IRS Whistleblower Office Faces Test With Trump Administration

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By Matthew Beddingfield and Colleen Murphy

Whistle-blower advocates are skeptical that the Trump administration will overhaul the IRS office charged with exposing tax fraud and evasion, despite new legislative action pushing broader reforms.

Although the IRS Whistleblower Office handed out $61 million in awards during fiscal year 2016 to whistle-blowers who helped the government halt tax-evasion schemes, critics told Bloomberg BNA that the office isn’t doing enough to ease taxpayers’ minds when they come forward with information.

As a means of improving the Whistleblower Office, Sen. Charles E. Grassley (R-Iowa) and Senate Finance Committee ranking member Ron Wyden (D-Ore.) introduced legislation (S. 762) March 29 to address the agency’s communication with tax fraud whistle-blowers.

The IRS Whistleblower Improvements Act of 2017 would provide legal protections to whistle-blowers from employers retaliating against them for disclosing tax abuses.

While former President Barack Obama included protections for whistle-blowers in his fiscal year 2017 revenue proposals, citing a “lack of protection from retaliation” for whistle-blowers filing claims under tax code Section 7623, the new administration has a chance to set its own agenda, including support for this new bill. The Obama administration had recommended retaliation protection for whistle-blowers and sanctions for whistle-blowers who improperly disclose taxpayer information in their claims—both supported by the IRS Whistleblower Office.

The IRS doesn’t comment on individual taxpayers or pending legislation or proposals.

History of Whistle-Blowing

Whistle-blower rights were first addressed by Congress in 1978, with the passage of the Civil Service Reform Act of 1978, which offered protections for federal employees who disclosed instances of agency fraud.

The Whistleblower Protection Act of 1989 followed, which expanded protections for federal employees who reported abuse in the government.

Dean Zerbe, a partner at Zerbe, Fingeret, Frank and Jadav, helped write tax code amendments as part of the Tax Relief and Health Care Act of 2006, which created the IRS Whistleblower Office and outlined specifications for a whistle-blower to receive an award from the agency. According to Zerbe, the IRS Whistleblower Office in recent years has been inconsistent in its awards and its handling of whistle-blower claims.

“This is a chance for the new administration to hit a home run,” Zerbe said.

Office Concerns

Grassley wrote the tax code provisions with Zerbe, when Zerbe was on the senator’s staff, that outlined the incentives for whistle-blowers to come forward to the IRS, but is still concerned with the office’s handling of claims.

“The IRS still is not as fast as it could be in considering whistle-blower information,” Grassley said in a January news release, signaling his support for the nomination of Steven Mnuchin for Treasury Secretary. Noting Mnuchin’s support for whistle-blowing, Grassley said that a significant challenge for the IRS Whistleblower Office has been misinterpretation of the whistle-blower statute, which is supposed to be read in favor of the whistle-blower, not the agency.

The office distributed 418 awards in fiscal year 2016, according to its 2016 annual report. On average, each award took more than seven years to process, the IRS said.

“Typically the IRS does not determine awards for at least five to seven years after the whistleblower has filed a claim because a payment cannot be made until there is a final determination of tax,” it said.

According to the report, the office collected $368.9 million as a result of whistle-blower claims in FY 2016. During that same period, the office received more than 13,000 new claims.

“There are too many cooks in the kitchen, meaning they’ve misread the law stating they need to coordinate with a number of other IRS officers to make a determination,” Zerbe said, regarding a whistle-blower who submitted information that was successfully used to recover hidden income. “They are thinking they have to get the whole gang together to write a check? No, that’s not the case.”

Proposed Changes

Grassley, who in 2015 helped launch the Whistleblower Protection Caucus, said in a news release that his March 29 bill, which he introduced with Wyden, would empower whistle-blowers and help recover high-dollar tax fraud, adding to the more than $3 billion already recovered by the office.

“Whistleblowers are a crucial line of defense against waste, fraud and abuse,” Wyden said in the release. “Empowering these whistleblowers is key to rooting out bad actors who are breaking the law by dodging their taxes.”

