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.

Pfizer and the Inversion Debate.

As everyone is aware, America will lose another company in 2016 to Ireland with the closing of the Pfizer – Allergan inversion.  See Bloomberg article.  With the inversion (See this Fortune article for more information about inversions), Pfizer will relocate its corporate headquarters to Ireland and continue its long standing policy of transferring profits from the U.S. to a lower tax jurisdiction.  Pfizer’s move will continue a trend of U.S. companies playing the shell game with its U.S. sourced profits through transfer pricing.  See these Bloomberg articles regarding profit shifting to avoid taxes and  the U.S. corporate tax-dodge

The obvious question about such a move is: What happened to President Obama’s and Treasury Secretary’s, Jacob J. Lew, position that the US would try and prevent future inversions (See Forbes article for more information of the Treasury Regulations) in response to Pfizer’s first failed attempt to invert by purchasing Astra Zeneca?  (Note: see Bloomberg article about Pfizer’s attempt to acquire Astra Zeneca).  As stated by the Wall Street Journal, the Treasury’s efforts failed to prevent US inversions or foreign corporations from acquiring US corporations. 

So how does the U.S. solve the problem given the ineffectiveness of the changes to the Treasury Regulations?  Possible solutions could be: 1. To lower the corporate tax rate in the United States; or 2. A Tax Holiday.  See Congressional Research Service’s article: Corporate Expatriation, Inversion and Mergers: Tax Issues for a discussion of the solutions proposed to solve the inversion problem.

The first solution would be to de-incentivize corporations from changing their home jurisdiction by matching the corporate rates in other countries.  However, that might not stop the mass exodus of corporations or generate job in the U.S.  See Sam Becker’s article about Kansas’ attempt to lower tax rates for businesses and the negative impact on jobs in Kansas.

The second solution might be to declare a tax holiday and allow the companies to bring back money to the United States at a reduced rate or without paying tax.  As stated in Jaimie Woo’s Huffington Post article this might not be the best idea, because it is rewarding the companies that shifted its profits offshore through transfer pricing by allowing them to bring the profits home at a much lower rate.  Also, the tax holiday would not address the problem of inversions, because the reason the companies are inverting is to avoid all U.S. taxation, not just at a reduced rate.

Another possibility, but rarely discussed is an expatriation tax.  This solution wouldn’t solve the corporate inversion problem, but would provide a huge incentive to not invert. What is an expatriation tax?  If you are a U.S. Citizen and want to renounce your citizenship (or are ordered to renounce your U.S. citizenship), the IRS treats that situation as an expatriation and imposes a tax on all your assets.  See Internal Revenue Code Section 877A.  As stated by the IRS, the Expatriation Tax would treat the individual as having sold all of his/her assets the day before expatriating their citizenship, and would impose a tax on the sale of those assets (with a sizable exemption).

The Expatriation Tax Model could be implemented to include Corporations and not just U.S. individuals.  This would require the U.S. Corporations to pay the tax on the deferred earnings of their offshore subsidiaries, and all other assets prior to inverting to the foreign jurisdiction.  This would make sure the company pays its fair share of U.S. taxes before utilizing the foreign jurisdictions tax benefits.

Could this unique solution work?  It might not stop the inversions, but it would at least cause the corporations to pay their fair share of taxes for choosing to relocate (on paper) its corporate headquarters in another jurisdiction.  Unfortunately, as with the proposed legislation (changing the tax rate and a tax holiday) it is unlikely that Congress will implement this solution to prevent corporations from avoiding U.S. taxes.

If you feel strongly about inversions and have specific/credible information about corporations avoiding the payment of tax, something that you can do now to limit the tax avoidance is to utilize the IRS tax whistleblower program.  The IRS pays an award between 15% to 30% of the tax collected to a whistleblower with specific and credible information about a corporate taxpayer’s avoidance of tax (either through an inversion or other methods, such as transfer pricing, or sham transactions).   Contact us if you want to file a tax whistleblower claim.

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.