Whistleblower Protection Blog : Whistleblower Lawyer & Attorney : National Whistleblower Legal Defense and Education Fund : Whistleblower Protection, Fraud Claims : Washington DC

Dean Zerbe and Felipe Bohnet-Gomez, representing the National Whistleblowers Center and Kohn, Kohn, and Colapinto LLP, respectively, presented remarks today at a public hearing on the IRS’s proposed regulations on its Whistleblower Program. Zerbe spoke on the policy implications of the regulations in their current form, and underscored the importance of whistleblowers in assisting the IRS to fight fraud effectively and efficiently. Bohnet-Gomez outlined objections to proposed regulations’ definition of certain key terms, which narrow the scope and effectiveness of the whistleblower program far beyond the language of the 2006 law.

All in attendance at today’s public hearing—including other attorneys and advocacy groups—agreed that the regulations should not be finalized in their current form. In addition to concern over the IRS’s definition of key terms, speakers also disagreed with the Service’s treatment of Net Operating Losses (NOLs) and other tax attributes, as well as a variety of provisions relating to the administration of the IRS Whistleblower Program and the Service’s communication with whistleblowers. Currently, whistleblowers face wait times of several years before their claims are processed, during which they typically do not receive any communication from the IRS regarding the status of their claim.

The National Whistleblowers Center submitted extensive written comments on the proposed regulations on February 19, 2013, and is available here.

A copy of Dean Zerbe’s presentation on whistleblower policy can be found here.

My previous blog post on this issue can be found here.

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Today on Forbes.com, Dean Zerbe, the National Whistleblower Center’s Senior Policy Analyst, explains the potential issues that may be slowing or sidetracking submissions at the IRS Whistleblower Office. He also gives detailed insight into issues that may cause delay that whistleblowers cannot control.  The IRS Whistleblower Program: What To Do When The IRS Isn't Moving On Your Submission tackles the most commonly asked questions in a simple and straightforward way.

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Late Friday, the Department of Treasury posted a notice in the Federal Register regarding the IRS's proposed rules for its whistleblower office (26 CFR Part 301 [Reg-141066-09]. The notice announces a public hearing on the proposed rules for the IRS Whistleblower Program. I previously shared information about these proposed rules here: IRS On Verge Of Crippling Whistleblower Program and here: IRS Whistleblowers Received Record Payouts in 2012, But Future Recoveries At Risk. In addition, the National Whistleblower Center issued an Action Alert regarding these proposed rules encouraging the public to submit comments. New IRS Regulations Hurt Whistleblowers, Help Swiss Bankers!

These proposed rules have caused uproar in the whistleblower community. On March 4 CNN Money noted that “"A grassroots campaign started by the National Whistleblower Center...saw more than 670 barb-laden letters from lawyers and ordinary citizens, an unusually high number, flood Miller's desk over the past two months.” Also see: NWC Threatens Legal Action if IRS Does Not Bend on Whistleblower Rules.

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Whistleblower Advocates Submit Extensive Comment  in Response to Proposed IRS Regulations

Yesterday, the National Whistleblower Center ("NWC"), the National Whistleblowers Legal Defense and Education Fund ("Fund"), Bradley Birkenfeld, Scott Rosen, and Gene Ross jointly submitted a comprehensive 84-page comment on the IRS's proposed rules for its whistleblower office (26 CFR Part 301 [Reg-141066-09]).  Click here to view their comment.

The critical issues addressed in the joint submission include: 

• IRS rules that would severely restrict the scope of the IRS whistleblower program by limiting "collected proceeds" to violations of Title 26 only. The joint comment states that the statute was intended to cover all violations enforced by the IRS, even if they are in Title 31 or Title 18. A strong whistleblower program is needed to prevent tax fraud related to offshore banking.

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The Internal Revenue Service Whistleblower Office announced that it paid a record $125.4 million in 2012 to whistleblowers that provided evidence of tax cheating, but new rule changes place future recoveries at risk.  The IRS report, which was made public on Wednesday, stated that more than 80 percent of the total paid out by the IRS in 2012 went to Bradley Birkenfeld, a former employee of UBS AG who received $104 million.

In total, the IRS issued 128 whistleblower rewards for the 2012 fiscal year, though just 12 of those cases involved more than $2 million in unpaid taxes.  Whistleblowers helped the IRS collect more than $592 million.  

