IRS Whistleblower Office Issues Latest Annual Report to Congress

The IRS Whistleblower Office has released its Annual Report to Congress, for the fiscal year ended September 30, 2008. Some highlights are below:

First, the IRS Whistleblower Program has experienced explosive growth since Congress authorized these new IRS Whistleblower rewards in December 2006.

According to this Report, “the initial results suggest that whistleblowers with significant knowledge are coming forward as a result of the changes to the award program. We received claims that appear to meet the section 7623(b) criteria on 46 taxpayers in the first three months of FY 2008. By the end of the fiscal year, that number grew to 1,246. Of the 994 claims in which the individual made a specific allegation about the amount of the underpayment, 228 alleged the underpayment of $10 million or more, and 64 alleged the underpayment of $100 million or more. Many of the individuals submitting this information claim to have inside knowledge of the transactions they are reporting, and often provide extensive documentation to support their claims. It is too early to tell how many of the 1,246 cases will result in collected proceeds, and whether the whistleblowers’ estimates of the amounts in dispute are accurate.”

In our experience from submitting early claims even before the new Whistleblower Office had hired any staff, because the IRS Whistleblower Office’s first Director Steve Whitlock immediately assembled a team of extremely able professionals from elsewhere in the IRS, the Whistleblower Office hit the ground running. “During this fiscal year, the Whistleblower Office staff grew from 4 to 14. The current staff includes ten analysts with decades of experience in a broad array of IRS compliance programs.”

As claims poured in, the Director and staff essentially had to “invent” the new Whistleblower Program with all that entails, in addition to keeping up with submissions of more and more claims.

Integrating the Whistleblower Program with the various divisions of the IRS also was a predictable challenge.

“Working with the IRS Operating Divisions, the Criminal Investigation Division, and the Office of Chief Counsel, the Whistleblower Office designed an intake process that includes initial review by Whistleblower Office staff and an evaluation by Operating Division subject matter experts. The Operating Division subject matter experts determine whether the information the whistleblower submitted warrants initiation of an examination of the reported issues. Each IRS Operating Division also has a Division Counsel. Division Counsel attorneys provide advice on technical tax issues as well as any legal issues that could limit the IRS’s ability to use some or all of the information the whistleblower provided. For example, information a whistleblower provided may be subject to an evidentiary limitation such as the “attorney-client privilege” or the “federally authorized tax practitioner” privilege under section 7525 of the Code. A Division Counsel attorney assists the subject matter expert in reviewing the information provided to determine if any of the information is subject to an evidentiary limitation and whether an exception to that limitation may apply. In addition, as part of the subject matter expert’s analysis, the whistleblower may be asked to meet to discuss the submission, to ensure that the IRS fully understands the issues and that the individual has submitted all relevant information.

From our observations in dealing with the Whistleblower Office, the staff has been very capable and diligent in creating and running the new program, and in coordinating with the other divisions of the IRS. “The IRS established a working group led by the Whistleblower Office, with representatives from the Operating Divisions, Criminal Investigation Division, and the Office of Chief Counsel. The working group addresses the detailed steps needed to implement the changes in the relevant law, including updates, revisions or replacements for regulations, policies, operating procedures, and forms for whistleblower awards.
This year, the IRS completed a comprehensive review of Internal Revenue Manual (IRM) provisions of section 7623, and published revisions on December 30,2008. In addition, the IRS published a Privacy Impact Assessment and a Privacy Act System of Records Notice for the whistleblower program. Publication of both the Privacy Impact Assessment and the Privacy Act System of Records Notice are essential steps in establishing program controls as required by the law and regulation.

As to money collected and paid out through the IRS Whistleblower Program, the Report provides information on claims submitted before the law changed in December 2006, and doubled the range of payments authorized to whistleblowers. Given that the claims submitted under the new program are now maturing, we look forward to future reports that show the success of the new IRS Whistleblower Rewards.

From the size of the claims we have seen from our firm’s clients, the IRS Whistleblower Program should be a source of significant recoveries that will benefit all honest taxpayers, as well as the IRS Whistleblowers who come forward.