Tax Whistleblower Attorneys At IRS Hearing Urge Treasury and IRS to Be True to Congress's Intent in Expanding the IRS Whistleblower Program
As has been reported today in Tax Notes and CCH, my colleague Richard Rubin and I addressed the IRS at its hearing yesterday on the proposed IRS Whistleblower rules. We were able to speak for roughly one-third of the hearing.
The government panelists were (1) the Department of Treasury's Alexandra Minkovich, an attorney-advisor in the Office of Tax Policy; (2) Stephen A. Whitlock, the Director of the IRS Whistleblower Office; (3) Thomas J. Kane, Senior Level Counsel at the IRS Office of Associate Chief Counsel (Procedure and Administration); and (4) Kirsten N. Witter, Chief, Ethics and General Government Law Branch, Office of Associate Chief Counsel (General Legal Services).
We focused on fundamentals. We urged that Treasury and the IRS must stay true to the intent of Congress to expand the number and types of IRS whistleblower claims that the IRS receives and pursues, and that merit awards to whistleblowers.
I argued that, from the outside, it appears that some in the IRS may be determined to undermine and thwart the the creation of the broad new tax whistleblower program that Congress has plainly ordered. Instead, major rules and policies proposed to date are in many ways more restrictive than those under the "old" program, which cannot be the result Congress intended.
Those restrictions and policies also create needless obstacles--such as a proposed two year delay that did not exist under the "old" system--that will discourage IRS whistleblower claims. The public will suffer as a result, becuase many unlawful tax schemes will go undetected without whistleblowers exposing them.
We argued for a straightforward rule that fulfills Congress's intent that any whistleblower claims providing a financial benefit to the Treasury should merit a whistleblower reward. Predictability of rewards is essential to attracting whistleblowers, especially those with information about the largest and most complex tax schemes.
Excerpts of an unofficial transcript of the hearing are reprinted below:
MS. WITTER: Good morning, everyone, and welcome to the Public Hearing on a Proposed Regulation Regarding Re-wards and Awards for Information Relating to Violations of the Internal Revenue Laws.
My name is Kirsten Witter. I'm the chief of the Ethics and General Government Law Branch in General Legal Services. And I'd like to introduce my fellow panel members. To my immediate right is Tom Kane, a senior level counsel in procedure and administration; Steve Whitlock, the director of the Whistleblower Office; and Alexander Minkovich with the Office of Tax Policy.
In a moment I will be inviting the speakers up to the podium. Please remember that you will have 10 minutes in which to provide your oral comments. Given that limited amount of time, we would like to keep the comments focused as much as possible on the definition of collected proceeds.
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MS. WITTER: Michael Sullivan and Richard Rubin can come up to the podium.
MR. SULLIVAN: . . .
By brief introduction, I'm an attorney. I practice in Atlanta. I'm a former federal prosecutor. I've worked with the major whistleblower statute that inspired the 2006 changes to the IRS statute which is the False Claims Act since the late 1980s. I have both defended and prosecuted False Claims Act cases in that time, and since the IRS statute was amended in December 2006, I and my firm have brought IRS whistleblower claims to Steve Whitlock's office totaling many billions of dollars at this point.
I'm also a member of the Taxpayers Against Fraud organization, which has separately submitted comments, as well as a member of the IRS Whistleblower Committee. I'm not sure who is here today, but for those who don't know, Taxpayers Against Fraud is a nonprofit educational and advocacy group dedicated to protecting taxpayer funds through federal and state whistleblower laws being effectively used.
There is a great track record to learn from of what's happened in the last quarter century under the False Claims Act because, see, the IRS is going through a process now not too dissimilar from what DOJ attorneys, some of who are now TAF members, reported that they went through when this whole idea of using whistleblower was proposed in 2006.
Up until the 1986 amendments to the False Claims Act, that law was essentially meaningless in this country. It was a Civil War-era statute designed to stop fraud and deter fraud against the public, other than in taxes. It was very little used, but in 1986, there were major amendments to the False Claims Act that have dramatically changed that and made it dramatically successful. Since that time United States taxpayers have received the benefit of $ 27 billion in recoveries under the federal False Claims Act.
