Don't Mess With Taxes

The Internal Revenue Service's Whistleblower Office marked its 15th anniversary in fiscal year 2021 by making 179 awards to whistleblowers totaling more than $36 million.

"Whistleblower claim numbers assigned in FY 2021 grew by 55% year over year, the second highest level of new claim numbers in the history of the program and claim closures also increased by 13%," wrote John Hinman, director of the IRS Whistleblower Office, in the introduction to the office's 2021 Annual Report to Congress, released on June 10.

Those tips led to the IRS collecting in fiscal 2021 more than $245 million, which includes almost $23 million in criminal fines, civil forfeitures, and violations of reporting requirements.

Since its inception in 2007, the IRS Whistleblower Office has paid out more than 2,500 awards to whistleblowers totaling over $1.05 billion. Those financially rewarded tips led to the IRS collection of $6.39 billion from non-compliant taxpayers.

Dramatic drop in recent years: However, the news wasn't universally accepted as good by whistleblower advocates.

Fiscal 2021's $245 million in whistleblower-related collections is down from $1.44 billion dollars just three years, noted the National Whistleblower Center (NWC). Awards to whistleblowers also dropped almost a tenth of where the program was in 2018.

"There is no way to make these outrageous numbers look good. It is extremely dispiriting to see these results," said attorney Dean Zerbe, partner at Zerbe, Miller, Fingeret, Frank & Jadav and frequent representative for tax whistleblowers.

The Whistleblower Report said that some of that decline can be attributed to the ongoing COVID-19 pandemic.

"This caused a slowdown in Whistleblower Program operations, including intake processing, classification, payment processing, litigation, and closures," according to the report. But there is better news. The report also noted that "most Whistleblower Program operational processes have been fully restored, and that the office continues to "process claims to the greatest extent possible."

Citing fiscal year whistleblower successes: The Whistleblower Office also touted some of its recent accomplishments during this challenging period.

In the outreach area, the report noted that last June the Whistleblower Office held its first ever Whistleblower Round Table Discussion. This meeting brought together several industry representatives to hear directly from IRS leadership, ask questions, share thoughts and suggestions, and learn more about the agency's whistleblower programs and other initiatives.

The Whistleblower Office also has continued outreach via IRS social media accounts and newsletters.

As for whistleblower reports, the most common allegation in FY212 was unreported income. It was followed by general allegations of fraud, tax fraud, wire fraud, insurance fraud, etc.; false dependent exemptions; employee vs. subcontractor misclassifications; failure to file; wage under reporting; capital gains tax issues; wages being paid in cash/under the table; rental income; and false deductions/expenses.

The annual Whistleblower Report also noted how it received its information from whistleblowers. The graphic below represents the total number of calls to the Whistleblower Office, the average number of monthly calls, and the highest and lowest monthly call volumes for FY 2021.

The report also noted the distribution of potential tax evasion reports. Overall, tax whistleblowers were pretty evenly distributed across the United States in fiscal 2021. The report says the Western Region accounted for 1,205 claims; 1,353 were made in the Central Region; and the Eastern Region recorded 1,586 claims. Another 134 reports came from outside the United States.

Whistleblower areas to improve: The annual report also presented the office's administrative priorities. Among them are —

Rules on access to and disclosure of taxpayer information could provide stronger protection for taxpayers. In this area, the report noted that the process of determining which information the IRS is then authorized to disclose to the whistleblower in connection with information award determinations is "tedious, time-consuming, and fraught with hazards." In addition, "stakes are further raised by the fact that whistleblowers can subsequently re-disclose anything provided to them …." Basically, "the IRS has no legal authority to restrain whistleblowers from re-disclosing third-party taxpayer information disclosed during administrative and judicial processes, nor does it have sufficient authority to provide whistleblowers with all of the information they might request."

Statutory clarification needed on submitting information and claiming awards. While information comes into the IRS from a wide variety of sources, relatively few individuals that provide information to the IRS do so with the intent to claim an award. The claim for award is the only trigger available to the IRS for classifying an individual as a whistleblower for purposes of Internal Revenue Code §7623, the section that provides for awards to whistleblowers. Part of that code language refers to a "claim for award" without providing any further specifics. Clarifying the statutory claim filing requirement by linking it to a whistleblower's information submission would strengthen the Program by ensuring that Whistleblower Office resources are devoted to processing whistleblower information and maintaining a contemporaneous record of IRS use of whistleblower information.

Information sharing within government could enhance IRS ability to use information and make awards. The Whistleblower Office determines awards when an action based on a whistleblower's information leads to the collection of proceeds. The tax code definition of proceeds includes amounts collected outside of the Internal Revenue Code, meaning other agencies or government entities may be a source of proceeds. The Whistleblower Office has no express investigatory ability to acquire information from these other agencies or government entities, despite their potential involvement in an action for which an award is payable. Statutory changes to give the Whistleblower Office investigatory authority would ensure that the IRS office could appropriately determine mandatory awards on proceeds under existing whistleblower law. In addition, the Whistleblower Office faces limitations on the information that it can share with other agencies and government entities. Allowing information sharing within the federal government for purposes of applying whistleblower provisions would enhance the IRS' ability to use information and make whistleblower awards.

Outside observations on improving tax whistleblowing: Zerbe also offered his take on how the IRS Whistleblower Office could be improved

"The IRS and Treasury management need to take a hard look and recognize that the best program the IRS has for going after big-time tax cheats is in a ditch," said Zerbe. "There are many commonsense reforms that the IRS can quickly embrace to start getting the program back on the road – allowing for awards under the discretionary program for whistleblowers who don’t meet the criteria of the mandatory award program; enter into contracts with whistleblowers and their advisors so that the IRS can fully utilize the knowledge and expertise of whistleblowers and their advisors; and, expediting the backlog of good cases that have been waiting for action by IRS Counsel and others – are just a few."

Stephen Kohn of Kohn, Kohn and Colapinto, LLP, another law firm specializing in whistleblower cases, also called on Congress to act and for changes in Tax Court cases.

"The IRS whistleblower report should be a massive wakeup call to the Congress that it needs to take action now and pass the bipartisan and bicameral reform legislation – the IRS Whistleblower Program Improvement Act. Passage of this legislation will send a strong signal of support for the program to the IRS and to whistleblowers," said Kohn.

Kohn also noted that "the number of awards has gone down and down since the Tax Court changed the standard of review for tax whistleblower decisions to a rubber stamp. Whistleblowers need to have confidence — and IRS managers need to know — that whistleblowers will get a full independent review of any denial of a whistleblower award."

You also might find these items of interest:

• Turning in U.S. tax cheats and getting paid for it
• $60 million IRS adjustment doesn't pay off for tax whistleblower
• Tax Court awards whistleblower pair $17.8 million in first case of combined civil/criminal collections

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