Has the IRS embraced the Whistleblower Program?

N0! History and experience reflect that the IRS has not embraced the program.

Facts.

In the recent blog Is the Whistleblower Program Good for the IRS, we discussed the enforcement power of the whistleblower program, the efficiency of the program and most importantly, the fact that the payment of awards does not affect the IRS budget. Now let’s look at the facts in order to determine if the IRS has embraced the whistleblower program.

• The IRS, after 12 years, still refuses to communicate with the whistleblower despite being able to do so under the regulations. (See Treas. Reg. § 301.7623-1(d)(1)).

• The IRS has never entered into a non-disclosure agreement (i.e., 6103(n) contract) with a whistleblower, despite the fact that the whistleblower is often an expert in the facts and the law with respect to the tax issues that are the subject of the claim and could easily assist the IRS in efficiently detecting and maximizing the collection of underpaid taxes. In its determination of awards, the IRS.

• In its determination of awards, the IRS regularly minimizes and rejects awards by narrowly construing the law, and often ignoring its own regulations.

  • The IRS will regularly take an action on the whistleblower’s information and obtain compliance by the taxpayer; but deny an award, claiming the taxes collected were a result of a “voluntary” change in the taxpayer’s behavior (i.e., the IRS did not examine the taxpayer’s return or failed to propose/make an audit adjustment).

  • The IRS will minimize the “collected proceeds” (i.e. taxes collected) by segregating taxes collected based upon the information of the Whistleblower (which caused the IRS to take an action, detect and collect the underpaid taxes) from taxes collected in the same audit but for which the whistleblower did not provide information as to the other tax issues. This is the current IRS position despite the fact that the IRS did not plan an audit of the taxpayer before receiving the Whistleblower’s claim.

  • Etc.

• After collecting the tax, the IRS waits two years before paying an award under the pretense that the taxpayer might successfully apply for a refund, when history shows that few if any taxpayers have done so in whistleblower cases.

• Despite the promises of anonymity (see Treas. Reg. § 301.7623-1(e); IRM 25.2.2.9) to a whistleblower, the IRS will object to anonymity of the whistleblower in litigation when the whistleblower appeals the determination of award before the U.S. Tax Court.

• The IRS does not prioritize Whistleblower claims over other audit initiating sources, even though one could argue that the IRS is often handed the case on a silver platter with whistleblower claims.

• The IRS does not pay interest on the awards even though the whistleblower will wait for years after the IRS collects the tax before payment is made to the whistleblower.

• The IRS reduces the payment of its determined awards due to sequestration, despite the whistleblower statute (I.R.C. § 7623 ) stating that it is to be a self-funded program.

Analysis

There can be no denying that the IRS has not actively promoted the whistleblower program and continues to discourage whistleblowers throughout the lengthy process. As was pointed out in our previous blog, the IRS and the American taxpayers only benefit from the success of the program as it results in the collection of taxes that would not have otherwise been detected and collected. Since 2007 the IRS has collected $5 billion in previously undetected and uncollected taxes and has approved awards in excess of $811 million. The program assists the IRS, with its limited budget, to enforce the tax laws with efficiency.

Therefore, one can only speculate why the IRS has not embraced the whistleblower program. Some have speculated that the IRS’ failure to fully support and utilize the whistleblower program could be in part due to one or more of the following:

1. Revolving Door. Many tax professionals have noted that the IRS executive offices have switched in the last twenty years from being held by career employees to former partners from large law and CPA firms. Many times, these positions are simply being held for a few years before the individual goes back to private practice. Therefore, perhaps this new revolving door of IRS management allows IRS management to ignore the whistleblower program because the IRS managers may be seeking to re-deploy in the private sector and do not want to jeopardize their future partnership opportunities.

2. Post Retirement Opportunity. Along this line of thinking, current IRS management may be persuaded by the private sector to discourage the success of the whistleblower program because when they retire there may be opportunity with the private sector.

3. Big Government. Some have suggested that big government is important. If this is true, then proper use of the whistleblower program could result in increased efficiency by the IRS allowing it to detect and collect the same amount of tax with less employees.

4. Pride. IRS examination agents may simply be embarrassed that they missed multi-million dollar issues and were unable to do their job without the assistance of a whistleblower.

Conclusion

Because the IRS has failed to aggressively implement and run the IRS Whistleblower Program, Congress needs to take another look at this program and mandate changes that would promote and make the IRS utilize the program more aggressively. Such easy steps might include requiring communications with the whistleblowers, impose transparent deadlines, stop sequestration reductions by the IRS and to interpret the law more broadly. After all, improving and utilizing the whistleblower program benefits the IRS and the American taxpayers. Therefore, if the IRS cannot successfully promote and implement the program, then perhaps Congress needs to get involved to make the program effective and regularly utilized by IRS.

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Author Thomas C. Pliske is a former IRS attorney.  He established the Tax Whistleblower Law Firm in 2008. whose sole practice is representing Whistleblowers before the IRS and the U.S. Tax Court.

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IRS Identifies Problems with the Whistleblower Program

Internal Revenue Service

The Tax Whistleblower Law Firm fully supports the recommendations stated in 2016 report by the IRS National Taxpayer Advocate with respect to improving the IRS Whistleblower Program.  Although much more can be done administratively as well as legislatively to improve the whistleblower program, this is the first real effort by the IRS to identify the problems of the program.

It appears that “lack of communication” by the IRS is the most serious problem.  However just as important is the length of time from the submission of a Whistleblower Claim to the time in which an Award is paid (currently running 6-8 years).  Although much can be done to speed up the process, the Taxpayer Advocate failed to address this very important issue.

The National Taxpayer Advocate recommends that the IRS:

1. Revise the regulations under IRC § 7623 to provide that a whistleblower “administrative proceeding” within the meaning of IRC § 6103(h)(4) commences with the whistleblower’s submission of Form 211.  (Currently the Regulations provide that an administrative proceeding begins when a preliminary award recommendation letter is sent….which in fact is the end of the administrative proceeding).
2. Revise the regulations under IRC § 6103 or IRC § 7623 to provide that the IRC §§ 7431, 7213 and 7213A penalties apply to re-disclosures of returns or return information by a whistleblower who has executed a confidentiality agreement as part of an IRC § 6103(h)(4) administrative proceeding, and that the IRC § 6103(p) safeguarding requirements also apply to such a whistleblower.  (Currently there are no stated penalties to a Whistleblower for the disclosure of taxpayer information, although penalties (i.e. forfeiture of the Award) could be stated within the Confidentiality Agreement).
3. Revise the regulations under IRC § 7623 to require the IRS, upon the whistleblower’s execution of a confidentiality agreement as part of an administrative proceeding under IRC § 6103(h)(4), to provide bi-annual status updates sufficient to allow a whistleblower to monitor the progress of the claim (e.g., whether the claim resulted in an audit, whether the audit has concluded, the existence of any collected proceeds, and whether the case has been suspended) according to procedures developed by the WO.  (Currently the IRS has a pilot program to simply inform the Whistleblower that the Claim remains open).

For unknown reasons, (budget, lack of IRS managerial support, etc.) the IRS is slow/reluctant to act in improving the whistleblower program.  Therefore, it is suggested that Congress look into the matter of enacting legislation to improving the program by changing the law and enacting these recommendations as well as many other recommendations that have been made. 

After all, even the IRS defined its Mission as -

“Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.”

— Internal Revenue Service

Therefore, a bipartisan Congress should support these changes in an effort to collect the billions of underreported and underpaid taxes.