Those who worked in Justice at the time report that they didn't really want to work with these whistleblowers. This was strange. This was foreign to them. They could put together their cases, and they knew what they were doing.
But they very quickly learned something that I think you'll see also picked up in the TIGTA report in 2006, before the 2006 IRS changes were implemented--that the whistleblower information was very useful in putting together cases. And they developed a mechanism to work with whistleblowers and to leverage the ever more scarce resources that the government has in times of tight budgets, by working together to utilize the information and expertise of the whistleblower, in addition to the whistleblower's attorney.
There is now this model of a public-private partnership, which is there for the IRS to learn from and follow, and not to repeat mistakes made or reinvent the wheel in the past.And I'm here to talk about a couple of those as it relates to the proposed rule.
When Senator Grassley, who was the patron saint of modern whistleblower law made and championed the changes in 2006 to the IRS law, he modeled the improvements after the successful 1986 whistleblower amendments to the federal False Claims Act, largely because of this fundamental principle: These were predictable awards, and they were meaningful awards.
I want to stop there and let you think about that for a second. To the extent that the rules can be written now for the IRS program to give whistleblowers that same sense of predictability that, if they come forward and provide a net benefit to the public--which is the Treasury, but this is the public's money--that they need to be recognized, and they need to be rewarded.
Our comments here really address one fundamental theme. It was the plain intent of Congress to expand the number and types of whistleblower claims that the IRS would receive and ultimately be able to pursue. Otherwise, huge tax schemes would go undetected if there is a restrictive approach taken.
There was not a whiff of anything in the 2006 amendments to the IRS whistleblower law that suggested an intent by Congress to somehow restrict the approach taken under the old system, which wasn't used very effectively, but I think TIGTA reported that the whistleblower information was incredibly cost-effective. Four 4 cents spent on an informant's award program I believe a dollar in recovery, and that was more than twice as effective as the other methods that the IRS was using up until that time.
So from a law-enforcement perspective, from a public policy perspective and from just a common-sense perspective, this is a program that the public can and will support if it is done smart, if these rules are written in a way not to discourage whistleblowers.
With that guiding principle, these rules should be looked at as almost a ratchet, a mechanical tool. Whatever was allowed under the old program, there should not be revisiting of rules or principles that would somehow restrict what was already allowed.
That is directly contrary to the intention of Congress, and from an outsider's perspective, the appearance is that there must be some in the IRS who are determined to undermine and to thwart what Congress has plainly intended to be done, which is why we are four years out from the enactment of this law and these rules are still very much in flux.
Principle number one, there should be not even be consideration of excluding any claim that could have been rewarded or any claim that could have resulted in a whistleblower reward made under the old system.
I'm not going to go into detail on the criminal fines, but I would suggest that the IRS was not operating illegally in 2006, when the IRM specifically mentioned the ability to pay from criminal fines.
So I think that the approach needs to be, let's take what Congress told us, let's expand it and let's broaden it to paying additional categories, and not revisit whether we pay in these old categories.
Number two, there should be no idea that we should be introducing delays or obstacles that didn't exist before. I've talked to these whistleblowers. Tom mentioned this. We talk to them all the time. It's incredibly discouraging for somebody to hear that somebody in the IRS or somewhere has made up a two-year rule, with no public comment, that didn't exist before.
There's nothing in the statute that said that this has to be done, this additional two-year delay, and we think that is fundamentally the type of thing that will kill this program, and that will leave money on the table, or more literally in the pockets of those who are cheating the Treasury and taxpayers right now.
I'm going to let Richard Rubin come up and follow me with some specifics of our points of submission. Those guiding principles are not hard to follow.
Congress has already made this decision. It is not up to the IRS, it is not up to the Treasury to try to second-guess what Congress has already decided: that we're going to have a broader and more effective whistleblower program at a time when there is already pressure to raise tax rates. Why don't we just collect what's already owed?
This can be phenomenally popular and successful, and I submit to you a huge feather in the IRS's cap, if some adjustments are made where people get on the same page and let the Whistleblower Office do the job that, from what I can tell in 4 years of working with them, is a very fine group of professionals who are determined to try to carry forth Congress' intent.
So I'm going to let Mr. Rubin take over.
