Grassley urges IRS commissioner-nominee to change anti-whistleblower culture

Sen. Charles Grassley (R-IA), a long-time champion of whistleblowers and the creator of the IRS whistleblower program, has sent a letter to IRS commissioner nominee, John Koskinen, expressing hope that he will change the anti-whistleblower culture at the IRS.

Grassley is concerned that the IRS whistleblower program is being underutilized and harmed due to the dearth of whistleblower rewards and IRS agents’ reluctance to “fully utilize the whistleblower’s knowledge and expertise to identify and expose tax cheats.”

Whistleblowers often put their careers in jeopardy by coming forward with valuable information. Those who have filed whistleblower claims or are considering filing whistleblower claims have been discouraged by the lack of response from the IRS.

Grassley recommends changes to the IRS whistleblower program: Assurances that whistleblowers will be valued and treated fairly, regular use of the awards programs, encouraging rather than discouraging whistleblowers to come forward, and showing whistleblowers that it is worth risking their careers to report those who violate or skirt tax laws and regulations.

IRS needs to do more to make tax whistleblower program successful

Statistics in the Internal Revenue Service’s annual report to Congress on the IRS whistleblower program for fiscal year 2012 reflect whistleblowers’ frustration with the IRS.

In FY 2012, only 332 whistleblowers submitted information about tax violations exceeding $2 million – the threshold for the reward program. That is down from a high of 472 in FY 2009. As Sen. Chuck Grassley(R-IA) noted, “. . . the delay in awards and the way the IRS treats whistleblowers might be contributing to the leveling off of whistleblower cases.”

Only five claims have been paid under the tax whistleblower program Congress created in 2006, the report said. The program promises whistleblowers rewards of 15 percent to 25 percent of what the IRS collects based on their information when recoveries exceed $2 million. A Phillips & Cohen client received one of the few tax whistleblower rewards made in FY2012 under the previous IRS whistleblower  program, which limited rewards to a maximum of $2 million.

By creating obstacles to whistleblower rewards and failing to embrace the whistleblower program, the IRS is missing out on an opportunity to narrow the $450 billion gap between what is owed in taxes every year, and what is actually paid.

It is ultimately the taxpayers and the federal treasury that will pay for this failure to foster a successful whistleblower program.  If the IRS would do more to give whistleblowers the confidence to come forward, rather than make it increasingly difficult to receive rewards or even information about their claims, then the IRS would make substantial recoveries.

Grassley calls for changes in proposed IRS whistleblower regs

Sen. Chuck Grassley (R-IA) is disappointed with the proposed regulations for the IRS whistleblower program, he told the Treasury Department and the Internal Revenue Service in a recent letter. He believes -- as do we -- that the new regulations fail to realize the full potential for recoveries under the whistleblower program.

Grassley said the  IRS whistleblower program should be designed to encourage whistleblowers to come forward and to mobilize their own resources, much like the successful False Claims Act.

Instead the proposed IRS regulations, if adopted, are likely to discourage whistleblowers. They narrow the definition of the kinds of recoveries that are eligible for reward, exclude certain kinds of recoveries altogether and  broadly define the limitation for “planners and initiators” of the fraud. The latter, Grassley fears, could be used to “arbitrarily reduce awards to whistleblowers.” The law is intended to reward whistleblowers; limiting the scope of eligible recoveries is at odds with that goal.

The proposed regulations do little to address one of the chief sources of complaints about the program: the lack of communication between the IRS and whistleblowers. Grassley also said “the IRS should establish regulations for utilizing its contract authority” so that the IRS can use whistleblowers and their counsels and resources to assist in the recovery of funds, much like the way the Justice Department does in False Claims Act cases.

In the early years of the False Claims Act, there were similar problems. But those were overcome, and it is now the federal government’s most successful anti-fraud program The IRS whistleblower program could follow a similar path if the agencies draw on the experience and advice of people like Grassley when they draft the final regulations. 

Former IRS employee outs whistleblower

The arrest last week of former IRS employee Dennis Lerner stands out for a particular reason to Taxfraudblog.com: The government said he had revealed the identity of an IRS whistleblower.

Such a breach of whistleblower confidentiality by a government employee is unprecedented.  As Special Agent Robert O’Malley of the Office of the Treasury Inspector General for Tax Administration (TIGTA) said, “Any allegation of corruption, self-dealing, or inappropriate disclosure of confidential information is a potential violation of the public trust and could erode the public’s confidence in the American system of tax administration.”

Lerner was charged with breaching conflict of interest laws and illegally divulging privileged IRS information. 

He worked as an international examiner for the New York IRS office from 2010 to 2011, during which time he headed the audit of an international bank that was launched on the basis of whistleblower information regarding nearly $1 billion in unreported income.  Lerner left the IRS in the fall of 2011 and went to work for the same bank he had audited while at the IRS, which the New York Times reported was German Commerzbank.

