IRS Whistleblower Program: Updated Summary for Lawyers with Potential Tax Whistleblower Claims

(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 (https://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).

Rewards under the “old” version of 26 U.S.C. § 7623 were small–zero to 15%–and were left entirely to the IRS’s discretion. The IRS Whistleblower thus had no “right” to receive any reward at all, under the former version of the statute. In practice, the average payout was less than $24,000.

Further, there was no “Director” or even any “Whistleblower Office” under the old program–no one person or centralized place to keep track of informant submissions, or to decide on rewards. There was a risk that claims would simply fall through the cracks and be lost. In addition, claims took an average of seven and one-half years to be resolved.

Because the taxpayer privacy provisions of 26 U.S.C. § 6103 limit what IRS officials can say about their investigations, over seven years whistleblowers might wonder if their claims had been forgotten.

Moreover, many potential IRS Whistleblowers never knew that rewards were possible, as the rewards were not well-publicized. All of these facts made the “old” program ineffective, when compared with how successful the False Claims Act has been since meaningful rewards became available through its 1986 amendments.

The New IRS Whistleblower Program Is Born

With the 2006 Report of the Treasury Inspector General for Tax Administration in hand to document the need for an improved IRS Whistleblower program, Congress amended 26 U.S.C. § 7623, effective December 20, 2006. The current version of this IRS Whistleblower statute is linked here and attached. (https://www.whistleblowerlawyerblog.com/2007/01/new_irs_whistleblower_reward_s_2.html).

The new IRS Whistleblower statute’s major provisions include the following:

1. Whistleblowers who report tax liability of at least $2 million (including penalties, interest, additions to tax, and any additional amounts) now have an enforceable “right” to part of the government’s recovery;

2. The reward range has doubled to 15 to 30% of the government’s recovery;

3. For the first time, the IRS has a “Whistleblower Office” and a Director, Stephen Whitlock, to coordinate whistleblower claims and make determinations about rewards;

4. The whistleblower may appeal the IRS’s reward determination to the U.S. Tax Court;

5. If the taxpayer is an individual, the new rewards apply only if the individual’s gross income exceeds $200,000, and there is at least $2 million in tax liability (including penalties, interest, additions to tax, and any additional amounts);

6. Even persons who participated in the tax violations may qualify for the increased rewards so long as they did not “plan” and “initiate” the actions in question;

7. If the tax liability does not meet the $2 million threshold, the IRS may still make a “discretionary” reward to the whistleblower.

There are certain exceptions and alternative reward provisions in the statute, some of which are similar to those of the False Claims Act.

The New IRS Whistleblower Program Continues to Develop

As claims under the new version of the IRS Whistleblower statute began to arrive, the IRS in February 2007 announced the first-ever Director of the new Whistleblower Office, Stephen Whitlock.

On December 19, 2007, the eve of the first anniversary of the new IRS Whistleblower Program, the IRS issued its interim “guidance” on filing tax whistleblower claims, which is linked here and attached. (See https://www.whistleblowerlawyerblog.com/2007/12/irs_whistleblower_instructions.html.) These interim procedures have addressed many questions that lawyers were asking informally of the IRS in pursuing claims during the new program’s first year. The IRS also issued a revised Form 211, which much be submitted under oath with each claim (also attached and linked here). (https://www.irs.gov/pub/irs-pdf/f211.pdf).

Since then, the IRS has issued various notices and temporary regulations on issues that arise in whistleblower claims. These include temporary regulations addressing how the IRS can share information with whistleblowers and their attorneys under written contracts with the IRS (also attached here and published at 26 C.F.R. § 301.6103(n)-2T), and advice from the IRS Chief Counsel on contacts with informants (also attached and linked here). A more complete “running” account of these IRS announcements can be found at https://www.whistleblowerlawyerblog.com/irs_rewards_program_tax/.