MR. KANE: Typically we would only give you guys minutes between you, but I think we'll let Mr. Rubin tell us what he wants to tell us.
MR. RUBIN: Do I get 10 minutes?
MR. KANE: We'll give you seven and a half and settle out of court. We have a small group this morning. Your clock is running.
MR. RUBIN: My name is Richard Rubin. I'm a federal and international tax attorney based in Atlanta. I sometimes work on behalf of taxpayers. Having said that, I've done a fair number of IRS whistleblower claims working very closely with Michael Sullivan. What I'd like to do is just look at the proposed regulation.
Clearly it's in and around collected proceeds, and if we just break out for a couple of moments, working together with Michael Sullivan we've dealt with a number of whistleblower cases some of which have been submitted, some of which have yet to be submitted, and a number of things have become patently clear from dealing with these cases.
The first thing is this, that the meaning that is to be attributed to collected proceeds is fundamentally important to these cases not only as to quantum, not only as to the amount of the case and therefore the amount of the reward that is based on the case, but also as to the existence of the case.
So if one misdefines or misinterprets or misattributes the meaning of collected proceeds, it won't only affect the amount of cases, in many cases it will actually exclude them and because of the rigors of being a whistleblower as has been mentioned by my colleague Linda Stengle there is a reluctance and a resistance to come forward. It does come at a price to the whistleblower. And unless there's a clear reward for the whistleblower coming forward providing this information, some whistleblowers prefer not to, and that's a very real consideration to recognize.
The other thing that's become patently clear is this, that there's a number of people out there who have excellent information, real information, dealing with large tax evasion and tax noncompliance, and they want to know that they're going to be rewarded for what it is that they are doing. For going through these rigors and these risks and exposing themselves, they want to know that they are going to receive a reward for the benefit of the information that they are giving.
One of the things where I possibly may depart slightly is this: When I look at the definition as it's phrased of collective proceeds, be it in the code or be it in the regulations, frankly, I don't see a definition. To my mind, there is no definition. The term is used "collective proceeds" and immediately after that it says, oh, including, and then we have certain specific inclusions. In tax terminology those are specific instances or specific inclusions. That's not the definition. The term "collective proceeds" remains to be defined, and I think that is fundamental to the problem that we have because if one had a suitable and sufficient definition of collective proceeds, I think a lot of these issues that we are facing today which tend to be highly specific in nature, would be covered, they would just all fall into place. It would be a natural thing to understand them.
So, I think first and foremost, we need to define collective proceeds. Yes, I know it's referred to in the code, I know it's referred to in the regs, in the proposed regulation too, but it hasn't been defined with respect -- it hasn't been defined. And to deal with specific inclusions on a term that hasn't yet been defined, in a sense, is missing the boat. We need to get to the fundamental. What is the fundamental of collective proceeds?
Very much echoing the comments of my colleagues, I would suggest that collective proceeds, the fundamental there, is net benefit to the Treasury. It's as simple as that. And the reason for it is again simple, the Treasury is the victim or the immediate victim, I should say, of tax evasion that is perpetrated, and as a corollary, the Treasury is the immediate beneficiary of tax evasion that is prevented. So, it's clearly -- it's all about the Treasury, the net benefit to the Treasury.
Now, what's happened in some of the cases that we've dealt with is we found that where as this focus, for example, under the regulations on the specific aspects, be it the denial of a refund or reduction of a credit, I've got no problem with those aspects per se in themselves -- they're fine. But without an underlying definition we're kind of still wondering what is this all about.
In the cases that we've dealt with, I can recall one instance where the refund issue came about as a practical matter. In a number of cases that we've dealt with, we've found that issues have come about which have not been addressed, simply -- or have not surfaced in the regulations, and that is the prevention of future tax avoidance. In most of the large cases, I'm talking specifically the large cases of tax evasion, there is a future component which just frankly has not been addressed anywhere, be it in the code, nor in the regulations, and I'd like to throw out some examples.
In one instance of a very wealthy taxpayer who took a number of steps to create the appearance that his estate had been depleted with a view to avoiding and illegally evading estate tax when one day he passes. Now, that hasn't taken place yet, the person is still alive, but one day when he passes, as a result of the whistleblower information that's been given, Treasury will benefit and benefit significantly from that. That is the prevention of future evasion. That is a highly valuable situation and it should be recognized and should be rewarded. It is in the future, but it should be rewarded.
