IRS Paid No Rewards in U.S. Whistleblower Program

The IRS said it didn’t pay any informants for the third consecutive year under a law that enhanced financial rewards for turning in suspected tax cheats.

The Internal Revenue Service also said today that it has delayed payments of awards under an older, less generous whistleblower program until those accused have more time to appeal auditors’ findings. Rewards that might have been paid in 2009 were delayed for up to two years, the agency said.

The tax agency has come under pressure to pay rewards from lawmakers including Iowa Senator Charles Grassley, a Republican who championed the more generous rewards, and a growing industry of law firms that represent whistleblowers.

“Failure to provide whistleblowers awards is seriously jeopardizing the success of the program,” said Dean Zerbe, a former Grassley staffer who helped write the law and now helps people make claims. He also is a special counsel for the National Whistleblower Center, a Washington advocacy group. “The administration cannot be serious about fighting tax evasion and the tax gap if it doesn’t ensure the success of the whistleblower program.”

Congress changed the IRS whistleblower program in 2006 to make it easier for informants to collect rewards of 15 percent to 30 percent of taxes collected as a result of the information they provided.

Tips Pouring In

Since then, tips have poured in. Steve Whitlock, the director of the IRS’s Whistleblower Office, told an audience of about 200 lawyers, investigators and government officials at a Miami Beach conference on offshore banking in May that his office receives 40 to 50 tips a month alleging tax liability in excess of $2 million. Americans submit another 200 tips a month alleging smaller violations, he said.

In an annual report to Congress today, the IRS said it received 460 submissions in fiscal year 2009, which ended Sept. 30, 2009. The tipsters identified 1,941 taxpayers each suspected of avoiding at least $2 million in tax.

That compares with 475 submissions identifying 1,246 alleged tax cheaters the year before.

The IRS paid $5.9 million in rewards to 110 informants in 2009, down from $22.4 million paid to 198 whistleblowers a year earlier. All of the cases resulted from claims submitted before the 2006 law change. The agency attributed the decline largely to a new policy giving taxpayers more appeal rights.

Many informants “claimed to have inside knowledge of the reported transactions, often with extensive documentation to support their claims,” the IRS said in the report.

‘Frustrating’

Grassley said in a statement today that he’d continue to press the IRS to pay out awards.

“It’s frustrating that the IRS still isn’t taking advantage of the 2006 whistleblower provisions affecting claims of more than $2 million and is moving slowly on smaller cases under the older whistleblower program,” he said. “A valuable resource in whistleblowers is being under-used.”

Interest in the whistleblower awards program also increased after informants helped the IRS pursue high-profile tax-evasion cases involving Americans who hid assets at Zurich-based UBS AG, Switzerland’s largest bank, and at Liechtenstein’s LGT Group, a bank owned by Liechtenstein’s ruling family.

The informant in the LGT case, former bank employee Heinrich Kieber, was given a new name in a witness protection program, Senator Carl Levin, a Michigan Democrat, said in 2008. The informant is seeking an IRS award, according to his attorney, Jack Blum.

Sent to Prison

One informant was sentenced to prison. UBS banker Bradley Birkenfeld was sentenced to three years and four months in prison for helping billionaire Igor Olenicoff cheat on his taxes. Olenicoff was sentenced to two years of probation and paid $52 million in back taxes, penalties and interest. Birkenfeld, who says he was imprisoned unfairly, also is seeking a financial reward.

The IRS established a whistleblower office in February 2007 to process claims. The 2006 law spurred a legal industry built around submitting claims.

After the law was enacted, the Miami-based Ferraro Law Firm, which specialized in personal-injury cases involving cancers related to asbestos, opened a Washington office that recruits and represents clients making such claims. The firm has said it made several claims alleging more than $1 billion in unpaid taxes.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net.

To contact the editor responsible for this story: Mark Silva in Washington at msilva34@bloomberg.net

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