IRS Resists Whistle-Blowers Despite Wide U.S. Tax Gap
Alliantgroup LP is a politically connected advisory firm that helps companies apply for lucrative tax credits. Clients have ranged from Oscar de la Renta to an Arkansas candle maker.
The firm also helps companies sidestep taxes, two former employees alleged in July 2009. In a 32-page submission filed with the Internal Revenue Service, along with internal e-mails and documents, they claimed Alliantgroup’s clients could owe the U.S. Treasury as much as $712.5 million in refunds over wrongly claimed tax credits. The whistle-blowers stood to make more than $210 million, under a law that offers informers as much as 30 percent of what the government recovers from their tips.
Twenty-one months later, the IRS rejected the claim, without its auditors ever talking to the whistle-blowers and even after a request by some agents to convene a grand jury, internal agency documents show.
The IRS whistle-blower program -- created by Congress in 2006 to boost tax revenue by giving incentives to tipsters -- has become the place where allegations of tax avoidance go to die. Over the past five years, more than 1,300 claims have been filed against almost 10,000 companies and individuals, alleging tax underpayments of at least $2 million apiece.
Just three awards have been paid. The IRS won’t disclose the total dollar amount. Taxpayers annually owe $385 billion more than the IRS is able to collect, the agency said.
By contrast, the U.S. Treasury has recovered more than $21 billion since 1986 due to whistle-blower tips under a similar law that covers other federal agencies. Last month, the Department of Justice announced that Abbott Laboratories (ABT) would pay $1.5 billion to settle federal and state claims that it illegally promoted an anti-seizure medication. Information from four whistle-blowers helped prompt the investigation.
The IRS is “demoralizing whistle-blowers” Senator Charles Grassley, who sponsored the whistle-blower law, wrote to Treasury Secretary Timothy F. Geithner in April. “The IRS does not have a problem attracting whistle-blowers. The IRS’s current problem is processing and compensating whistle-blowers in a timely manner,” said Grassley, an Iowa Republican. As a result, “I am now concerned that whistle-blowers will stop coming forward.”
Even as the U.S. grapples with a $1.2 trillion budget deficit, the IRS won’t aggressively pursue whistle-blower tips because of fears that will spur accusations from Congress of heavy-handed enforcement, said Bryan Skarlatos, a tax-litigation lawyer at Kostelanetz & Fink LLP.
Whistle-blower claims “can take years to go through the IRS review and award determination process,” and the IRS doesn’t collect enough information on why claims are rejected, the Government Accountability Office said in a report last year.
The program hasn’t met expectations, IRS officials said. “It’s fair to say the whistleblower program isn’t where we would like it yet,” said Steven T. Miller, IRS deputy commissioner for services and enforcement, who oversees the whistle-blower office. “And I think it’s fair to say we are working hard on it.”
The IRS doesn’t talk to whistle-blowers more frequently because of concerns about violating strict laws protecting taxpayer privacy, Miller said. He attributed the slow pace to taxpayers appealing IRS rulings. The agency says prospective whistle-blowers should expect to wait as long as seven years for an award.
“It is not an incredibly fast process,” Miller said. The agency expects to pay out another three to five awards this year, he said.
Whistle-blower allegations are filed confidentially and the IRS never tells the subject that a claim exists. Informed of the allegations by Bloomberg News, Alliantgroup denied them.
Alliantgroup is “proud of its success in helping thousands of small and medium businesses across the country benefit from tax credits and incentives,” the company said in a statement. Alliantgroup’s directors and advisory board include a former senator, three former congressmen, a former IRS commissioner and several former congressional tax-staff members.
Spurned whistleblowers include a California environmental activist, John Hansen. He filed an IRS whistle-blower submission that claimed the value of salt flats sold by Cargill Inc. had been exaggerated by appraisers, inflating charitable donation deductions. A California judge found the property’s appraiser had overvalued the land.
While the IRS reduced Cargill’s deductions, it rejected Hansen’s claim without speaking to him even though he had more information, Hansen said. Cargill accepted the IRS’s reduced deduction, said Lori Johnson, a spokeswoman for the agriculture company.
The Alliantgroup whistle-blowers’ odyssey began in July 2009 when they submitted their claim to the IRS.
