Billions Collected, but Timeliness and Communication Concerns May Discourage Whistleblowers.” 

The IRS Whistleblower Program is a work in process that has, and will continue to, change over time.  The IRS Whistleblower Program is the most powerful tool that Congress could have given the IRS to enforce tax compliance.  However, to date, the IRS has failed to properly utilize this tool in accordance to its mission statement

For unknown reasons (perhaps the IRS lack of resources, its failure to prioritize these cases, and its overall attitude towards the success of the program, etc.) the IRS has not prioritized and expedited these whistleblower cases resulting in a weak program.

As time brings change, perhaps, the following Recommendations, as set forth by the GAO, will bring good changes to the program.

Matter for Congressional Consideration

1.     Matter: To further encourage whistleblowers to provide information to IRS about serious tax noncompliance and to protect whistleblowers, Congress should consider legislation that would provide protections for tax whistleblowers against retaliation from their employers.

Recommendations for Executive Action

1.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to strengthen the procedures for calculating award amounts and for the issuance of the preliminary award recommendations and award letters to whistleblowers. Such procedures should include, at minimum, a documented process for: (1) supervisory review prior to the director's concurrence, (2) verifying collected proceeds prior to an award payment for both the 7623(a) and 7623(b) programs, and (3) reviewing preliminary award recommendation and award letters to the whistleblower prior to their issuance.

2.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to provide additional information in the annual report to Congress to better explain the statistics provided and the categories of claim review steps reported. Specifically, the report should (1) include correct, reliable data that reflect only the activities of the fiscal year of the report; (2) describe all status categories and clearly identify claim type in the tables; and (3) include an overall timeliness measure (by providing an average and range) to show how long claims take to go from submission of Form 211 to closure decision.

3.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to develop an additional or revised fact sheet about the whistleblower claim process and/or publish additional information on the IRS website. Such information should include (1) an outline of the entire claim review process, with an average time or time range for the various review steps; (2) a description of the key taxpayer rights that a taxpayer may exercise and how much time this may add to a claim's review; (3) examples to illustrate common circumstances that result in denials; and (4) items to include in a Form 211 submission, and suggestions for the types of documentation that are particularly helpful to the WO.

4.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to develop a comprehensive plan for evaluating the costs and benefits of the pilot annual status letter program, including obtaining feedback from whistleblowers in the pilot regarding the usefulness of the letter.

5.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to establish a process to ensure whistleblower addresses are being properly updated in E-TRAK to ensure the WO does not send whistleblower mail to outdated or incorrect addresses. This process could include developing a change of address form specific to whistleblowers and including a blank copy of it in every correspondence with whistleblowers or referencing the importance of updating the WO with any address change in every correspondence with whistleblowers.

6.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to formally document a procedure for return address labels for mail originating from the WO that states that external envelopes should not identify the WO as the sender of the correspondence.

7.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to record refund statute expiration dates in E-TRAK and monitor expiration dates routinely so that the award payment process can start as soon as the claims are eligible for payment.

8.     Recommendation: To ensure timely and consistent information to Congress and the public, the Secretary of the Treasury should issue its Whistleblower Office annual report to Congress no later than January 31st each year covering the prior fiscal year.

9.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to implement a staffing plan for streamlining the intake and initial review process to make more efficient use of staff resources.

10.    Recommendation: The Commissioner of Internal Revenue should direct the Deputy Commissioner for Services and Enforcement to develop guidance for examiners in operating divisions to use in determining whether an Internal Revenue Code section 6103(n) contract with a whistleblower would be beneficial and outline the steps for requesting such a contract.

11.   Recommendation: The Commissioner of Internal Revenue should direct the Deputy Commissioner for Services and Enforcement to strengthen guidance and procedures to ensure whistleblower information is retained only in the proper file locations. Such procedures could include requiring management sign off of taxpayer file reviews to ensure all whistleblower information has been appropriately segregated and sent back to the WO.