While working for the bank, Lerner continued to unethically seek out information regarding the IRS investigation, and revealed the identity of the whistleblower to his new employer, violating IRS whistleblower confidentiality, according to the government.  

For more information on whistleblower protection and IRS whistleblower rules, see here. 

Despite landmark financial penalties in the recent $3 billion GlaxoSmithKline settlement, some maintain that fines are not enough to discourage unethical behavior and malfeasance in corporate conduct. Rather, responsibility must be placed upon individuals in order to effect long-term change.

A recent New York Times article discusses individual criminal prosecution and barring pharmaceutical executives from taking part in Medicaid and Medicare programs as more effective means of reforming the industry. The article states that

"...to institute real change, executives must be prosecuted criminally or barred from participating in the Medicare and Medicaid programs, an action known as 'exclusion.'

This has occurred in only a handful of cases, and rarely in a case involving a major pharmaceutical company. In 2011, four executives of the medical device company Synthes were sentenced to less than a year in prison for conducting clinical trials that were not authorized by the Food and Drug Administration."

The GlaxoSmithKline settlement involves a “corporate integrity agreement,” which places emphasis on the role of individual company leaders in illegal activity and punishes their involvement. Part of this agreement is an “executive financial recoupment” program that calls for the withdrawal of bonuses and other financial incentives when executive and/or their employees are found guilty of participating in unethical or illegal behavior.

Phillips & Cohen attorney Erika Kelton, who represented two key whistleblowers in the Glaxo case, approves of this agreement as a step in the right direction. Kelton says that this “creates pressure and it creates an element of responsibility."

For more information on the role of whistleblowers in the GlaxoSmithKline settlement, please visit http://www.glaxowhistleblowers.com/.

G-20 countries should consider whistleblowers to help stop tax evasion

Many countries are trying to crack down on tax evasion as a way to increase revenues. But they are overlooking a powerful weapon: whistleblowers.

Tax evasion and compliance is on the agenda of the group of 20 countries this week. Only the U.S. has a program to reward whistleblowers for reporting tax evasion or other tax law violations. The Internal Revenue Service will reward whistleblowers 15 percent to 30 percent of funds recovered as a result of the whistleblower's information and help if the amount exceeds $2 million, including tax, penalties and interest.

The U.K. took a major step this week to encourage whistleblowers with information about financial crime. The Serious Fraud Office set up a whistleblower hotline and said it protect the whistleblower's identity.

IRS audits of major corporations decrease

The number of Internal Revenue Service audits of large corporations has decreased, according to an analysis by the Transactional Records Access Clearinghouse—which shows how important whistleblowers can be for uncovering tax fraud and other tax violations.

The research group, based at Syracuse University, says, “Among corporations reporting assets of $250 million or more, the IRS since FY 2005 has cut back by a third (33 percent) the hours it spends examining their books. IRS has also sharply reduced the number of large corporate returns it examines — these audits have fallen by 22 percent since 2005.”

The IRS disputes TRAC’s conclusions, Reuters reports. Steven Miller, deputy commissioner of services and enforcement, said the IRS audits about half of the corporations with assets of between $5 and $20 billion and all corporations with assets greater than $20 billion.

IRS Issues Dirty Dozen List of Tax Scams for 2010

The Internal Revenue Service (IRS) has issued its “Dirty Dozen” tax scams list for 2010, which includes hiding income offshore and disguising corporate ownership—schemes that whistleblowers often expose.

“IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from over 14,700 voluntary disclosures received last year,” the IRS said in a statement.

The IRS said it is concerned about disguised corporate ownership because “such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing.”

IRS investigates Rabobank, Newell transactions

The Internal Revenue Service is investigating a whistleblower's allegations that Rabobank Group engaged in transactions with Newell Rubbermaid Inc. and other U.S. companies that were solely designed for the U.S companies to avoid taxes, the Wall Street Journal reported.

The Journal said Newell sold accounts receivable at a discount beginning in 2001 to a newly created overseas company funded by Rabobank, a Dutch bank. Newell took a tax deduction for the discount.

"As long as Newell didn't control the overseas company, any cash left over after paying Rabobank wasn't taxed in the U.S. Newell says Rabobank controlled the entity," according to the Journal.

A former Rabobank executive reported the tax fraud to the IRS last year and may be eligible for a reward under the new tax fraud whistleblower law if the IRS recovers any funds.

Offshore-account holders struggle over tough choices

Facing an intensified government crackdown on offshore bank accounts, people who use those accounts to illegally hide their income are struggling over whether and how to turn themselves in, reports The Wall Street Journal.

Lawyers advising tax dodgers are saying their clients are struggling to decide among several alternatives. They can confess and plead for mercy. They can quietly file amended tax returns, pay up, make other required disclosures and hope overworked government prosecutors won't follow up. Or they could choose to do nothing and pray their names won't turn up.

The recently adopted law that increases the reward for whistleblowers who provide specific information to the Internal Revenue Service about tax avoidance schemes is encouraging whistleblowers to come forward.