The ex-employees permitted Bloomberg News to review their allegations and requested anonymity because the IRS doesn’t disclose whistle-blowers’ names. One of them works for a firm that advises companies on tax credits. The two former employees spent a combined six years working at Alliantgroup’s headquarters in Houston; one is a tax attorney.
The IRS has challenged research credits claimed by some of Alliantgroup’s clients.
In March, U.S. Tax Court Judge Diane L. Kroupa rejected tax credits by an Alliantgroup client and said the firm had shown no proof that wages paid to two top executives of hair-care products maker Farouk Systems Inc. qualified as research expenses.
“The inadequate substantiation prevents any amount of the relevant wages from qualifying for the research credit,” the judge wrote. She called the testimony from Farouk’s witnesses “self-serving and unreliable.”
While Alliantgroup said in a statement that Judge Kroupa’s findings were “unfortunate,” it said “there is no question” that Farouk Systems’ founder and employees engaged in research.
In the whistle-blower claim, the former employees alleged Alliantgroup inflated research expenses by saying top managers spent large portions of their time working on such projects. That enabled more of their salaries to count as costs eligible for the credit.
The whistle-blowers included an internal e-mail that showed -- after the IRS began examining one client -- Alliantgroup manager Amol Gavankar suggested changing the job description of a purchasing manager.
“Obviously in software design, purchasing has no qualification in R&D,” Gavankar wrote. “I need you to decide whether we should modify the title or figure out a better job description.”
In an interview, Gavankar, who left the company in 2008, said that while he didn’t recall the specific e-mail exchanges, it was common to shoehorn employees’ job descriptions into positions that would help generate credits.
“I wasn’t comfortable with that,” he said. “Not having a formal tax background, we did what the partners taught us to do.” Gavankar previously worked as a software engineer.
“Alliantgroup does all it can to provide accurate job titles to the IRS,” the company said in a statement. Clients must “provide confirmation of allocations and costs before information is placed into” their studies. The company says 93 percent of the research credit dollars claimed by clients and audited by the IRS or state tax administrators since January 2009 have been upheld.
In August 2009, a week after receiving the whistle-blowers’ file, Katherine Onken, an IRS analyst, began working the phones.
The 35 staff members in the IRS whistleblower office don’t pursue claims themselves. Instead, they try to enlist overworked auditors on the IRS’s enforcement staff, whose ranks dropped by more than 500 agents and revenue officers last year.
Reached by telephone, Onken declined to be interviewed.
Onken learned the IRS had previous disputes with Alliantgroup’s clients. Agency officials in Houston “have had many cases with this group,” according to an e-mail to Onken from a colleague on Aug. 10, 2009. She also found out Alliantgroup was in negotiations with the IRS over a proposed penalty of about $250,000 for allegedly preparing false tax returns. The company says it hasn’t paid any penalty.
In November, three months after filing their claim, the whistle-blowers hadn’t received any IRS response, other than an acknowledgement it was received. Their attorney, Joel Androphy, arranged a meeting with two agents from the IRS’s criminal division in Houston.
The meeting lasted the better part of a day. The IRS agents started a preliminary investigation into Alliantgroup and requested the convening of a grand jury, according to an internal agency memorandum from Jan. 5, 2010.
That request was denied after discussions between the criminal division and the IRS chief counsel’s office, according to the memorandum. The file was passed back to Onken at the whistleblower office.
On the same date, Onken e-mailed a description of the allegations to her boss. The whistle-blower office’s director, Stephen Whitlock, wrote back quickly that there might be a case to be pursued against Alliantgroup.
He also cautioned in an e-mail: “Sounds like this would be very resource intensive.”
Alliantgroup’s political connections were also raised in several internal IRS memos.
Alliantgroup’s vice chairman is former IRS Commissioner Mark W. Everson, who ran the agency under George W. Bush from 2003 to 2007. Its national managing director is Dean Zerbe, former senior counsel to the Senate finance committee, who worked for Grassley and helped write the legislation that set up the whistle-blower office. He has represented several tax whistle-blowers, including former UBS AG banker Bradley Birkenfeld.
