Part II: IRS Tax Whistleblower Officials Explain Details of New IRS Whistleblower Rewards Program

This is Part II of this whistleblower lawyer blog’s description of how IRS Tax Whistleblower officials have explained many of the long-awaited details of the new IRS Whistleblower Rewards Program to whistleblower attorneys at the annual Taxpayers Against Fraud Conference in Washington, a national organization of whistleblower lawyers who represent whistleblowers under the False Claims Act, the state False Claims Acts, and the new IRS Whistleblower Rewards Program for tax whistleblowers. Both parts summarize information provided by IRS Whistleblower officials at this Conference, at which I had the pleasure of participating in a panel discussion with the Director of the IRS Whistleblower Office, Stephen Whitlock, and later spending time with other IRS officials from the IRS group responsible for the Financial Services industry (including hedge funds), Large and Mid-Sized Business Division, Stuart Mann and Nicole Cammarota.

The investigation of matters submitted by whistleblowers will be handled not by the Whistleblower Office, but by other IRS officials–in the field. The Whistleblower Office will initially perform a screening function at the beginning of the process, with “classifiers” reviewing the claim submissions and directing them to the appropriate persons within the IRS for investigation, if an investigation is warranted.

If an investigation results, and the government recovers funds (tax liability, interest, penalties, or other amounts), Director Whitlock then will determine the amount of any award to the whistleblower or whistleblowers. The new statute allows the whistleblower to appeal any determinations to the Tax Court to review decisions about rewards.

The threshold question for persons seeking to submit IRS Whistleblower claims is to demonstrate plainly to the IRS why–with so many potential matters that the IRS already has to investigate, and with limited resources–pursuing an investigation suggested by an informant is the best use of the IRS’ limited resources. Not all potential tax violations can be investigated–or will be investigated–by the IRS. Thus, the challenge is to present a whistleblower claim that the IRS will decide to pursue–and pursue vigorously.

(I had a chance to discuss with Director Whitlock a week or so before the conference the report and conclusion of the Treasury Inspector General for Tax Administration in 2006 that audits and examinations based on information from informants are essentially twice as productive as those initiated by other means. To convince the IRS to pursue a particular matter, our firm does not believe it is enough merely to present the information that our client has gathered about the tax violations. As former federal prosecutors, we work to develop the “tax case” itself–by analyzing the various potential theories of liability, as well as possible avenues of recovery–with input from experts on specific tax issues as necessary. With the facts, evidence, and legal analysis all presented together at the start, our approach is to enable the IRS to evaluate the case quickly and efficiently–so that it can decide to pursue an investigation immediately.)

Some of the more interesting issues discussed about the IRS Whistleblower Program that are still being resolved concern how to balance the demands of the Privacy Act, which limits what the IRS can say about taxpayers, with the need to communicate effectively with the counsel for the informant or whistleblower. We also discussed how claims involving multiple taxpayers will be addressed; how exposing industry-wide practices may lead to larger rewards; and how the statutes of limitations will likely apply to claims of simple noncompliance with the tax laws, as opposed to tax fraud (which has no statute of limitations).

In addition, it was encouraging to hear that the identity of the whistleblower or informant will remain confidential under the new IRS Whistleblower Program, as it was under the former program.

The new regulations clarifying many of these issues will be released by December 20, 2007.

After the IRS presentations at the conference, I was able to discuss further with Director Whitlock, Mr. Mann, and Ms. Cammarota some more difficult questions about the new Whistleblower Program. It was clear to me that the IRS is extremely interested in many of the matters that clients have been calling our firm about since early January 2007 (immediately after Congress created the new program, and a few weeks before the new Whistleblower Office had its first Director). These claims include abuses in the financial services industry (including hedge funds and insurance companies), various industry-wide practices that defraud the IRS, and abusive schemes and practices used by individual taxpayers (perhaps more accurately called “non-taxpayers”).

There is no question that the IRS is enthusiastically encouraging whistleblowers or informants to step forward and report significant tax cheating and tax underpayment. The IRS plainly now wishes to pay rewards to whistleblowers who provide useful information. Also important, the IRS officials I met with are all highly professional and extremely well qualified–and they strike me as having the “good sense” that it will take to make the program work effectively. These hours of discussions with IRS officials left no doubt that the new IRS Whistleblower Program should be a great success–and answered many questions about how best to represent our clients who are considering pursuing IRS Whistleblower claims.