IRS Guidelines Discourage Whistleblowers

Today, Tax Analysts published an article about how Internal Revenue Service (IRS) guidelines can result in whistleblower awards being unfairly reduced. The Government Accountability Project, No FEAR Coalition and National Whistleblowers Center sent a letter to IRS Commissioner Shulman on August 10, 2011 requesting that the IRS immediately revise their Internal Revenue Manual’s factors for determining whether a whistleblower should have a reduced award because the whistleblower “planned and initiated” an action.

The IRS whistleblower law was designed to protect and encourage individuals to report tax fraud. The IRS whistleblower law was modeled after the False Claims Act , which recognized that it “takes a rouge to catch a rouge.” Congress correctly recognized that not everyone stepping forward would have the cleanest hands – they may have participated in the fraud on the lowest levels. However, you need these individuals who have detailed inside knowledge in order to expose the masterminds of the scheme.

The IRS whistleblower law allows the IRS to offer reduced award amounts to a whistleblower who “planned and initiated” a tax evasion. Therefore, how the IRS determines whether a whistleblower is a planner or initiator is very important. These factors will determine if a whistleblower receives his or her reward.

The group letter explains that the “planned and initiated” factors created by the IRS depart significantly from traditional understanding as reflected in Congessional intent, caselaw, and clear stautory language. The factors provide that “anyone who contributes or advises” or "knew or should have known that the activity may lead to tax noncompliance” could be found to have planned and initiated an action. This precariously wide net could “conceivably capture every whistleblower” and would “eviscerate the policy of encouraging whistleblowers.”

Dean Zerbe, national managing director at Alliantgroup LP and Special Counsel at the National Whistleblowers Center, correctly stated to Tax Analysts that “the limitation on whistleblower awards for somone who planned and initiated only applies to an individual who is the chief architect or chief wrongdoers – the Bernie Madoffs of the world,” and by, “giving a straight-arm to the most valuable whistleblowers,” the IRS has undermined the success of the law. Reuben A. Guttman of Grant & Eisenhofer PA agreed and stated that, “there is a difference between someone carefully designing an evasive tax structure and a second-year associate who merely helps carry out the plan.”

The IRS factors for determining who is a planner or initiator should be immediately revised to focus on the “principal architects” or “chief wrongdoer” of the fraud scheme.

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