In the May 14th issue of Tax Notes, it was reported that Stephen Whitlock, director of the IRS Whistleblower Office, had made an appearance along with other IRS participants at the OffshoreAlert conference which was held at the Ritz-Carlton Hotel in Miami Beach.
Marchant, the editor of the newsletter OffshoreAlert, was hosting the concluding cocktail hour at his annual conference. Taken from its website, “[t]he OffshoreAlert Conference is an independent, non-promotional event covering every aspect of the fast-paced, ever-changing, complex world of Offshore Financial Centers and how they are routinely used by the world's biggest corporations and High Net Worth Individuals to minimize risk and maximize protection.” But why was a head of IRS offshore enforcement at the conference? That was clearly on the mind of Senator Chuck Grassley (R-Iowa), who stated his objection to the presence of Whitlock and other IRS employees at the conference. Perhaps it was because lawyers who represent whistleblowers were also in attendance. After all, Grassley has been critical of the fact that the Whistleblower Office was not processing a sufficient number of cases. But Grassley further expressed his displeasure about Whitlock and other governmental officials appearance at the conference that he wrote a strongly worded letter informing Treasury Secretary Timothy Geithner and IRS Commissioner Douglas Shulman about Miami trip, and he used the opportunity to express his impatience with the handling of his earlier complaints about the whistleblower program.
Portions of the letter are reproduced here:
Dear Secretary Geithner and Commissioner Shulman:
It has been seven months since I last wrote to Commissioner Shulman regarding the implementation of the whistleblower program at the Internal Revenue Service (IRS). While I was encouraged by the IRS's plodding but steady progress, I am now writing to convey my extreme disappointment in the management of the program. It was brought to my attention that the Director of the IRS Whistleblower program is currently participating in the Offshore Alert Conference (Conference) at the Ritz-Carlton in Miami Beach.
It is not clear to me how his attendance at the Conference furthers the administration of the IRS whistleblower program. The panel in which he is participating is titled "Enticing the Top Echelon: How the IRS, SEC and CFTC Attract High-Level Whistleblowers". Yet, the conference itself does not seem to attract whistleblowers. Under the "Who Attends" section of the conference's website, the following are listed: Global Financial Experts and Leading Offshore Firms and under "Who Should Attend" the following are listed: Offshore Providers, Offshore Clients, and Investigators"….
Separately, the Conference agenda lists at least two other IRS employees as "featured speakers", one a special advisor to the Offshore Compliance Initiative (OCI) and another who is a Special Trial Attorney to the OCI. The IRS's Offshore Voluntary Disclosure Initiative (OVDI) and its corresponding successes with combating offshore tax evasion are the result of whistleblowers coming forward following the improved IRS whistleblower incentives I authored in 2006. Assuming that these two individuals are involved with the OVDI program, I would expect that they could speak on behalf of the IRS Whistleblower Office.
However, I am skeptical that it is even appropriate for these two individuals to attend. There is certainly no reason for nineteen IRS employees to attend the conference as was reported to me just this morning. Again, the target audience for the conference is not whistleblowers, and, in a challenging fiscal time, this is not the best use of IRS resources. As a result, I ask that you provide the following information. (emphasis added).
Grassley proceeded to ask for detail of each person, by position and title who is an employee of the IRS or Chief Counsel who attended the conference and to further explain their justification for their attendance. He continued his sharp rebuke….
“Moreover, as I indicated in my September, 2011, letter, data from the IRS's own annual whistleblower report to Congress, as well as reports from the Government Accountability Office (GAO), make clear that the IRS does not have a problem attracting whistleblowers. The IRS's current problem is processing and compensating whistleblowers in a timely manner. Since last writing to Commissioner Shulman, I have received even more correspondence from whistleblowers whose claims are not progressing at the IRS. Such correspondence, along with recent cases filed in the Tax Court and corresponding press coverage, indicate that my worst fears are coming true. The lack of progress is demoralizing whistleblowers so that I am now concerned that whistleblowers will stop coming forward. In my September, 2011, letter, I asked for monthly updates about the number of claims sitting in the Whistleblower Office for review. The IRS has completely ignored this request and I now ask that you provide an update immediately.”
"The Whistleblower Executive Board was created in July 2008 and meets periodically to address matters pertinent to administration of the Whistleblower Program within the IRS. The Board has not yet reviewed an award claim recommendation or determination."
