IRS Stingy With Whistleblower Payouts, Slow to Follow Up on Tips

The IRS took more than four years to reward a whistleblower through a new program to encourage tipsters and has drawn criticism from the Government Accountability Office for failing to move faster.

A recent GAO study found that the program, which has attracted tips from more than 1,300 whistleblowers, doesn’t collect data that could speed up evaluation of information that started to pour in after Congress authorized the Internal Revenue Service to establish the office in late 2006.

“Five years later, they have to start paying rewards,” Stephen Kohn, executive director of the National Whistleblower Center, a Washington-based non-profit group that advocates for government informants, told Bloomberg Government.

The 2006 law was designed to help the IRS narrow the tax gap, which is the difference between taxes owed and taxes paid. The gross amount of the gap is estimated to be $345 billion.

Senator Charles Grassley, an Iowa Republican who pushed for the law, noted that by comparison the U.S. Justice Department has collected more than $27 billion under the False Claims Act, the law upon which the IRS whistleblower statute is modeled. The figure cited by Grassley reflects recoveries since 1986 changes to the law and includes at least $7.8 billion collected since 2009, according to Justice Department figures.

‘Opportunity’ for IRS

“Here’s an opportunity for the IRS to get the help of a lot of non-IRS employees, the same way the Justice Department is getting the help of a lot of non-Justice employees,” Grassley said in a telephone interview.

He recently asked the IRS to address issues identified by the GAO report and by whistleblower advocates. Grassley, who said he knows of only one IRS whistleblower award, said the agency is slow to pursue tips because of concerns that the information could reflect negatively on its enforcement.

Tax attorney Christopher Rizek, who has represented whistleblowers and companies facing their claims, said the lack of IRS rewards so far is to be expected because of the potential stakes, especially for businesses.

“The big money is in whistleblowing on big corporations with big tax liabilities,” Rizek, an attorney with Caplin & Drysdale Chartered in Washington, said in a telephone interview. “Those big corporations have lawyers and accountants on staff who scour the issues and may have a reasonable dispute.”

Complex Cases

Other tax lawyers see more than the complexity of cases behind the dearth of whistleblower payouts.

“The IRS really has difficulty, culturally, dealing with people who aren’t clean as an angel,” said Dean Zerbe, national managing director of AlliantGroup, a Houston-based tax consulting firm.

Zerbe, who helped write the 2006 IRS whistleblower law as an aide to Grassley and now represents whistleblowers, said the IRS must signal that it is serious about rewarding informants.

“The best thing they could do is have the Ed McMahon moment -- give somebody the big check,” he said.

The IRS declined to comment directly on questions about the whistleblower program and steered inquiries to its letter of response to the GAO report.

The time it takes to process claims “is due to a number of issues, most notably the requirement to allow taxpayers the appeals and litigation rights that the law affords,” Steven T. Miller, IRS deputy commissioner for services and enforcement, said in the Aug. 3 letter.

Years-Long Wait

In its 2010 report to Congress on the program, the IRS said whistleblowers are told that completing a claim could take five to seven years and sometimes longer.

Before the law, the IRS could issue rewards at its discretion and collect tips about alleged tax underpayment in any amount.

The 2006 measure mandates rewards of up to 30 percent of proceeds recovered and targets cases where the amount in dispute exceeds $2 million. If the claim is against a person, he or she must have an annual income of more than $200,000 a year.

The current program has attracted tips from almost 1,400 whistleblowers, who have provided information on more than 9,500 individual and business taxpayers, according to the GAO report. The report said the IRS has paid “a small number of awards” through May 12, and didn’t disclose how many. The agency declined to say how many awards it has made.

In April, the IRS settled for the first time with a whistleblower under the 2006 law, according to attorneys Eric Young and Brandon Lauria of Egan Young in Blue Bell, Pennsylvania, who handled the case.

Financial Services Firm

Their client reaped $4.5 million for reporting a tax liability of more than $20 million at a “large national financial services firm,” Young said in a phone interview. He declined to identify his client.

IRS spokeswoman Julianne Breitbeil declined to confirm the settlement, citing an obligation to protect taxpayer privacy.

The whistleblower, an in-house accountant and auditor, went to the IRS after complaining to managers that the company had underpaid its taxes, according to Young. Two years after giving this information to the IRS, the whistleblower hired Young’s law firm.

“After his initial interview, the IRS pretty much went radio silent,” Young said. “He became concerned that there was some disconnect.”

False Claims Act

By contrast, whistleblowers and their lawyers often consult with Justice Department lawyers as they investigate False Claims Act lawsuits filed under seal, Young said.

The whistleblower’s experience mirrors findings in the GAO report, which examined the IRS’s eight-step process for evaluating claims. Government reviewers found that IRS didn’t track the time it took to complete each step or collect other information that would shed light on streamlining the process.

The lack of information limits the whistleblower office’s ability to update “Congress and the whistleblower community, which may erode confidence in the program,” the report said.

Kohn, of the whistleblowers center, said the IRS’s wariness is frustrating because “there’s hundreds of billions of dollars in unpaid taxes and there are whistleblowers that have the information” needed to recover the uncollected levies.

Kohn noted that there’s no mention of a whistleblowing program on the home page of the IRS web site. By comparison, Kohn said, the Securities and Exchange Commission extends an invitation to whistleblowers in the upper right-hand corner of its home page.

“There’s a big difference,” Kohn said. “They’re still keeping it pretty secret.”

To contact the reporters on this story: Andrew Zajac in Washington at azajac@bloomberg.net; David Voreacos in Newark, New Jersey at dvoreacos@bloomberg.net

To contact the editors responsible for this story: Mark Silva at msilva34@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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