Practical Observations for “Screening” and Pursuing IRS Whistleblower Claims

Although I have promised not to quote IRS officials, the following practical observations can be made based on time spent in discussions (and panel discussions) with senior IRS officials:

Screening Cases: Counsel can help perform a valuable “screening” function for the IRS by selecting only those claims that are likely to be worth the IRS’s time in investigating and pursuing. Although the IRS seeks a “presence” in essentially all industries and income levels, obviously claims of greater dollar amounts (well above the $2 million threshold for the new rewards) should attract more attention. Currently, some examples of particular interest to the IRS apparently include high net worth taxpayers and abuses in tax shelters, hedge funds, and offshore schemes.

“Willful” tax violations also appear to be a priority, and willful conduct may extend the statute of limitations and allow the IRS to recover greater amounts. In our experience, the IRS Criminal Investigative Division is not hesitant about pursuing tax fraud and tax evasion.

Nonetheless, the Whistleblower Office also is interested in cases that do not necessarily involve fraud (which has a high standard of mens rea or intent), but concern tax “noncompliance,” especially when substantial amounts of money are involved.

“Industry-wide” practices are also of interest to the IRS. It may be possible to support a greater reward if the IRS recovers from more than one entity in a given industry.

Evidence required: As to what information and evidence the whistleblower must present, “stories” are not enough. The IRS needs claims with specific documents to prove the violation. Although the whistleblower does not necessarily have to be an “insider,” it is preferable for the whistleblower to have direct knowledge of the violation.

In our view, submissions should include not only the verified Form 211, but also a detailed summary of the facts and supporting evidence from the informant (through counsel), supporting documents, and a list of witnesses or people involved, including their contact information.

If the whistleblower lacks certain documents that will prove the violation, it is important to describe with specificity those documents to the IRS, and as much as possible provide a “road map” for the IRS to follow in its investigation. Counsel and experts who analyze the legal elements of the violation and are prepared to discuss with the IRS how the violations may be proved are extremely helpful in this process–and may make the difference in whether the IRS pursues the matter.

For whistleblowers who participated in the violations, the threshold question for counsel is whether they “planned and initiated” the actions involved. If so, the statute places them in a lower reward category of no more than 10% (although they receive nothing if they are convicted of criminal conduct arising from this role), as described in 26 U.S.C. § 7623(b)(3). Nonetheless, based on our experience, the IRS is very interested in obtaining information about criminal conduct from “insiders” who may have played a role in the violation, and it may be possible to negotiate an agreement that protects the whistleblower from certain repercussions from the government.

Confidentiality: “Confidentiality” of the whistleblower’s identity is addressed in section 3.06 the interim “guidance” attached and linked here. (https://www.whistleblowerlawyerblog.com/2007/12/irs_whistleblower_instructions.html#more.) Many whistleblowers are encouraged by the language that “[t]he Service will protect the identity of the claimant to the fullest extent permitted by law. Under some circumstances, such as when the claimant is needed as a witness in a judicial proceeding, it may not be possible to pursue the investigation or examination without revealing the claimant’s identity. The Service will make every effort to inform the claimant before proceeding in such a case.”

Thus, unlike qui tam cases under the False Claims Act, claims under the IRS Whistleblower Program do not necessarily lead to anyone else’s discovering that there has been a report by a whistleblower. Nonetheless, consistent with the caveats of that section, we believe it is important to recognize that the identity may become known, especially if a criminal prosecution of the taxpayer results and proceeds toward trial.

Process: Successful IRS Whistleblower claims must first pass a “screening” by the Whistleblower Office staff, whom we have found to be extremely capable and professional. The matter then is assigned to be investigated by the appropriate persons within the IRS. The Whistleblower Office will track all claims and will ultimately make a determination of any reward to the whistleblower, subject to the whistleblower’s right of appeal to the U.S. Tax Court.

Although the new IRS Whistleblower Program promises to be dramatically more effective that the “old” program, IRS Whistleblower claims still will usually take several years to be resolved.