Accountability by IRS Whistleblower Office

Should the United States Tax Court (in suits initiated by Whistleblower) and Congress be holding the IRS accountable for the Whistleblower Program? 

Background: 

Recently, the “most exciting two minutes in sports”, aka the Kentucky Derby, ended in controversy when the race stewards disqualified the 2019 race winner, Maximum Security, after the race for veering too far to his right after the second turn and interfering or impeding the progress of other horses.  

See this Bloomberg video commenting about the correctness of the outcome.  

See also this Sports Illustrated commentary about the rules are the rules, and they should be followed, even at the Kentucky Derby. 

Even the President got involved in the controversy tweeting that the result was incorrect and only due to political correctness. 

Significance to Whistleblower law: 

The Kentucky Derby result, while shocking, and as noted above, was the right result because there are specific rules in place in horse racing that must be enforced regardless of the stage or event.  Similarly, there is a whole body of law (statute and regulations) regarding the whistleblower program that should be enforced by the United States Tax Court, Congress and the IRS.  Yet, despite this existing body of law, often when the IRS makes award determinations, it appears as if the IRS is ignoring the statute and regulations to minimize an award.  

One example of the IRS’ interpretations not following the written rules is the IRS’ attempt to exclude amounts from collected proceeds.  I.R.C. § 7623(a) states in pertinent part:  

The Secretary, under regulations prescribed by the Secretary, is authorized to pay such sums as he deems necessary for— 

(1) detecting underpayments of tax, or 

(2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same, 

in cases where such expenses are not otherwise provided for by law. 

Likewise, I.R.C. § 7623(b) provides in pertinent part: 

If the Secretary proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary’s attention by an individual, such individual shall, subject to paragraph (2), receive as an award at least 15 percent but not more than 30 percent of the proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action (determined without regard to whether such proceeds are available to the Secretary) 

In Smith v. Commissioner, United States Tax Court Docket No. 25605-15W, the IRS attempts to subdivide an administrative action between issues for which the whistleblower provided information, and issues from the same administrative action for which the whistleblower did not provide information, as a way to exclude certain amounts from collected proceeds and the calculation of an award to the whistleblower.  However, the IRS’ approach attempts to subvert I.R.C. § 7623(b), because the IRS is excluding amounts from the action generated by the Whistleblower’s information by trying to bifurcate an administrative action, when there was only one administrative action.  The IRS is trying to bend I.R.C. § 7623(b) to limit the award payable to the whistleblower.  Instead, as with the Kentucky Derby, the IRS should read the law as it is written (namely, proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action) and award a percentage of the additional amounts collected from the same administrative action started by the whistleblower’s information to the whistleblower.  Clearly the rule contemplates to award the whistleblower additional proceeds derived from the same action(s), or a portion thereof, which were initiated by the whistleblower’s information, and the IRS should be held accountable to the language of the statute. 

Another example of the IRS’s interpretation resulting in a negative outcome for the whistleblower is sequestration. (See the prior blog on sequestration).  In an award determination, the statute and regulations provide for a specific formula for the IRS to follow to determine an award.  The simple formula is: award percentage multiplied by collected proceeds.  The IRS has discretion to determine the award percentage, applying both positive and negative factors in determining an award percentage.  One would assume that if there would be a reduction of the award it would be at this stage.  However, the IRS’ sequestration reduction is applied after the award is determined, and this reduction is not provided for under the statute or regulations.  The only permissible reductions, after a determination is made, are for less than substantial contribution (publicly available information), and/or initiation and contribution of the tax scheme; neither of which permits the IRS to reduce the award for sequestration.  The IRS should be held accountable for making an award determination and should not be allowed to pay an award less than that which they determined.  The formula for determining the award and payment of the determined award are set by statute; the IRS should not be allowed to unilaterally determine and pay a lesser amount 

Finally, a third example of the IRS not following the rules as they are written is with respect to anonymity.  The IRS in its regulations (Treas. Reg. § 301.7623-1(e)) promises to protect a whistleblower’s anonymity.  Specifically, Treas. Reg. 301.7623-1(e) provides in pertinent part:  

Under the informant's privilege, the IRS will use its best efforts to protect the identity of whistleblowers. In some circumstances, the IRS may need to reveal a whistleblower's identity, for example, when it is determined that it is in the best interests of the Government to use a whistleblower as a witness in a judicial proceeding. In those circumstances, the IRS will make every effort to notify the whistleblower before revealing the whistleblower's identity. 

Despite this directive to protect a whistleblower’s identity, the IRS throws this directive to the wayside when a whistleblower seeks additional information through a United States Tax Court Petition seeking review of the determination of award. (In many cases, these actions are undertaken by the whistleblower to determine what exactly was undertaken by the IRS using the whistleblower’s information).  If the rule is to protect the whistleblower’s identity before filing suit in the United States Tax Court, the rule should also be followed after the whistleblower files suit to obtain information as to what the IRS undertook with the whistleblower’s information.  If the IRS prefers to avoid tax court, they should consider being more forthcoming before rejecting/denying claims and allow administrative appeals.  (See the prior blog on administrative appeals). 

