Whistleblower Lawyer Blog

(Updated) For a national conference of employment lawyers, I was asked to participate in a panel discussion of "Strategic Thinking in Whistleblower Cases" and to explain the new IRS Whistleblower Program.

Because our whistleblower lawyer blog (http://www.whistleblowerlawyerblog.com/irs_rewards_program_tax/) has followed closely the development of the new IRS Whistleblower Program since Congress authorized it in December 2006, I will summarize here some of the key points about the IRS Whistleblower Program, which is still taking shape. By experimenting and using this "blog" as an old-fashioned seminar paper--with the interactive features of the web--the National Employment Lawyers Association lawyers (and others) may be able to "link to" other pertinent topics on the web, such as the various IRS materials discussed here.

Overview

Until December 2006, the Internal Revenue Service had no effective program to encourage whistleblowers to report tax fraud and tax violations. Rewards to "IRS Whistleblowers" were rare, slow, discretionary, and small--and typically could not exceed 15 percent of the amount recovered by the IRS. As a result, the "old" program was ineffective--even though the IRS historically has made good use of information from informants.

The new IRS Whistleblower Program provides the first meaningful rewards to whistleblowers who report substantial tax violations when at least $2 million is owed to the IRS. The amended IRS Whistleblower statute, 26 U.S.C. § 7623, doubles the rewards available to 15-30% of the government's recovery, and for the first time creates an enforceable right for the whistleblower to receive a reward. Not only taxes, but also interest and penalties, count in calculating the whistleblower’s reward.

Many challenges nonetheless remain in representing IRS Whistleblowers. Perhaps the greatest is convincing an overburdened IRS that your client's case is worth the investment of its limited resources. The IRS already has many other cases awaiting investigation, and would-be whistleblowers continually add to that "pile" by submitting hundreds of other potential cases.

Background--Why Now?

The new IRS Whistleblower rewards were inspired by another whistleblower statute, the federal False Claims Act. The successes of the False Claims Act over the past two decades convinced Senator Chuck Grassley (R-Iowa) and others in Congress that meaningful whistleblower rewards are an effective tool for the government to recover public dollars obtained by fraud. Since the False Claims Act was amended in 1986 to increase the size of rewards and otherwise encourage "qui tam" lawsuits that expose fraud against the government, the federal government's fraud recoveries have grown dramatically--from less than $100 million in 1987, to more than $3 billion in 2006.

Tax violations, however, fall outside the False Claims Act, which expressly “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.” 31 U.S.C. § 3729(e). As a result, there was no meaningful incentive for tax whistleblowers to come forward to the IRS before December 2006.

With a "tax gap" of more than $200 billion in estimated unpaid taxes each year, the old IRS program brought in less than $100 million annually--even though information from "insiders" historically has been quite productive for the IRS. In fact, the June 2006 Report of the Treasury Inspector General for Tax Administration (TIGTA) noted that, based on past experience,"examinations initiated based on informant information were often more efficient and effective." (See June 2006 Report of Treasury Inspector General for Tax Administration--which predated Congress' creation of the new IRS Whistleblower Rewards Program, entitled "The Informants Rewards Program Needs More Centralized Management Oversight," No. 2006-30-092. (
http://www.treas.gov/tigta/auditreports/2006reports/200630092fr.pdf).

Continue reading "IRS Whistleblower Program: Updated Summary for Lawyers with Potential Tax Whistleblower Claims" »

Bogus tax shelters and other tax fraud and evasion are among the common reports by tax whistleblowers to whistleblower attorneys. Today, the government launched a new, coordinated federal effort by the IRS, the Justice Department's Tax Division, and U.S. Attorneys to stop fraudulent tax claims, frivolous tax returns, and bogus tax schemes.

Quoting former Supreme Court Justice Oliver Wendell Holmes’ famous observation that “[t]axes are what we pay for a civilized society,” Nathan J. Hochman, the Tax Division’s Assistant Attorney General, announced the "National Tax Defier Initiative," or "TAXDEF." Its purpose is to "investigate, pursue and, where appropriate, prosecute those who take concrete action to defy and deny the fundamental validity of the tax laws."

According to the Tax Division, this TAXDEF initiative will:

--"Strengthen and expand coordination" among the Tax Division, the IRS, and U.S. Attorneys’ offices "to ensure that both criminal and civil enforcement tools are fully considered and utilized."

--"Leverage expertise and resources" so that agents and attorneys across the country may "efficiently detect, investigate and where appropriate, prosecute tax defiers," from a national perspective.

--Expand the government's use of injunctions to stop "tax defier activity. Since 2001 the Tax Division has obtained over 300 civil injunctions against tax promoters and preparers, over a third of which directly involved tax defier activity." The government views injunctions as a "powerful method of stopping the promotion of tax defier activity at the earliest possible moment," and estimates its collections at more than $600 million from these efforts.

--Maximize the government's use of technology to "detect, develop and prosecute cases." According to the Tax Division, the Internet in the last decade has "greatly facilitated tax defier activity and turned what was once a paper–based local or regional enterprise into a click and download national operation."

--"Alert and educate the public to the falsity of tax defier claims and publicize the consequences of tax defier conduct." The government says it wants "to pull back the curtain and show the public that the promoters of these schemes are not wizards imparting the secrets of a 'tax-free universe' but are nothing more than garden variety hucksters and modern day snake oil salesmen peddling tax evasion schemes."

Our whistleblower lawyer blog agrees with the government's theme today that tax cheats place a greater burden on the vast majority of honest Americans who pay their taxes. For this reason, those who expose tax cheating should be thanked for their efforts.

The government's announcement is at http://www.usdoj.gov/opa/pr/2008/April/08_tax_275.html.

Today saw a major development that could affect every whistleblower, whistleblower attorney, and whistleblower case involving the False Claims Act, the nation's primary whistleblower law. The U.S. Senate Judiciary Committee today approved new legislation to restore the False Claims Act to its originally intended strength, by eliminating a series of "loopholes" that dishonest government contractors had used to avoid liability.

Our whistleblower lawyer blog has written extensively about the False Claims Act, the qui tam statute that allows private citizens to report fraud as whistleblowers or "relators," and to share in the government's recovery of damages. We have followed the development of the new whistleblower law amendments, the False Claims Act Correction Act (S. 2041), since it was introduced last September by a bipartisan group of Senators (Grassley, Durbin, Leahy, and Specter).

The advocacy group Taxpayers Against Fraud (with which I am proud to be associated) describes the new law as "A Better Rat Trap" designed to put more "snap" into the False Claims Act, and summarizes its key provisions as follows:

--to clarify that False Claims Act liability protects all federal funds;

--to solely vest the Government with the power to dismiss whistleblower- filed False Claims Act lawsuits that are based on public allegations;

--to remove confusion over the statute of limitations period;

--to explicitly clarify that the False Claims Act applies to those who discover an overpayment and decide to pocket the funds; and

--to provide strengthened employment protection for whistleblowers.

According to Jeb White, President of Taxpayers Against Fraud, "[t]his is common sense legislation that we expect to sail through the House and Senate. . . . It's hard to be opposed to building a better rat trap to catch corporate cheats, chiselers, and con artists."

The bill passed the Judiciary Committee overwhelmingly, and moves forward in the legislative process.

We congratulate everyone who had a part in moving the new law forward, so that these loopholes for dishonest contractors may finally be closed.