However, proposed rules to the IRS whistleblower law are drawing criticism from the NWC, U.S. Sen. Grassley and others. The IRS’s proposed rules will make it harder for whistleblowers to collect awards and limit the scope of cases that qualify for awards. 

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On January 6, 2013 The Urban-Brookings Tax Policy Center was announced as the 2012 Tax Notes Person of the Year. Tax Notes also recognized nine others who were “contenders” for the title. Among the contenders was the National Whistleblowers Center’s Senior Policy Analyst, Dean Zerbe.

Zerbe gained significant recognition in 2012 when he and co-counsel Stephen M. Kohn helped internationally acclaimed UBS whistleblower Bradley Birkenfeld obtain a historic $104 million reward.  Mr. Birkenfeld’s unprecedented disclosure resulted in cracking the illegal offshore Swiss bank system and resulted in over $5 billion recovered for U.S. taxpayers. Birkenfeld’s information forced Switzerland to change its international treaty with the United States resulting in it’s largest bank being forced to turn over the names of over 4,900 U.S. citizens who held illegal offshore accounts.

In Zerbe’s position as Senior Policy Analyst with the NWC he has frequently commentated on the government's development of the revised IRS whistleblower program. He has pressed the IRS to develop guidance on whistleblower anonymity and to define procedures for award payments and timelines for acting on whistleblower information. In addition, Zerbe co-authored with Kohn, on behalf of the NWC, an amicus brief filed with the Tax Court addressing key questions of law governing the IRS Whistleblower program. The brief, linked here, addressed the issue of "collected proceeds" under the IRS whistleblower law. The "collected proceeds" issue impacts hundreds if not thousands of cases in which the IRS must determine whether a whistleblower is entitled to a reward based on monies obtained by the U.S. government related to tax violation.

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On November 5, 2012, the National Whistleblower Center filed a briefing paper/amicus brief with the Internal Revenue Service addressing key questions of law governing the IRS Whistleblower program. The brief, linked here, addresses the issue of "collected proceeds" under the IRS whistleblower law. The "collected proceeds" issue impacts hundreds if not thousands of cases in which the IRS must determine whether a whistleblower is entitled to a reward based on monies obtained by the U.S. government related to tax violations.

The brief was co-authored, pro bono, by myself and Dean Zerbe. In a statement issued by the NWC, Zerbe explained the importance of the briefing paper: "Whistleblowers are eligible for rewards based on the government recovering ‘collected proceeds.' A narrow definition of this term will devastate the impact of this critical whistleblower law and result in a hardship to hundreds (if not thousands) of whistleblowers who lawfully report tax violations but who are found ineligible for a reward based on a restrictive and hyper-technical definition of the term ‘collected proceeds.' Whistleblowers risk their careers to help detect fraud. They should not be doubly punished for their good deeds."

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On October 5, 2012, the Third Circuit U.S. Court of Appeals conducted oral arguments in Wiest v. Lynch, a case that tests the scope of protection for whistleblowers under the 2002 Sarbanes Oxley Act (SOX). Harrisburg, Pennsylvania, attorney Richard Angino argued the case for Jeffrey Wiest.  He generously shared his time with attorney Stephen M. Kohn, Executive Director of the National Whistleblowers Center (NWC). The panel of three judges consisted of Chief Judge Theodore A. McKee, Judge Kent A. Jordan and Judge Thomas I. Vanaskie. In the earlier arguments that day, Judge Jordan was the most active questioner of lawyers on both sides of each case.  The Court was running late as the questioning exceeded the time allotted for all the attorneys.

