Kansas City Whistleblower Lawyer Blog

On average, there is a $450 billion annual gap between the taxes that are owed to the federal government and the taxes that are actually paid. In theory, those who help the government find those who cheat on taxes and contribute to the shortfall should be the heroes that the federal government wants to reward. After all, the people who underreport income or hide assets can cost the government millions of dollars. At first glance it seems that Congress wanted to create incentives to report potential income tax fraud. Back in December 2006, Congress passed legislation that increased the reward for reporting tax fraud to the heights typically reserved for Qui Tam whistleblowers. During the last five years, potentially $500 million dollars in unreported or falsely deducted corporate and personal income tax could have been recovered thanks to this legislation.

Sadly, only one reward has been given under the new law since 2006. Four and a half million dollars was awarded to a corporate auditor who tried to convince his employer to pay the $20 million in taxes they rightfully owed.

The problem is not a shortage of claims nor is it the quality of the information. The problem appears to come from the IRS itself. In a 2010 interview, former IRS chief Donald Korb had this to say in Tax Notes:

The new whistle-blower provisions Congress enacted a couple of years ago have the potential to be a real disaster for the tax system. I believe that it is unseemly in this country to encourage people to turn in their neighbors and employers to the IRS, as contemplated by this particular program. The IRS didn't ask for these rules; they were forced on it by the Congress.

Such a statement speaks to a great institutional resistance to change, especially change that is, in the words of Korb, "forced on it by Congress."

However, due to decades of case law about "agency deference," the IRS has a great deal of leeway in interpreting just how to implement these new rules forced on it by Congress. Every opportunity that the IRS had to interpret these rules, it chose the path of most resistance. Some examples of problematic guidelines include:

• Narrowed the sources of recovery that are the basis of whistle-blower awards.


• Imposed unprecedented withholding requirements on whistle-blower awards.


• Created roadblocks to IRS interactions with whistle-blowers, such as the 2008 "one-bite" rule (now relaxed) that limited receipt of information to an initial meeting.


• Defined "planners and initiators" of the tax scheme - who by law receive only a reduced award (if any) - in a manner that could block employees whose involvement is far removed from the true architects of a scheme from receiving a reward.

Lawyers who work with such whistle-blower claims frequently complain of the "black hole" that seems to consume them before a resolution can be reached. Recently a whistleblower filed suit against the IRS to not only pay him, but also disclose how the information he provided contributed to finding and collecting from those he reported as committing tax fraud.

That a whistle-blower should have to sue an agency to learn how his information helped uncover fraud is the height of absurdity. It's not as if all federal agencies are as recalcitrant - the SEC has been quite amenable to whistleblower information. They understand that citizens who help uncover fraud are allies and not antagonists. There's no need for the IRS to get defensive about citizens "turning in their neighbors" or for attorneys representing whistle-blowers to become demoralized at the complete lack of progress due to some power struggle between Congress and the IRS.

Source:
IRS Keeps Ignoring Whistleblowers, by Richard Lavinthal, published at WashingtonExaminer.com, April 12, 2012.

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Almost 2 years before Enron declared bankruptcy and created one of the largest financial meltdowns in history, a whistleblower tipped off the Internal Revenue Service (IRS) that the company was using illegal tax shelters to generate income.

After nearly 10 years, the IRS finally paid the whistleblower a $1.1 million reward. Ironically, if the IRS had pursued the information in 1999, when the whistleblower first came forward, the government may have realized the depth of Enron's problems and may have been able to avoid the financial disaster that ruined the portfolios of Enron investors.

The tax fraud reported by the whistleblower allowed Enron to evade taxes in amounts of more than $600 million and to report almost $300 million in false profits. The whistleblower estimates the numerous schemes he knew of and reported about involved over 10 billion taxable dollars.

The Enron whistleblower received a 15% reward for the money he helped the IRS to recover. However, the rates have increased since 1999. In 2006, the law was changed to allow whistleblowers to receive between 15% and 30% in cases involving more than $2 million.

In this case, the whistleblower received a significantly diminished amount because Enron declared bankruptcy in 2001, making the total amount the IRS could recover much smaller than the actual amount of tax fraud that occurred.

Source:
IRS pays Enron whistleblower $1.1 million, The Washington Post with Bloomberg Business, March 15, 2011

The IRS modified its rules last year which seemingly made it even more difficult for whistleblowers to collect rewards on reports of uncollected taxes to the IRS. Whistleblowers and their attorneys have tried, unsuccessfully, for years to ensure that significant rewards are paid to IRS whistleblowers who help the government collect unpaid taxes.

Thankfully, on January 14, 2011, the IRS reversed its previous position and made it more likely that whistleblowers could collect rewards when reporting tax evasion to the IRS.

Senator Charles Grassley (R-Iowa) has long been a champion of exposing government waste and recently sponsored legislation that helped whistleblowers to have an incentive to identify tax fraud. Grassley noted that the IRS was undermining its own procedures by not allowing whistleblowers to collect on certain types of tax fraud.

Through Senator Grassley's work, along with private counsel for a number of whistleblowers, the IRS has modified its policy and now gives rewards for a much more broad list of tax fraud schemes.

As an example, the IRS received tips on 5,678 cases in 2009 and only paid rewards on 110 of them. This low reward rate has created a decline in the number of whistleblowers willing to come forward. With the new policies in place, Senator Grassley and officials at the IRS feel confident that more potential whistleblowers will come forward.

Source:
IRS Reverses Position, Which Could Benefit Whistleblowers, Washington Post, January 15, 2011