Everson and Zerbe keep tabs on federal tax developments and update the company’s clients on potential changes and legislation.
Following a conference call on the allegations about Alliantgroup, Onken, the IRS analyst, scrawled one word next to Everson’s name in a handwritten memo: “Concern.”
That concern was heightened in May 2010 when Onken received a phone call from her boss, Whitlock. He told her Zerbe and Everson were meeting with the IRS later that week, according to Onken’s notes. “He didn’t know what the topic/purpose of the mtg was,” she wrote.
Everson and Zerbe met with five top officials at the IRS that month, an agency spokeswoman said, including Commissioner Douglas Shulman and Miller, the deputy commissioner for services and enforcement.
The meeting was requested by Alliantgroup to “present its views of issues and challenges faced by small- to mid-sized accounting firms,” said an agency spokesman. It didn’t address the whistle-blower office, the agency said.
The IRS’s “determination of any case is based on the law and the facts as they are presented -- period,” said Terry Lemons, an IRS spokesman. “Our agents are trained to avoid any inappropriate influence by a taxpayer’s representative. We have multiple reviews in place throughout the IRS to ensure decisions are based solely on the facts and circumstances of the case.”
Meanwhile, the Alliantgroup file had been given to an IRS technical adviser. While he dismissed some of the allegations, a few were “troublesome,” he wrote. They included the allegation that Alliantgroup changed job titles of clients’ employees to qualify for more research tax credits.
“The changing of job titles and use of generic descriptions seem at first glance to have been an intentional act to disregard of [sic] the rules,” wrote the IRS official, Paul Coates in his May 20, 2010 memorandum. He recommended passing on those allegations to field agents and said a penalty against the firm may be warranted.
Nevertheless, analysts and examiners whose job it is to audit companies like Alliantgroup resisted pursuing the allegations. A team already auditing Alliantgroup as part of a broader examination of research tax credits “doesn’t want to look at the [whistle-blower] info because they think they have the same or similar info,” Onken wrote in a June 2010 memo.
“I don’t understand why the team wouldn’t want to look at the info,” Onken wrote.
Soon after, one of the whistle-blowers called Onken to say he still hadn’t heard back from the IRS, a year after filing his claim. She said she couldn’t tell him anything other than that his claim was being considered, according to her notes of the conversation.
The reluctance of the IRS to talk directly to whistle-blowers is common, according to lawyers who file such claims.
“You have an agency that is virtually completely non- communicative,” said Erika A. Kelton, an attorney at Phillips & Cohen LLP in Washington, which represents about 40 tax whistle-blowers. Since sophisticated tax shelters are complex, “when you have an insider who can shortcut things for you, why not take him up on it?”
The IRS generally doesn’t permit its most knowledgeable examiners -- field agents handling audits -- to speak to the whistle-blowers at all, the agency says. That is because of fears of accidentally sharing confidential information with whistle-blowers, said Marty Basson, an attorney who retired last year from the IRS office that handles those claims.
As the agency debated what to do about Alliantgroup, one IRS official expressed misgivings, according to internal correspondence.
“On one hand it makes sense to reject” the claim, wrote manager Amy Liberator in a June 16, 2010 e-mail. “On the other, they’re (Alliantgroup) getting just what they want because they know we probably won’t audit these mid-size” companies.
Liberator declined to comment.
An IRS analyst who had been looking at the broader issue of abuses of research tax credits -- identified by the IRS in 2007 as a top audit priority -- wrote in a memo that he didn’t feel pursuing the allegations against Alliantgroup “would be an efficient use of resources.” Onken forwarded this information to her bosses.
A few months later, on April 26, 2011, the IRS sent brief rejection form letters to the whistle-blowers.
“Although the information you submitted did not qualify for an award,” it read, “thank you for your interest in the administration of the internal revenue laws.”
The two whistle-blowers have filed a petition, under seal, in U.S. Tax Court challenging the rejection of their claim.
“This could have been used to refund other taxpayers, or pay down the national debt,” said one of them, the former Alliantgroup tax attorney. “Instead, the IRS completely dropped the ball. They wouldn’t spend the time and money to go after it.”
To contact the editor responsible for this story: Jonathan Kaufman at firstname.lastname@example.org