You can read the continuation of this blog post for a more detailed report of the judge's questions and the issues that arose.  However, I want to emphasize a moment at the end of Stephen Kohn's rebuttal argument.  Judge Jordan had been questioning all the attorneys on whether any whistleblower protection can protect disclosures employees make as part of their official duties.  Stephen Kohn answered that many frauds and violations are discovered by employees performing their duties and raising a concern to their supervisor. Therefore, whistleblower laws would lose much of their effectiveness if they did not protect this most common form of raising concerns. He cited the nuclear whistleblower case, Mackowiak v. University Nuclear Systems, Inc., 735 F. 2d 1159, 1163 (9th Cir. 1984) (employers may not discharge employees engaged in quality control because they do their jobs too well). He got Judge Jordan to agree that establishing protected activity is "a low bar." Stephen Kohn emphasized how the Department of Labor opinion in Sylvester v. Parexel International LLC, ARB No. 07-123, ALJ Nos. 2007-SOX-39 and 42 (ARB May 25, 2011), is entitled to deference, and how the legislative history showed that in enacting SOX, Congress relied on the Third Circuit's decision in Passaic Valley Sewerage Comm. v. U.S. Department of Labor, 992 F.2d 474, 478-79 (3d Cir. 1993). Past the official time limit, he even pointed to the roots of protecting employee communications to supervisors in the old Mine Safety Act cases, Phillips v. Interior Bd. of Mine Operations Appeals, 500 F.2d 772, 778 (D.C. Cir. 1974), cert. denied, 420 U.S. 938 (1975), and Munsey v. Federal Mine Safety and Health Review Comm’n, 595 F.2d 735, 741 (D.C. Cir. 1978). Finally, Judge Jordan said, "I gotcha" and the argument concluded. To me, the persistence of the argument, Stephen Kohn's determination to draw on all the available authority, and his keen understanding of the practicalities of whistleblower protection, made it possible for us to believe that all three judges might agree to reinstate Jeffrey Wiest's case. It will probably be months before we get the Court's opinion, but I am already convinced that this oral argument had a positive effect on the outcome of this case and on the state of the law.  Bravo!

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By Guest Columnist: Donna Boehme
Principal at Compliance Strategists LLC and editor of the weekly CS Newsflash (and former chief compliance and ethics officer at two leading multinationals). Follow her on Twitter @DonnaCBoehme.

Originally Published in Corporate Counsel (September 20, 2012) 

Last week’s outsized bounty award of $104 million to former UBS AG banker-turned-whistleblower Bradley Birkenfeld has commentators lighting up the Twitterverse with outrage and the Wall Street Journal calling Birkenfeld’s tale one of “sordidness piled on sordidness.” Seems his 2007 testimony regarding thousands of U.S. tax dodgers netted the Internal Revenue Service a $780 million fine and the names of 5,000 potential tax cheats from the Swiss banking giant—not to mention potential recovery of over $5 billion in unpaid taxes.

This has resulted in what one of Birkenfeld’s lawyers has called "the largest whistleblower reward issued to a single individual.” What has got so many folks’ knickers in a wad is not just the record-setting, eye-popping monetary reward, but the fact that Birkenfeld himself had a spectacular role in the scheme, at one point famously smuggling diamonds for a client in a tube of toothpaste. And what’s more, he lied to the IRS and served 30 months in jail before collecting his reward. Judging by much of the commentary, this is being seen by many as whistleblower protection gone horribly awry and the end of civilization as we know it.

As a former chief compliance officer who has been in the trenches for 20-plus years, I’d like to offer an alternative view, starting with some undeniable truths about whistleblowers (and, by the way, we need another term for individuals who report misconduct, but I digress.) To all the outraged commentators, please have a glass of Pinot and unwad your knickers. Go ahead, I’ll wait.

OK, on to the undeniable truths about corporate whistleblowers:

UNDENIABLE TRUTH NO. 1

Whistleblowers are not always model citizens (gasp). Sometimes they are very close to the misconduct—that’s how they know about it. This is the same reason that in developing the Dodd-Frank whistleblower program, the U.S. Securities and Exchange Commission declined to exclude whistleblowers involved in the misconduct unless criminally convicted: it makes no sense to automatically exclude the people most likely to have the information. Ever heard of the U.S. Department of Justice’s antitrust leniency program?

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Attorney Dean Zerbe (pictured) published an article in Forbes magazine explaining how recent events in the IRS whistleblower program give reasons for whistleblowers to see an even brighter future.

Since 2006, federal law has had a reward system for those who blow the whistle on tax fraud. The program can award a successful whistleblower up to 30% of the IRS recovery that results from the whistleblower's disclosure. It comes as no surprise that the IRS program is a valuable program. It honors truthful taxpayers, allows the IRS to catch those who evade paying their taxes and seeks to protect whistleblowers.

Senator Grassley of Iowa has been a strong advocate for the advancement of whistleblower protections for several decades. Recently, Steven Miller, Deputy Commissioner and long time supporter for the IRS whistleblower program, responded directly to concerns Senator Grassley raised. In a June 20, 2012 memorandum, Miller established a plan for the IRS to respond to whistleblowers in a more timely fashion when a case is being decided, and to create a timeline for when a case can be approved and an award can be issued to the whistleblower.

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