Part 2: IRS Whistleblower Program Report by Treasury Inspector General for Tax Administration (TIGTA)

We wrote yesterday about the just-released report on the new IRS Whistleblower Program by the Treasury Inspector General for Tax Administration (TIGTA). The “rest of the story” should be told.

Some history is essential to evaluate how far the handling of whistleblower (or “informant”) claims has progressed since the newly created IRS Whistleblower Office was formed in early 2007, and what is still needed.

Although information provided by whistleblowers is extremely effective in exposing fraud, before 2006 Congress had not authorized an effective IRS whistleblower rewards program–and some in Congress affirmatively opposed one.

Some of this history is described in a 2006 report by TIGTA, which helped prompt Congress to create the new IRS Whistleblower Rewards Program. That 2006 report described the value of informant claims–and also the absence of any centralized process within the IRS for coordinating those claims. It described what the new IRS Whistleblower Office Director and still-to-be-hired staff would inherit in February 2007.

First, the 2006 IG Report leaves no doubt about how valuable “informant” information has been to the IRS–even when there was no coordination of informant claims:

The Informants’ Rewards Program has significantly contributed to the IRS’ efforts to enforce tax laws, but additional management focus could enhance the effectiveness of the Program as an enforcement tool and make the process more accommodating to informants. Our analysis of IRS data indicated that examinations initiated based on informant information were often more effective and efficient than returns initiated using the IRS’ primary method for selecting returns for examination.

Nonetheless, perhaps based in part on the past hostility toward the IRS’s making effective use of whistleblowers before 2006, the old “informant” program was no program at all. This was the “mess” that the new Whistleblower Office Director and tiny staff of four inherited and had to start revamping in 2007, as described by TIGTA’s 2006 report:

However, we found that a lack of standardized procedures and limited managerial oversight resulted in control weaknesses over the Program. We reviewed a judgmental sample of 22 paid claims for reward and 69 rejected claims for reward processed at 3 of the 5 Informants’ Claims Examiner (ICE) units in operation during FY 2005. We noted that each ICE unit maintained its own records because a nationwide database of informant claims does not exist. For the paid informant claims in our sample, we found that 45 percent of the case files reviewed had problems with basic control issues (missing copies of key forms, no record of letters to informants, etc.), and we were unable to determine the justification for the reward percentage awarded to the informant in 32 percent of the cases. For the rejected informant claims in our sample, we were unable to determine the rationale for the reviewer’s decision to reject the claim in 76 percent of the cases reviewed.

We also found that an average of over 7 ½ years passed between the filing of the initial claim by the informant and the payment of the reward. We observed lapses in the monitoring of taxpayers’ accounts for payment activity, which may have contributed to delays. For the rejected claims in our sample, an average of over 6 ½ months elapsed between the date of the claim and the letter to the informant rejecting the claim. We observed instances of lengthy delays in the processing of rejected claims, such as unexplained delays between the receipt of the claim and the initial or subsequent review of the claim by ICE unit personnel.

The lack of centralized and active management oversight of the Program increases the risk of errors such as improper payment of rewards or incorrect rejection of valid claims. Additional management focus could also assist in reducing the processing time for paid claims, which would make the Program more attractive to future informants wishing to report violations of tax laws.

Only against this background may the progress of the new IRS Whistleblower Program be evaluated fairly. It should be no surprise that the IRS had been using more than one system to track informant claims before 2007, and that the Whistleblower Office thus inherited those “systems.” A staff that grew to four persons that next year had the task of bringing order to disorder.

Obviously, most of us reading TIGTA’s latest report were not there to see first hand how this tiny Whistleblower Office staff went about its work. I do know, however, that my calls to Whistleblower Office staff members about our firm’s cases over the past 2 1/2 years have been returned, sometimes even on federal holidays, before business hours, and at night–which is remarkable.

Through programs such as the IRS Whistleblower “Boot Camp,” we have been fortunate to get to know members of the staff, who without exception have struck me as dedicated and extremely qualified professionals.

The “rest of the story” here is that Congress would be wise to recognize the value of such dedication–and increase the resources available to the IRS–so that the Whistleblower Program can realize more fully its great potential in recovering from tax cheats.

Past history shows that there is a huge return on investment in funding such efforts. That will lessen the burden on honest taxpayers in this time of record deficits.