Whistleblower Lawyer Blog

In a controversial decision today, the IRS squandered an opportunity to help close the tax gap by attracting more whistleblowers with significant information about large tax schemes. The public will suffer as a result.

Stubbornly, the IRS rejected calls for a common sense approach to rewarding tax whistleblowers, as it refused to modify a proposed rule that narrowly defines the categories of cases that should justify awards to whistleblowers.

At issue is what Congress meant by the term "collected proceeds"--an undefined phrase in the 2006 tax whistleblower law. This law unquestionably sought to expand the number and variety of whistleblower claims presented to the IRS.

As my colleague Richard Rubin and I pointed out in comments to the IRS, Senator Grassley modeled changes to this tax whistleblower law on the dramatically successful False Claims Act, the nation's major whistleblower law. That law has returned some $30 billion to the Treasury by rewarding whistleblowers who help unearth fraud against taxpayers, and helps deter future fraud.

Today, Senator Grassley saw that some in the IRS want to undermine his efforts and ignore Congress's plain intent--essentially supplanting Congress's role as lawmaker. The IRS announcement has insisted on a narrow reading of that phrase. It rejected the commonsense notion that any whistleblower who can help provide a "net benefit to the Treasury" should be rewarded.

To illustrate, although the IRS' own past guidance reveals that it formerly paid rewards based on criminal fines, it now has declared criminal fines off-limits from whistleblower rewards. The IRS also has refused to recognize all benefits provided in preventing improper use of net operating losses (NOLs), as well as a variety of other future benefits to the Treasury.

When Congress in 1986 amended the nation's major whistleblower law that helped inspire the new IRS Whistleblower Program, the False Claims Act, it took a few years before the Department of Justice realized just how essential encouraging and rewarding whistleblowers is to enforcement of the law.

We wish a speedy learning curve for the IRS. With a tax gap of more than $350 billion annually in owed but unpaid U.S. taxes, the public needs the IRS to heed Senator Grassley's words--that whistleblowers are to be welcomed--because the public sorely needs them.

Financial fraud cases under the False Claims Act continue. A Pennsylvania lender has agreed to pay $3.9 million in a False Claims Act case over alleged false statements in mortgage loan applications for loans insured by the U.S. Department of Housing and Urban Development (HUD). The loans were made to two nursing homes.

The government contended that Capmark Finance LLC misrepresented the borrowers' creditworthiness in these two applications for mortgage loans. When the loans defaulted, the FHA sustained losses.

The Financial Fraud Enforcement Task Force takes credit for this recovery. It was created to investigate and prosecute financial crimes.

It is fitting that false statements to obtain federally insured mortgage loans which result in losses to taxpayers are receiving scrutiny under the False Claims Act. The False Claims Act is the nation's major whistleblower law. Private citizen whistleblowers (known as "relators") who report fraud can share 15-25% of the government's recovery of damages.

Since the 2008 financial collapse, many have called for imposing liability on those whose fraud fueled the crisis.

In this early phase of what we predict will be a wave of financial fraud cases, the Justice Department announced today the largest False Claims Act settlement to date over mortgage fraud. Bank of America has agreed to pay $1 billion to resolve allegations that the Bank, through Countrywide Financial Corporation and some of its subsidiaries and affiliates, engaged in underwriting and origination mortgage fraud.

DOJ alleged that Countrywide knowingly made loans to unqualified home buyers and used inflated appraisals, thus causing hundreds of millions of dollars in damages to the Federal Housing Administration. The FHA insured the loans in question.

The U.S. Attorney's Office for the Eastern District of New York handled the case, as part of the Financial Fraud Enforcement Task Force. The DOJ announcement is linked here.

We congratulate those who brought about this recovery of taxpayer funds.