IRS Whistleblower Program Evaluated

By Gerard H. Schreiber Jr., CPA, Metairie, LA

Editor: John L. Miller, CPA

On September 30, 2009, the IRS Whistleblower Office released its 2009 annual report to Congress outlining claims made under Sec. 7623. In a related action, on October 8, 2009, the Treasury Inspector General for Tax Administration (TIGTA) issued its own evaluation of the IRS’s management of the whistleblower program.

The Tax Relief and Health Care Act of 2006, P.L. 109-432, created the IRS Whistleblower Office. This act also amended Sec. 7623 to increase the amount of awards available to whistleblowers who provide information that results in the collection of taxes, penalties, interest, and other qualifying amounts. Congress intended to place a priority on high-dollar cases that would result in significant recovery of federal tax, interest, and penalties. Among other things, these new provisions required the IRS to develop processes to distinguish among whistleblower claims based on the potential amount of taxes the IRS could recover.

New Sec. 7623(b) requires the IRS to pay awards for qualifying information received after December 19, 2006. The information must substantially contribute to the collection of taxes, penalties, interest, and other qualifying amounts when the taxpayer’s gross income exceeds $200,000 and the amounts in dispute are more than $2 million. Depending upon the impact of their contribution, whistleblowers who provide such qualifying information are eligible for an award of at least 15% and up to 30% of the collected proceeds (Sec. 7623(b)(1)). Whistleblower claims that do not meet the gross income and dispute amounts will continue to be processed under Sec. 7623(a), which only requires the IRS to pay an award of the amount it “deems necessary.”

In identifying the progress made in implementing these new provisions, the report details actions taken by the IRS. This includes an outline of the creation of a new “intake” process, issuance of Notice 2008-4, revision of Form 211, Application of Award for Original Information, and creation of a Whistleblower Executive Board. The IRS review also summarizes activity levels in FY 2008, reporting that it received 476 whistleblower submissions related to 1,246 taxpayers that appeared to meet the $2 million threshold. According to the report, 228 of the submissions it received alleged underpayment of $10 million or more and 64 alleged underpayment of $100 million or more. Only 8 of the 198 fully paid claims in 2008 involved collections of more than $2 million, and only 3 involved collections of more than $10 million. For the three-fiscal-year period 2006–2008, the report identified 10,750 cases received, of which 695 involved awards paid. For that three-year period, a total of $596,360,556 was collected in tax, penalties, interest, and other amounts, while $60,155,419 was paid in awards.

In its independent review of the whistleblower program, TIGTA concentrated primarily on the handling of Sec. 7623(b) claims and found that the use of multiple inventory systems and inadequate procedures resulted in ineffective control over whistleblower claims (TIGTA Report 2009-30-114, “Deficiencies Exist in the Control and Timely Resolution of Whistleblower Claims” (August 20, 2009)). TIGTA reported that despite a two-year effort to develop and implement a new inventory system, there remain inaccuracies and inconsistencies in the control and tracking of Sec. 7623(b) claims.

In addition to reporting its findings related to the procedural and process challenges, TIGTA recommended that the IRS deal with the fear of retaliation expressed by some whistleblowers. The report points out that unlike the False Claims Act (31 U.S.C. §§3729–3733), which covers false claims by government contractors (but specifically excludes tax fraud), the whistleblower provision of the Tax Relief and Health Care Act of 2006 does not include specific provisions for employee protection against retaliation by an employer. Finding that 5% of the whistleblower claims have come from employees of the reported individual or company, TIGTA concludes that without some formal system of protection, the risk of retaliation might outweigh the reward incentive, resulting in employees’ being unwilling to come forward with information related to their employers’ significant misreporting of tax liabilities. TIGTA recommends (to the IRS) that legislation is needed to ensure informants are protected against retaliation. IRS management responded to the recommendation by observing that such action is outside its jurisdiction (TIGTA Report, Recommendation 5).

It is not possible merely from these two reports to make any comprehensive assessment of the new Sec. 7623(b) claims procedures. However, while the FY 2004– 2008 data included in the IRS reports do not reflect any significant increase in either the number of cases received or awards paid, it does document a significant increase in the amount of awards paid and the underlying amounts collected, suggesting the intended migration to higher-dollar whistleblower referrals.


EditorNotes

John Miller is a faculty instructor at Metropolitan Community College in Omaha, NE. Michael Dolan is with KPMG LLP in Washington, DC. Joe Marchbein is with Jack P. Fitter, CPA, APC, in Chesterfield, MO. Vance Randall is with Grantham, Poole, Randall, Reitano, Arrington, & Cunningham PLLC in Jackson, MS. Gerard Schreiber Jr. is with Schreiber and Schreiber in Metairie, LA. Mr. Dolan is immediate past chair and Messrs. Marchbein, Randall, and Schreiber are members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For further information about this column, contact Mr. Miller at johnmillercpa@cox.net.

Newsletter Articles

AWARD

James M. Greenwell Wins 2014 Best Article Award

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

 

FEATURE

How Legal Marijuana Businesses Are Treated Federally

This article examines the tax problems that these businesses face and warns that professionals may provide services to them at their peril.