The IRS Internal Revenue Manual (IRM), section 220.127.116.11.2 states the following: "Prior to communicating the preliminary recommendation to the Whistleblower, the Director will share the preliminary recommendation with the Whistleblower Executive Board for concurrence." However, it is not clear how often this board meets. Provide a detailed list of all such meetings for the past three years and indicate when the next one will occur.
In my September, 2011, letter to Commissioner Shulman, I requested that the IRS implement the GAO's recommendations as well as a few others before the IRS submitted its next whistleblower report to Congress. The IRS response to the GAO indicated that IRS did not have the resources to implement those recommendations. As I stated in my letter, the money recovered from whistleblowers should more than cover the costs of implementing those recommendations.”
The balance of Grassley’s letter chronicled the lack of progress overall that the Whistleblower office had made to date, and among the particulars that whistleblowers were coming to his office to complain about delays in processing their claims. He demanded a progress report on final whistleblower regulations. (Section 406(b) and (c) of Title IV of Division A of the Tax Relief and Health Care Act of 2006 requires an annual report.)
Grassley is presently cosponsoring the Incorporation Transparency and Law Enforcement Assistance Act (S. 1483), which would require states to collect beneficial ownership information for corporations and limited liability companies. Non-transparent entities are used as well for Medicare fraud in addition to tax evasion. For whatever reason, S.1483 is opposed by the American Bar Association, the American Bankers Association, and the U.S. Chamber of Commerce. Publicly traded companies and broker-dealers would be exempt. FinCEN also has issued a notice of proposed rulemaking using a risk-based approach to ownership verification and explicitly requiring continuous monitoring of the customer relationship. FinCEN's alternative definition of beneficial owner would look for the entity's largest equity owner and responsible manager. The agency also advocated identification of owners of the assets in an account in some circumstances. FinCEN wants to phase in the identification requirement for existing customers.
At the ABA tax section meeting in San Diego earlier this year, Whitlock remarked that the IRS had paid about $20M in whistleblower awards on tax collections of $461M in 2010. In 2011 the IRS paid $8M in whistleblower claims based on $48M of collections. At the OffshoreAlert conference, Whitlock announcedhe could not provide even aggregate figures for the numbers and amounts of larger-case awards made under his program, because that might identify a taxpayer and jeopardize the program itself. The False Claims Act, however, allows the Justice Department to publicize awards. Under the False Claims Act, whistleblowers may bring their own cases to court. see Doc 2011-19478 or 2011 TNT 178-51 .)
A whistleblower (IRS) case takes five to seven years to complete from the time of the whistleblower's initial complaint. The case must be analyzed and the taxpayer audited. The taxpayer has rights to appeal that must be exhausted. The IRS tries to get the statute of limitations extended, especially when the taxpayer's conduct is continuing. Each case must be analyzed on its own merits.
A whistleblower cannot receive an award until the IRS recovers the associated taxes (section 7623(b)(1) refers to the collected proceeds). Technically, a net operating loss can wipe out the taxpayer's liability and the whistleblower's reward along with it, Whitlock acknowledged. Grassley complained about the failure to address this problem, and the IRS is reexamining the pertinent part of the Internal Revenue Manual.
The IRS Whistleblower Office acknowledged receiving approximately 3,500 submissions per year, about 10% of which are for tax liabilities of $2 million or more.
The IRS does not involve whistleblowers in case analysis or audits. A whistleblower may be debriefed while the claim is being evaluated, before the audit has begun, Whitlock explained. After the audit has begun, it's hands off. The results of investigations or audits are not announced. Whistleblowers who are denied awards are not told why their claims were closed. The IRS has the power to contract for a whistleblower's services -- a power Kelton says has never been invoked. See IRC section 6103(n) and Proc. Reg. section 301.6103(n)-1(b)). It is up to the IRS field and audit functions to pursue the complaint and, importantly, to evaluate how the whistleblower's information aided their audit. Section 7623(b)(1) requires that the whistleblower's information make a "substantial contribution" to the IRS action.
The tax statute does not guarantee a whistleblower anonymity, unlike the statutes governing SEC and CFTC whistleblowers that were enacted as part of the Dodd-Frank Act. Whitlock said the IRS tries to protect the whistleblower's identity, but it has to be disclosed if the IRS relies on him as a witness. So the IRS tries to develop the case independently, especially in criminal cases, when the whistleblower's identity could be required to be disclosed. See, e.g., Whistleblower 14106-10W v. Comm’r, 137 T.C. No. 15 (2011).