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. 

IRS awards UBS whistleblower $104 million

The IRS awarded $104 million to UBS whistleblower Bradley Birkenfeld Tuesday.  In 2007 Birkenfeld played a key role in alerting the U.S. government to the ways the Swiss bank, UBS, was encouraging clients to evade taxes in the U.S.  Following Birkenfeld’s tip, UBS agreed to a $780 million settlement with the Department of Justice, and turned over information on some 5,000 Swiss accounts to the IRS. 

Largely as a result of Birkenfeld’s cooperation and the subsequent investigation of several Swiss banks, the IRS launched its first Offshore Voluntary Disclosure Program in 2009.  Over 33,000 Americans have since participated in the program and the IRS has recouped approximately $5 billion in back taxes and penalties.   

Such a substantial whistleblower reward recognizes the value of Birkenfeld’s contributions to the IRS investigation.  ErikaKelton, a whistleblower attorney at Phillips & Cohen LLP, noted the significance of the reward in a Bloomberg article.  Kelton said, “The government acknowledged that without him or someone in his position, offshore evasion at UBS would still likely be going on.” 

Kelton also noted that although the record of IRS whistleblower program has been discouraging for the past few years, Birkenfeld’s reward bodes well for the momentum of the program.  “This is a powerful statement that things are moving and whistleblowers are welcome and they’re open for business,” said Kelton. 

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/.

European Commission to beef up regulation on tax evasion

The European Taxation and Customs Union is expanding efforts to crack down on tax evasion and fraud. The plan includes measures to assess the efficacy of regulatory bodies already in place, increase communication within the monitory network, Eurofisc, and implement standardized minimum penalties for tax related infractions, according to a recent memo released by the Commission.

The EU Taxation and Customs Union memo also noted that efforts should encourage tax compliance, though offered no specific strategy to do so.
  
EU member countries would benefit from adopting whistleblower programs that reward and protect whistleblowers, similar to those in the U.S.  The U.S. has four major whistleblower programs: one handled primarily by the Justice Department, and more recent ones with the Internal Revenue Service, the Securities and Exchange Commission and the Commodity Futures Trading Commission. These programs have been critical tools to fight tax fraud in the United States.    

IRS unable to collect payments from Medicaid providers who owe taxes

Despite owing approximately $791 million in unpaid federal taxes, about 7,000 health care providers in New York, Florida and Texas have collected millions of dollars in Medicaid reimbursements in the past two years, according to a report released this morning by the U.S. Government Accountability Office. Because Medicaid reimbursements are channeled through state programs, they are not considered federal money, and therefore cannot be levied (seized or stopped) by the IRS in order to off-set taxes owed to the federal government.

Under the American Recovery and Reinvestment Act, health care providers may apply for Medicaid funding whether or not they owe federal taxes. Critics recommend implementing stricter requirements for obtaining Medicaid funding from the government, while others claim that such restrictions might discourage upstanding providers from seeking participation in the program, according to the Washington Post.

The GAO report recommended the IRS review its policies for collecting taxes and find more efficient ways to obtain owed funds from Medicaid providers.

One of the most successful ways the government recovers money lost to fraud is through whistleblowers, who have helped the U.S. reclaim about $30 billion. However, the IRS has yet to take full advantage of its whistleblower program, according to attorney Erika Kelton, and would do well to explore the potential of that program.