IRS Whistleblower Office Announces Important Changes, New Procedures for IRS Whistleblower Program

IRS Whistleblower Office Director Steve Whitlock announced important, long-awaited developments in the new IRS Whistleblower Program yesterday at the Second Annual “IRS Whistleblower Boot Camp” in Washington.

First, Director Whitlock finally announced how the IRS will share information that will allow whistleblowers to understand the Whistleblower Office’s decisions about what awards are made to whistleblowers.

A year ago in my interview with the IRS Whistleblower Office Director, Mr. Whitlock discussed the need to solve the vexing question of how the IRS can share this information with whistleblowers and their attorneys, while also complying with legal requirements for confidentiality of taxpayer information under section 6103 of the Internal Revenue Code.

The new procedures described yesterday for what will happen with IRS Whistleblower claims–once the IRS has recovered money as a result of a whistleblower claim– are as follows:

1. After the Whistleblower Office receives a report from the IRS Operating Division that handled the matter, the Whistleblower Office Analyst will review the files and recommend an award to the whistleblower.

2. That recommendation then will go to the Whistleblower Office Director for review and approval.

3. A summary of the award recommendation then will be provided to the whistleblower and the whistleblower’s attorney for comment. That summary will identify:

(a) the amount of money collected by the IRS based on information provided by the whistleblower;

(b) the recommended award percentage to the whistleblower (15-30% of the funds recovered, unless an exception under the statute applies to lower the percentage);

(c) the factors considered by the IRS Whistleblower Office in reaching the recommended percentage;

(d) the recommended award amount; and

(e) the whistleblower’s options upon learning of this recommendation.

In welcome news to whistleblower attorneys, the IRS Whistleblower office also will make available a “detailed” award recommendation to whistleblowers and their attorneys who sign a confidentiality agreement. The whistleblower and counsel then may review in person (but not copy) the documents in the IRS administrative file that are the basis of the award recommendation, and comment to the Director about the award. Violation of the confidentiality agreement will lead to reduction of the award.

The new procedures are to be published in the Internal Revenue Manual in June 2010, and later will be included in regulations, with an opportunity for notice and comment.

Director Whitlock also clarified further that his Office will determine whether an IRS recovery was “based on” the whistleblower’s information by using basic principles of causation (“proximate cause”).

He also described in some detail how his office will determine what percentage award will be made within the 15-30% range, by using certain “positive” and “negative” factors. For example, whistleblowers who fail to cooperate reasonably with the IRS may receive a lower award. So may whistleblowers who were significant participants in the tax violations.

Mr. Whitlock also explained in more detail what awards will fall in the 0-10% range because they are based principally on specific allegations that appeared in certain public sources. He also discussed the reduction in awards to those who both “planned and initiated” the actions in question.

There is much more, which will await further posts here. In addition, this conference covered many other issues affecting whistleblowers discussed by IRS representatives and practitioners.

I will report separately on the session I moderated, “Protecting Whistleblowers from Civil and Criminal Liability,” at which we discussed the steps that lawyers for potential IRS whistleblowers can take to avoid prosecution of whistleblowers who are willing to make full disclosure to the government.

How to protect whistleblowers from prosecution has been the subject of much confusion and misinformation since the UBS whistleblower Bradley Birkenfeld recently entered prison. As we have discussed previously and will address further in our next discussion of protecting whistleblowers, based on the transcript of UBS whistleblower Bradley Birkenfeld’s case, Birkenfeld brought about his own incarceration.

Birkenfeld’s apparent failure to make full disclosure of his own wrongdoing to the government predictably led to his self-inflicted prosecution. Had he followed the approach discussed at this week’s conference, there is little doubt that Birkenfeld would have avoided prosecution.