IRS Whistleblower Office: A Taxing Affair

No one likes a tax cheat, and last week Congress had government employees and contractors in its sights. But questions remain about whether the Internal Revenue Service’s (IRS) Whistleblower Office is doing enough to incentivize and reward whistleblowers who report tax violations.

Under the policy, if certain thresholds are met, the whistleblowers share a portion of the government’s recovery. Sounds like a great way to crowdsource the outing of tax cheats, right? The IRS, however, doesn’t seem to be a fan of its own office. The agency seems to treat whistleblowers, referred to internally by the unflattering term “informants,” as the enemy rather than a crime-solving partner.

According to the IRS report, Fiscal Year 2013 Report to Congress on the Use of Section 7623, only nine whistleblowers have received a share of the recovered taxes since the award program began in 2006. The “number of payments made under the [whistleblower award] program [was] not projected to grow dramatically in FY 2014,” and POGO was informed that the number of whistleblower awards now stands between 10 and 15. According to the IRS, there are more than 22,300 claims open (sometime there are multiple claims for a single whistleblower submission), of which 11,500 involve the post-2006 enhanced whistleblower award program. Those open claims truly highlight the lack of progress in closing out whistleblower cases.

The problem is that it can take the Whistleblower Office staff of approximately 40 employees “five to seven years to analyze, investigate and/or audit, and collect proceeds.” As the IRS plods through the investigation and collection process, whistleblowers are often ignored. The partnership is so broken that whistleblowers are starting to realize that stepping forward to make claims may not be worth the risk to them personally and professionally. Congress is concerned, too.

To improve relations, the IRS Whistleblower Office announced that at least once a year it will send letters to whistleblowers to notify them that the IRS Whistleblower Office still has their claim under consideration. Sounds fair, but most cases are open for years. The draft letter on the IRS’s website says the claims were “submitted more than three years ago,” are “pending” and still being evaluated, and that the Whistleblower Office “cannot share any additional information regarding your open claims.” In closing, the letter thanks the source “for your continued interest in the administration of the internal revenue laws.”

The Project On Government Oversight was notified of the letter by a source familiar with the office, whose reaction was:

That they would think for a micro second that this proposal would either please claimants or improve the claims process demonstrates just how removed they are from reality.

The problem seems very attitudinal, as if the Whistleblower Office is offended that it receives assistance from company insiders. Former IRS Chief Counsel Donald Korb went so far as to state that “[t]he IRS didn’t ask for these rules; they were forced on it by Congress.” I think the same can be said about the Department of Justice and its lethargic job in investigating and intervening in qui tam cases filed on behalf of the government by whistleblowers. That said, the IRS problem appears to be much worse. The IRS claims that taxpayer secrecy laws slow down the process. Others disagree, and some in Congress worry that the IRS is “discouraging whistleblowers from coming forward.”

IRS insiders claim that the IRS Whistleblower Office is a broken office and that factors such as cozy relationships between the IRS and corporations lead to cases not being investigated.

POGO has been aware of these issues and has asked the IRS to restrict the involvement of a senior IRS official, William Wilkins, who used to lobby the IRS and other agencies on behalf of the Swiss Bankers Association. Swiss banks have been at the center of tax evasion scandals and, therefore, they have a major stake in the work of the Whistleblower Office.

The office’s failure to operate more effectively isn’t a new problem. In fact, the IRS Inspector General published reports criticizing the office in 2009 and 2012, and the Government Accountability Office (GAO) exposed weaknesses in 2011, including the slow processing of claims. GAO recently recommended that the Department of Justice provide government (FBI) whistleblowers with more information about the handling of their retaliation claims. I agree and think that more could be done to assist IRS whistleblowers, too.

It doesn’t seem like anything has been resolved since the father of the IRS Whistleblower Office, Sen. Charles Grassley (R-Iowa) raised concerns in 2010 and 2012 and he has stated that the office is merely “limping along.” Senators Grassley and Ron Wyden (D-Ore.) wrote last year that they have:

been puzzled why the IRS often snubs whistleblowers who may provide invaluable evidence of wrongdoing, especially when the costs of inaction are only growing. Taxpayers who underpay what is legally owed are shifting the burden to others. And despite efforts by the IRS to narrow the tax gap, noncompliance looms large.

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Despite their collective record of success, we routinely hear from whistleblowers who complain about how the IRS handles their cases. They are strung along for years without any indication that the IRS is even looking into their claims.

POGO has supported the IRS Whistleblower Office and even urged it to incentivize people to step forward. We also supported Bradley Birkenfeld, one of the few whistleblowers who has received a financial reward. The former UBS banker blew the whistle on the Swiss bank’s far-reaching efforts to help Americans hide money from the IRS. Mr. Birkenfeld received $104 million for his assistance in exposing the scheme despite being prosecuted by the DOJ. That amount of money might seem like a lottery jackpot, but tax evasion involves big money: recoveries exceeded $367 million in FY 2013 alone (Table 6).

If Congress is worried about going after individuals, it should also improve the IRS process and improve relationships with whistleblowers. Many of the whistleblowers who come to the IRS are very smart and provide mountains of evidence, but they are treated poorly and are often ignored as cases languish inside the resentful IRS Whistleblower Office.