IRS Tax Whistleblower - What is an Administrative Action?

IRS Tax Whistleblower - What is an Administrative Action?

An IRS tax whistleblower award hinges on whether the IRS initiated an action (i.e. an “administrative action” or a “judicial action”) using the whistleblower’s information.  Accordingly, understanding the concept of administrative action can may assist whistleblowers in receiving a larger award, or in other cases advocating for an award in the first place.

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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.


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.


IRS Whistleblower Program - IRS, Revisit the 2-Year Waiting Period!!

The IRS should be encouraging whistleblowers to come forward and promote the program by shortening the waiting time for a whistleblower to receive an award.  Therefore, the IRS should reassess the necessity of certain rules (i.e., the two-year waiting period) and/or should modified existing practice (i.e., paying interest and offering all taxpayers a closing agreement).  Alternatively, the IRS should outright eliminate the two-year waiting period if they determine history shows taxpayers in whistleblower claims have not been successfully filing claims for refunds as to the whistleblower’s issue.

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