In another case -- I'm just going to throw out a couple -- a case of a large corporate taxpayer, where the taxpayer had illegally and invalidly stepped up the basis of an asset with a view to claiming excessive tax depreciation to which it was not entitled. At the time of submitting the claim -- the tax depreciation was going to run over 15 years. At the time of submitting the claim, only a few of those 15 years had run, three or four years had run. The real benefit to the Treasury wasn't in the three or four years that had run, it was in the 11 or 12 years that had yet to run, and by the IRS being informed of that coming in, zoning in on it, preventing that 12 years is worth a lot more than having stopped recovering in respect to the previous three. Again, it's a prevention of future tax evasion. It's very real and, as I say, in most of the large claims, corporate claims that people are organized and sophisticated, there is normally a future element that is there, and sometimes it's a very big element, it may even be bigger than the past.
In yet another case, and then I'll stop with it, with these cases, instances, it's a situation with a large corporate group. What they've done is they've manipulated earnings and profits, and earnings and profits is a figure, as we know, that's calculated on the side. It does impact the ability to claim foreign tax credits. And they've done it in such a way that it's likely to have future benefits to them. It's not just the current you infect at the time that the claim was made, there's very little if any benefit that has come through, but the stage has been set. That group will have significant future foreign tax credits to which they are not entitled as a result of manipulating a figure currently and that is the essence of this. There is a number of means of manipulating figures, parameters, which have carryforward potentials -- mention has been made of NOLs, there's also -- mention has also been made of capital losses, excess foreign tax credits, earnings and profits, fiddling around with bases. All of these parameters have the potential and ability to carry forward and that is why the taxpayers actually do it, because if they were to -- if the tax fraud which are manifest in the current year, in the space of two or three years, the chances are that the IRS would be on to it in any event. What they've done in many instances is they've set up parameters that have a long-term vista, a long-term effect, five, 10, maybe even 15 years to come about. That is clear -- there are clear benefits to the Treasury in those cases, and that should be recognized.
There was mention of how does one value future benefits to the Treasury. I understand that that is a difficult situation, but it's not just the IRS that faces it. Business faces exactly the same situation and in terms of present value calculations, which incidentally the methodology and philosophy already exists in the code in terms of life interests, and other -- for estate tax and gift tax purposes. It can be done and it should be done to bring this in line with the modern business world.
Present valuations give account to the time value of money and to contingency, and it's not difficult to build that in. In fact, it's very simple to build it in using business-related models, and if one were to do that, all that one has -- the start-ing -- departure point is to recognize benefit to the Treasury and there's nothing against that. The term "collective proceeds" is not defined, so there's nothing against defining collective proceeds as benefits to the Treasury. I submit that that is the correct approach; that it's appropriate, and thereby it will also allow future benefits to the Treasury.
MS. WITTER: Thank you.
MR. SULLIVAN: Before Mr. Rubin sits down, can I just point the panel to one thing in the TAF Submission that I think addresses an earlier comment that I just forgot to mention? To the extent that there is a non-cash --
MR. KANE: As long as you refer to us earlier as a court, we'll allow this.
MR. SULLIVAN: Your Honors, I will genuflect when I'm done. Maybe I should do it first. But in the TAF Submission they make a very good analogy to the False Claims Act. It's not just this pot of money that you collect on day one. Under the False Claims Act, the exact statutory language is "the proceeds of the action or the settlement of the claim," and I'm quoting the TAF Submission, "the majority of the courts that have considered a whistleblower's entitlement to a share of non-cash recoveries agrees that to the extent the government receives a benefit, cash or otherwise, the whis-tleblower is entitled to receive a share."
In the head notes in the West Digest System, this is probably found under the heading "alternate remedies." When the government receives something else of benefit, but that is quantitized -- or quantified and monetized or whatever the appropriate "ized" word is, and there is a recognition that that is a benefit for which the whistleblower is entitled to be paid. But that is the text accompanying footnote seven to the TAF Submission. Thank you.
