The Battles Necessary for the IRS Whistleblower Office to Succeed

Once the IRS stops fighting tax whistleblowers and starts to embrace them, the government will collect tens of billions in new tax revenue.  This will be a welcome development in an era of trillion-dollar budget deficits and widespread concern that the system is stacked in favor of powerful companies and individuals who no longer need to fear audits.  Tax whistleblowers and their counsel will be an essential part of this constructive change, and they will be compensated with aproximatley 22% of the amount collected. But before that can happen, tax whistleblowers need to win a few battles including: 

• Whistleblowers must be allowed to support audits in real-time
• Whistleblowers must be paid sooner – ten years is too long
• Whistleblowers claims must not be aggregated, and partial payments must be made
• “Constructive denial” and other technical issues must be resolved.  
• The IRS Chief Counsel’s Office must stop treating whistleblowers as the enemy
• The IRS must provide meaningful communication to whistleblowers on pending claims

The IRS must allow whistleblowers to support audits in real-time.  It is perfectly understandable that audit teams don’t believe they need whistleblowers to do their jobs.  IRS auditors are competent professionals, and whistleblowers can seem like opportunistic stoolies.  A way must be found to overcome the auditors’ natural tendency to self-reliance.  Whistleblowers already know what IRS auditors only learn with massive effort.  Whistleblowers know what the taxpayer did and why, whereas the auditor is given a carefully prepared, and deceptive, version of the truth.  The whistleblower lived the unvarnished truth.   The whistleblower will know instantly whether a taxpayer’s answer to an IDR (information document request) is honest.  The auditor can only guess.  Permitting whistleblowers to support audits will require the IRS to overcome the IRC 6103 problem.  IRC 6103 prohibits the IRS from giving tax return information to whistleblowers.  The solution is simple.  IRC 6103(n) allows the IRS to share this information if an appropriate agreement is put in place to protect the taxpayer’s information.  Unfortunately, 6103(n) has never been used in a civil audit. It should be used regularly.  The best way to make this change is communication, education and most of all management.  If the IRS were to encourage the use of 6103(n) agreement and then measure how frequently audit teams use the agreements, the audit teams’ behavior would change.  Once field audit teams are measured on whether they use this powerful tool, they will start to use it.       

The IRS needs to pay whistleblowers sooner.  According to the 2018 IRS annual report, the average time to pay a claim was 9+ years. In 2017 it was 8+ years.  In 2016, it was 7+ years.  The trend is obvious.  Additionally, there are 15,000 pending claims; almost 5,000 from 2010 alone. Just 3% of claims result in payment.  These are the statistics of a program that isn’t working.  No rational would-be whistleblower is going to jeopardize his career for the unlikely chance of a payment in 10 years.  Some delays are unavoidable for example the three-year statute of limitations and matters that go to appeal or litigation. Other delays are arbitrary.  For example, in 2010, the IRS decided to wait an additional 2 years before paying - just to be safe.  See https://www.dhirubhai.net/pulse/irs-whistleblower-program-revisit-2-year-waiting-period-pliske/  The IRS’s attitude should be “let’s get whistleblowers paid so the program will be successful.”  Each year, there is well over $100B in uncollected taxes; the last estimate of the “tax gap” was $450B. Yet the IRS Whistleblower Office managed to collect only $1B last year.  That’s a great start, but it’s a small percentage.  Supporting whistleblowers rather than fighting them is the way to bridge the gap.    

Whistleblowers claims must not be aggregated into one claim, and partial payments must be made The IRS has made a series of seemingly small policy decisions that frustrate and delay payments to whistleblowers.  For example, the whistleblower office aggregates all of a whistleblower’s claims against a taxpayer into one claim then states that every issue on every claim must be resolved before any payment can be made.  This is obviously against the interests of whistleblowers, and it is one of many reasons “real whistleblowers” have abandoned the whistleblower program.  The IRS should instead start making partial payments for the issues that are partially resolved.  If a taxpayer pays $90M of a $100M deficiency, the whistleblower should be rewarded based on the $90.  Waiting for the extra $10 is contrary to the government’s interest – which is to make the whistleblower program successful.  

“Constructive denial” and other technical issues need to be resolved.  With the average time to payment approaching 10 years, many claims have in reality been constructively denied.  Whistleblowers cannot challenge the IRS's decision to not pay on a claim in tax court until the IRS makes a final determination and mails a denial letter.   The IRS can instead tell the whistleblower that “your claim is being evaluated" – literally forever.  For mere mortals with children and mortgages, a payment that is delayed ten years may as well be delayed forever.    People are dying waiting to be paid - 23 people last year based on the Whistleblower Office annual report.  (Watch and see if the IRS stops disclosing this statistic next year…)  Justice delayed is justice denied.  The Tax Court or Treasury Department needs to address the constructive denial problem and others like it.

The IRS Chief Counsel’s Office needs to stop treating whistleblowers as the enemy  Senator Grassley said it well: "I again find myself frustrated with an IRS Chief Counsel office that seems to wake up every day seeking ways to undermine the whistleblower program both in the courts and the awards." "I am especially concerned that Chief Counsel is throwing every argument it can think of against whistleblowers in tax court. It appears at times that the Chief Counsel's office thinks its job is to come up with hyper technical arguments and seek to deny awards to whistleblowers who have risked their lives to uncover big time tax cheats." This practice is obviously inconsistent with a successful whistleblower program.

The IRS needs to communicate with whistleblowers about their pending claims  The new Taxpayer First Act increases the IRS’s obligation to communicate with whistleblowers.  The question is whether the IRS will interpret this as a mandate to actually communicate with whistleblowers or whether they will find ways to communicate as little as possible. 

Change is not easy. When the False Claims Act was first enacted, Department of Justice lawyers fought whistleblowers harder than they fought dishonest corporations.  Senator Grassley’s comment above about the IRS Chief Counsel office could have easily applied to the DOJ back then.  It is human nature to believe you can do your job without the interference of others.  The DOJ believed they were doing a great job without whistleblowers’ “help.”  Over time, the results proved the DOJ could be much more effective with whistleblower help.  The same process needs to happen, and will happen, at the IRS.