A course correction for IRS whistleblower program

The Internal Revenue Service has a golden opportunity to boost its efficiency discovering federal income tax fraud and to correct deficiencies in its fledgling Whistleblower Program.

Seven years ago, when the IRS opened its Whistleblower Office, whistleblower advocates welcomed the initiative as another arrow in the government’s quiver to pursue tax cheats and fraudsters. Since 2006, however, the IRS has neither investigated nor prosecuted thousands of whistleblower claims involving billions of dollars in unpaid taxes by corporations and high net worth individuals. The IRS paid less than 10 rewards and thousands of claims remain languishing in a system hamstrung by obstructive administrative rules and narrowly tailored legal opinions. The IRS Chief Counsel appears to be hostile toward whistleblowers.

The IRS can do a much better job.

By contrast, during 2012, the Securities and Exchange Commission Whistleblower Office “return[ed] over 3,050 [whistleblower] calls,…identified and tracked whistleblower tips [leading] to enforcement actions,” SEC Chairwoman Elisse B. Walter told the Senate Banking Committee last month. “The high quality information…from whistleblowers has…allowed our investigative staff to work more efficiently and permitted us to better utilize agency resources,” Chairwoman Walter pointed out. “A whistleblower who helped…stop a multi-million dollar fraud received an award of 30 percent of the amount collected…for submit[ing] a tip concerning the fraud and…provid[ing] documents…that allowed the…investigation to move at an accelerated pace and ultimately led to the filing…in federal court to prevent the defendants from ensnaring additional victims and further dissipating investor funds,” she told senators.

In New York state, a whistleblower enabled Attorney General Eric T. Schneiderman to win a big taxpayer victory. High society tailor Mohanbhai "Mohan" Ramchandani pleaded guilty to evading sales and income taxes and will pay $5.5M to settle false claims initiated by a whistleblower under New York State’s False Claims Act. “Between September 2002 and June 2012, although Mohan's Custom Tailors made at least $28,046,064 million in taxable retail sales, Mohan fraudulently reported only $5,674,738 in retail sales on the tax returns,” Schneiderman announced.

Schneiderman deserves a lot of credit. As State Senator, he authored amendments to New York’s False Claims Act enabling whistleblowers to come forward more effectively about tax law violations.

In crafting new whistleblower rules, the Internal Revenue Service would wisely follow the SEC’s and New York Attorney General Schneiderman’s examples by:

- prioritizing and investigating whistleblower claims promptly

- establishing meaningful and open communications among IRS attorneys, senior staff, whistleblowers and their counsel, and
 
- basing rewards on the merits of tax fraud claims.

When large corporations engage in federal income tax fraud, executives and certified public accountants in upper and middle management with precise, detailed knowledge of firms’ inner workings constitute the IRS’s critical life line to discovering and ultimately recovering massive tax frauds. And, when these ethical, well-educated professionals come forward, they become whistleblowers.

By welcoming and working with tax fraud whistleblowers, the IRS can efficiently and effectively assess tax fraud, evaluate investigations, and, in the end, bring prosecutions to recover fraudulently hidden tax revenues.

Unfortunately, the IRS’s proposed rules seem more intent on protecting the vast IRS bureaucracy from much, if any, accountability as to how well or poorly it is enforcing and implementing whistleblower legislation, devising hair-splitting distinctions limiting rewards, and insulating IRS staff and attorneys from effective contact with whistleblowers and their counsel. Comments closed last month.

If the IRS goes ahead and implements the proposed rules, the outcomes are clear: bureaucratic inertia, administrative redundancy, depleted public resources.

Instead, the IRS should leverage new whistleblower rules to show it can work  ‘smarter,’ a key goal of President Obama’s. “It is not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth,” the president said in his State of the Union address.

Effective rules would win bipartisan accolades. Sen. Charles E. Grassley (R-Iowa), champion of the whistleblower legislation, insists the IRS shape up every chance he gets.

Enforcement matters. Congress should get to the bottom of why the IRS finds it so difficult to implement and enforce whistleblower laws. A Senate hearing on IRS whistleblower foot dragging would go a long way toward addressing bipartisan concerns over tepid enforcement. The IRS could use the hearing to correct course with an efficient, effective whistleblower system that benefits all taxpayers by responding to and investigating tax fraud claims.

Young is founding partner at Young Law Group, P.C., a nationally renowned law firm specializing in SEC, IRS, CFTC, and False Claims Act/Qui Tam whistleblower cases in the pharmaceutical industry, healthcare, tax, finance, and government contracting.

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