The above examples are just a sampling of statute and regulations that the IRS does not follow as written.  Congress, IRS Management, and whistleblowers should not accept the IRS’ continual obfuscation of statutes and regulations.   

If you have concerns that the IRS is not properly following the statutes and regulations in your whistleblower case, contact us about reviewing your case, and possible action in U.S. Tax Court. 

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Author, SHINE LIN strives to present a balanced yet focused claim which allows the IRS to concentrate on the key facts, legal issues, law and legal analysis so that the IRS may successfully pursue the alleged wrongdoers.

TIGTA-2016-26 Press Release

October 24, 2016
TIGTA-2016-26
Contact: Karen Kraushaar, Director of Communications
Karen.Kraushaar@tigta.treas.gov
(202) 622-6500

The Whistleblower Program Helps Identify Tax Noncompliance; However, Improvements Are Needed to Ensure That Claims Are Processed Appropriately and Expeditiously

 WASHINGTON — The Internal Revenue Service (IRS) Whistleblower Program can be a powerful tool to assist the IRS in identifying violations of tax law and collecting funds that might otherwise be lost to tax evasion.  However, improvements are needed to monitor the timeliness of whistleblower claims processing and ensure that program decisions are properly supported, according to a new report issued publicly today by the Treasury Inspector General for Tax Administration (TIGTA).

Internal Revenue Code Section 7623 authorizes the IRS to pay monetary awards to whistleblowers for information leading to detecting underpayments of tax or bringing to trial and punishment persons guilty of violating tax laws.  However, whistleblowers and members of Congress continue to express concerns with the operation of this program.

In its review, TIGTA found that the Whistleblower Program has helped the IRS collect significant amounts of revenue by facilitating whistleblower claims reporting violations of the tax laws that may otherwise go unidentified.  From Fiscal Year 2011 through February 2016, the IRS collected more than $2 billion because of information that whistleblowers provided.  In addition, the Whistleblower Office has recently reduced inventory backlogs.  However, the Whistleblower Office does not have appropriate controls in place to allow for sufficient oversight of claims processing, and whistleblowers are not always contacted to clarify allegations.

TIGTA recommended that the Director, Whistleblower Office, implement the Balanced Performance Measurement System for the Whistleblower Program and implement controls to ensure that whistleblower claims are appropriately and timely evaluated before being rejected, denied, or referred to operating divisions for investigation or examination.  In response to the report, IRS management agreed with and plans to implement corrective actions for nine of TIGTA’s 10 recommendations.

“The IRS Whistleblower Program plays an important role in reducing the Tax Gap by providing an avenue for reporting tax evasion,” said J. Russell George, Treasury Inspector General for Tax Administration.  “It is important for the IRS to make every effort to implement controls to ensure the consistent, appropriate, and expeditious processing of whistleblower claims.”

Read the report.

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Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.

ARE THE LOBBYISTS FOR LARGE WEALTHY TAXPAYERS SUCCEEDING?

Influencing Congress to curtail IRS abuse seems to have caught on and is supported by many….until we think about it.  On April 4, 2016, the Center on Budget and Policy Priorities recently reported in an article IRS Funding Cuts Compromise Taxpayer Service and Weaken Enforcement that the IRS budge has been cut 17% since 2010 weakening the IRS ability to enforce the tax laws.  In fact with over 13,000 less employee (12,000 enforcement staff) it has resulted in the lowest audit levels in a decade.  These budget cuts are in addition to the IRS increased responsibilities including 9 million more individual returns filed, enforcement of ACA, FACTA, and its focus on identity theft that alone results in $6 billion of fraudulent refunds being issued by the IRS every year.

House Republicans have targeted the IRS for sharp cuts since the Lois Lerner fiasco.  Senator Ted Cruz pledges to keep his promises as he runs for President and then naively promises that he will eliminate the IRS.  We as taxpayers know that there is a cost to living in a civilize society.  However, what is happening is that the large influential taxpayers with their millions to spend to defend their underreporting and underpayment of tax are now just too big for the IRS to successfully audit with its limited budgets and lack of resources.  The IRS has now been reduced to do what it does best, and that is simply going after the little guy (middle and lower class).

One has to wonder if the reduction of enforcement of the tax laws as to the wealthy taxpayers and large multinational corporations is just an unforeseen consequence of cutting the IRS budget or is it the result of an overall plan by the wealthy influential taxpayer and the Republicans. 

In 2010, the IRS was given the most powerful tool for enforcement of the tax laws, IRC §7623(b)…a strengthened Whistleblower program.  The IRS was mandated to pay 15% -30% of the tax collected based upon information that was provided to it from an individual that resulted in the determination of tax.  However, this was with respect to only large taxpayers in which there was more than $2,000,000 of tax in dispute.  Thousands of whistleblower claims have been handed to the IRS on a silver platter every year involving large wealthy taxpayers, but for unknown reasons, the IRS has not used the whistleblower program as it should by working with whistleblowers, expediting these whistleblower cases through the system, and promoting the whistleblower program.  Perhaps with the current limited budget, the IRS will realize that is more important now than ever before to embrace the whistleblower program and work with the true insider to efficiently enforce the tax laws as to the large wealthy taxpayer.