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

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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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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Yesterday, Senator Grassley (R-IA) released a letter sent to Internal Revenue Service (IRS) Commissioner Douglas Shulman concerning the progress of the IRS Whistleblower Office. Senator Grassley thanked the IRS for “making good faith efforts to embrace whistleblowers instead of reverting to the old culture of treating them like skunks at a picnic,” but said he remains concerned that the long timeframes and lack of communication with whistleblowers will discourage current and future whistleblowers.

Senator Grassley made a number of requests, including that the IRS prioritize the changes recommended in a recent report on the Whistleblower Office from the Government Accountability Office (GAO). He also requested that the data from the GAO report be updated and included in the IRS yearly report to Congress.

Senator Grassley attached a letter sent to Commissioner Shulman from The Government Accountability Project, No FEAR Coalition and National Whistleblowers Center on August 10, 2011 requesting that the IRS immediately revise their Internal Revenue Manual’s factors for determining whether a whistleblower should have a reduced award because the whistleblower “planned and initiated” an action. The Senator asked that the IRS “give serious consideration to the points raised” in the advocacy organizations’ letter. Senator Grassley confirmed that the “limitations for planners and initiators was intended to apply to the chief architect or the chief wrongdoer [emphasis original].” For more information see the August 11, 2011 blog posting “IRS Guidelines Discourage Whistleblowers. We hope that the IRS makes this change and encourages everyone, even those without the cleanest hands, to come forward and report tax fraud.

The Senator stated that the GAO report provides a road map and it is up to the IRS and Treasury Department to follow it by making changes so that whistleblowers will not be discouraged by delays in claim processing or by rules that contradict well-established rules for compensation of non-tax whistleblowers. Senator Grassley concluded that improving the IRS whistleblower program is in everyone’s best interest because “more tax compliance means more fairness for hardworking families who pay what they owe.”

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Today, Tax Analysts published an article about how Internal Revenue Service (IRS) guidelines can result in whistleblower awards being unfairly reduced. The Government Accountability Project, No FEAR Coalition and National Whistleblowers Center sent a letter to IRS Commissioner Shulman on August 10, 2011 requesting that the IRS immediately revise their Internal Revenue Manual’s factors for determining whether a whistleblower should have a reduced award because the whistleblower “planned and initiated” an action.

The IRS whistleblower law was designed to protect and encourage individuals to report tax fraud. The IRS whistleblower law was modeled after the False Claims Act , which recognized that it “takes a rouge to catch a rouge.” Congress correctly recognized that not everyone stepping forward would have the cleanest hands - they may have participated in the fraud on the lowest levels. However, you need these individuals who have detailed inside knowledge in order to expose the masterminds of the scheme.

The IRS whistleblower law allows the IRS to offer reduced award amounts to a whistleblower who “planned and initiated” a tax evasion. Therefore, how the IRS determines whether a whistleblower is a planner or initiator is very important. These factors will determine if a whistleblower receives his or her reward.

The group letter explains that the “planned and initiated” factors created by the IRS depart significantly from traditional understanding as reflected in Congessional intent, caselaw, and clear stautory language. The factors provide that “anyone who contributes or advises” or "knew or should have known that the activity may lead to tax noncompliance” could be found to have planned and initiated an action. This precariously wide net could “conceivably capture every whistleblower” and would “eviscerate the policy of encouraging whistleblowers.”

Dean Zerbe, national managing director at Alliantgroup LP and Special Counsel at the National Whistleblowers Center, correctly stated to Tax Analysts that “the limitation on whistleblower awards for somone who planned and initiated only applies to an individual who is the chief architect or chief wrongdoers – the Bernie Madoffs of the world,” and by, “giving a straight-arm to the most valuable whistleblowers,” the IRS has undermined the success of the law. Reuben A. Guttman of Grant & Eisenhofer PA agreed and stated that, “there is a difference between someone carefully designing an evasive tax structure and a second-year associate who merely helps carry out the plan.”

The IRS factors for determining who is a planner or initiator should be immediately revised to focus on the “principal architects” or “chief wrongdoer” of the fraud scheme.

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Speaking on the Diane Rehm Show today, IRS Commissioner Doug Shulman said that the agency's amnesty program for US citizens who hid their assets in off-shore accounts brought in "billions" of dollars. That program, of course, was prompted by the disclosures of former UBS employee Bradley Birkenfeld. Over 15,000 taxpayers came forward because they faced criminal prosecution once UBS was forced into turning over its records revealing the huge scheme to help Americans evade their taxes. Audio of the interview is available here. Although Commissioner Shulman addresses the UBS scandal earlier in the show, his comment about the huge recovery is in the last ten minutes of the hour-long interview.

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