IRS resists using whistleblowers

Whistleblower disclosures have helped the federal government make some of its biggest recoveries from fraudsters. In the Obama administration alone, the government recovered over $21 billion thanks to whistleblowers using the “qui tam” procedure under the False Claims Act (FCA). The government also recovered many additional billions through criminal fines and penalties.

Erika Kelton, an attorney in the Washington, DC, whistleblower law firm of Phillips & Cohen, wrote an article in last week’s Forbes magazine that explains how the Internal Revenue Service (IRS) is losing out on the opportunity to develop its own income stream from whistleblower tips. In December 2006 Congress enacted a law similar to the FCA to reward whistleblower who informed the IRS of tax frauds and violations. Many whistleblowers have filed claims under the new IRS whistleblower program.

Kelton says the IRS however, has squandered opportunities to recover billions of dollars in revenue with the information submitted by whistleblowers. Dozens of whistleblower submissions concerning losses over $100 million in tax fraud were reportedly received by the IRS Whistleblowers Office. Another thousand concerning tax underpayments over $2 million were also reported. However, the IRS has paid only one whistleblower reward during the program’s first five years.

Clearly, there is a problem here. The problem, according to Kelton, does not lie within the laws implemented by the program in 2006, but with the IRS itself and institutional resistance within the IRS to rewarding whistleblowers.

After leaving the IRS and joining a white-collar law firm to defend companies from the IRS, former IRS Chief Counsel Donald Korb expressed anti-whistleblower opinions. In a 2010 interview with Tax Notes, he revealed an astonishing mindset. He stated: “The new whistleblower provisions Congress enacted a couple of years ago have the potential to be a real disaster for the tax system. I believe that it is unseemly in this country to encourage people to turn in their neighbors and employers to the IRS as contemplated by this particular program. The IRS didn’t ask for these rules; they forced on it by the Congress.”

The IRS Office of Chief Counsel (OCC) interpreted the laws set by the program in such a way that discouraged many whistleblowers from reporting information and lowering the whistleblower ‘s potential for success.

The OCC guidance appear problematic, Kelton says, as it:

It can be frustrating to see the unwillingness of the IRS to use the assistance and information given by whistleblowers. Employees see tax frauds occurring from the front seat and hold all the information necessary for the IRS to take action. Kelton says their assistance, contemplated by the 2006 law, could be permissible without violation of confidentiality restrictions with the use of special confidentiality agreements known as “6103(n) contracts.”

Most of the claims submitted to the IRS have been going nowhere. Kelton reports that the IRS has failed to give whistleblowers and their lawyers’ status updates on their claims. Unlike the attitude by the IRS, the Securities Exchange Commission (SEC) has taken a more positive approach to its new whistleblower program. The SEC is actively welcoming help from whistleblowers.

An SEC enforcement official told Kelton that whistleblower information has been of immense help to the SEC saving them six to twelve months of investigative time. Unfortunately, time saving whistleblower information like this is what the IRS has been failing to use.

Whistleblower reports have reportedly been dropping in number according to statistics in the IRS Whistleblower Office’s 2010 report to Congress. Seeing that their reports are being ignored, set aside and not put into action, we can see why whistleblowers are now thinking twice of about reporting fraud and placing their own livelihood at risk.

The IRS is weakening its whistleblower program, pushing aside these tools given to them by Congress. Kelton argues that if they took advantage of these tools, they would be able to narrow the annual $450 billion gap between what is owed in taxes and what is paid. Ultimately, the IRS’ present course will only hurt taxpayers and the federal Treasury.

This blog post was written by intern Laura Berumen.

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