IRS red tape, old guard slow whistleblowing on corporate tax cheats
Only 1 award since IRS revamped its bounty program; new SEC whistleblower program modeled after the IRS one
The Center for Public Integrity
iWatch News
Finance By Michael Hudson
6:00 am, June 22, 2011
iwatchnews.org
Senator Charles Grassley. J. Scott Applewhite/The Associated Press
For years, the Internal Revenue Service had a reputation as an unwelcoming place for whistleblowers who offered tips about corporate tax dodgers. They faced what Sen. Charles Grassley called a “culture of hostility” and intimidation.
In December 2006, the Iowa Republican tried to change that by pushing through a law expanding the IRS program paying cash awards to tax tipsters. Whistleblower advocates hailed the law as a way to empower whistleblowers and encourage a culture change within the IRS.
Things haven’t panned out as hoped.
The tipster program has been hampered by excessive secrecy and continuing animosity toward whistleblowers within the agency’s old guard, whistleblower advocates say. And recent IRS policy moves, they say, could further restrict the ability of informants to collect bounties for turning in corporations and wealthy individuals who stiff the government out of millions — and sometimes billions — in tax dollars.
The 2006 law championed by Grassley requires the IRS to pay whistleblowers a reward of 15 percent to 30 percent for identifying cases involving $2 million or more in unpaid taxes.
While the agency has fielded a flood of tips – more than 3,000 in the first two full years of the expanded bounty program – whistleblowers have been greeted with virtual radio silence from the IRS regarding awards in big evasion cases.
In the 4½ years since Congress moved to jump-start the program, just one cash award under the new rules has been made public — a $4.5 million payout to an accountant who reported a $20 million tax underpayment by an undisclosed Fortune 500 firm.
“The IRS is so concerned about the privacy of fraudsters that it seems like they’re almost unable to operate in the whistleblower arena,” said Patrick Burns of Taxpayers Against Fraud, a group that lobbies for whistleblowers and whistleblower attorneys.
New attention on the IRS tipster program comes at a time when the use and abuse of whistleblowers are the subject of much debate.
Corporate reformers say a wave of fraud on Wall Street and in the mortgage industry leading up to the 2008 financial meltdown might have been prevented had more whistleblowers been emboldened to come forward. The Dodd-Frank financial reform law required the Securities and Exchange Commission to create a whistleblower bounty program modeled on the IRS’s expanded program — which prompted some whistleblower advocates to plead with the SEC to be more aggressive than the IRS in implementing its new tipster awards program.
Meanwhile, the U.S. Government Accountability Office and the inspector general for the IRS are investigating the IRS’s whistleblower program. The GAO’s report is expected this summer, and the inspector general’s report is slated for release this fall.
Grassley has credited the IRS with making some strides recently in reducing bureaucratic hurdles, but he told iWatch News that he remains “concerned that the legal advice provided to the Whistleblower Office puts up more roadblocks than it clears.”
The senator said he’s concerned that proposed IRS rules will discourage awards to whistleblowers who prevent long-term losses to the Treasury by reporting tax dodges early, before the schemes have had a chance to fully play out. These would include cases in which companies have, on paper, artificially inflated their “net operating losses,” allowing them to claim tax write-offs for 15 years or more to come.
“Blowing the whistle on improper deductions, such as net operating losses, is just as important as blowing the whistle on unreported or underreported income. Both protect the Treasury,” Grassley said. “The IRS needs to put on its thinking cap and figure out a way to reward whistleblowers whose tips don’t result in immediate tax collections.”
Not doing so may “just discourage whistleblowers from coming forward at all,” the senator said.
The IRS refused to answer questions from iWatch News about its whistleblower program.
In public comments, IRS leaders have said they are committed to working with whistleblowers and that they have reduced red tape and delays. In a letter to Grassley in November, the IRS said it had “committed significant resources” to the whistleblower program and that the agency considers it “a critical part of the IRS strategy to uncover tax cheats and to vigorously and appropriately administer the nation’s tax laws.”
One former high-ranking IRS official counted himself among those who didn’t think the whistleblower program was a good idea.
“I don’t think we should have a system in America where one neighbor is encouraged to turn in his neighbor to the IRS,” Donald Korb , the IRS chief counsel from 2004 through 2008, told iWatch News.
Korb, who is now in private practice and represents companies and individuals with IRS disputes, said the agency never pushed for an expanded whistleblower program. “The Senate Finance Committee just did it,” he said. “The IRS didn’t ask for it.”
Tax probes can take 6-10 years
Korb said the complexity of tax cases — not IRS intransigence — explains why there hasn’t been a wave of bounties paid under the expanded whistleblower program.
“Some of these cases take six, seven, eight, 10 years. That’s what IRS audits take,” he said. “This program is relatively new, so it shouldn’t surprise anybody that there haven’t been many awards.”
Whistleblower attorneys say rewarding tipsters who help make big cases could create momentum that will bring in still more tips and help ease the logjams that have stalled the progress of cases through the system. “They’re going to get even better tips when they start paying out awards,” said Dean Zerbe , a former Senate staffer who drafted the 2006 whistleblower law on behalf of Grassley. “My hope is that we’re going to see a real breakthrough in the next few weeks or months in terms of making awards.”
The IRS’s Whistleblower Office, which vets tips as they come in and refers them to other units for investigation, is widely praised by attorneys representing whistleblowers. The problems, they say, come from hurdles erected by the IRS chief counsel’s office and others within the agency.....
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