The changes—increasing communication with whistle-blowers while protecting taxpayer confidentiality and protecting whistle-blowers from retaliation—were included in a taxpayer protection bill (S. 3156) approved by the Finance Committee in the last Congress.

To increase communications, the bill would allow the IRS to exchange information with whistle-blowers where doing so would be helpful in an investigation, and require the agency to provide status updates to whistle-blowers at significant points in the review process, according to the release.

Advocates Request Improvements

Grassley isn’t alone in seeking to improve the agency’s whistle-blower efforts. Other advocates say the IRS Whistleblower Office needs to improve, especially in light of the Trump administration’s interactions with other government agencies since the president took office.

Kathleen Clark, a professor at Washington University School of Law in St. Louis who specializes in whistle-blower laws, said that agencies like the IRS haven’t yet demonstrated a commitment to whistle-blowers.

“In contrast to other agencies like the SEC or even the Department of Justice under the False Claims Act, both have shown more of a public commitment to whistle-blowers, and have publicized to a high degree that they have whistle-blower awards,” Clark said.

A Cautionary Tale

Zerbe currently represents Bradley Birkenfeld, a former UBS AG banker who in September 2012 received the largest award in IRS Whistleblower Office history for exposing how the Swiss lender helped Americans evade taxes.

Birkenfeld, who received $104 million for his testimony to the U.S. government, didn’t come out of his whistle-blowing experience unscathed, however. In 2008, Birkenfeld pleaded guilty to a single count of conspiracy to defraud the U.S. and was sentenced in 2009 to 40 months in prison. He spent 31 months in prison.

According to the DOJ, Birkenfeld didn’t have whistle-blower status when he came forward with his information.

“Why aren’t we embracing whistle-blowers? Making the law stronger?” Birkenfeld said in an interview with Bloomberg BNA. “Because people who are breaking the law don’t want this stuff to happen and that’s a problem.”

Better Communication

Zerbe said the IRS Whistleblower Office needs to be better at communicating with whistle-blowers about the status of their awards, and that the office has missed opportunities with whistle-blowers from Fortune 500 companies because of its lack of initiative.

In terms of solutions, Zerbe said that Grassley’s new bill would help improve the program, particularly in opening communications between the IRS and whistle-blowers.

“It’s one thing to wait, but to wait in the dark is very difficult,” Zerbe said. “I don’t think the IRS is thrilled they can’t communicate as much as they’d like with the whistle-blowers.”

Zerbe added that individuals like Birkenfeld could offer a unique perspective to the IRS Whistleblower Office. “You really just want to chain him to a desk at the IRS and put him to work.”

The energy on Capitol Hill around a tax overhaul brings the opportunity to fix a lack of communication and ability to process whistle-blower claims that currently plague agencies like the IRS, Zerbe said.

Clark said the rhetoric from Trump’s administration “is inconsistent with whistle-blower laws,” and that Grassley will need to be a prime mover in effecting change to benefit whistle-blowers.

Efforts for Movement

Broader reform efforts are underway. Legislation from Rep. Jason Chaffetz (R-Utah) that was enacted in December 2016 amended the Whistleblower Protection Enhancement Act of 2012 by extending protections to the Federal Bureau of Investigation.

In addition, Chaffetz joined Grassley and Rep. Mark Meadows (R-N.C.) in sending a Feb. 1 letter to White House Counsel Donald F. McGahn II that highlighted the legal protections for—and importance of—federal employees and their communications with Congress.

Meanwhile, the House Oversight and Government Reform Committee on Feb. 2 approved the Follow the Rules Act (H.R. 657), aimed at protecting workers who refuse to obey employer orders that would require them to violate a current law, rule or regulation. The committee on Feb. 2 also approved the Federal Employee Antidiscrimination Act of 2017 (H.R. 702), which would strengthen protections for employees who are restricted by agency gag orders from communicating with Congress or special counsel.

Looking Ahead

While these broader protections for whistle-blowers have found success, improvements specifically geared toward the IRS Whistleblower Office, including Grassley and Wyden’s proposed legislation, have yet to be addressed by the new administration.

Zerbe said that while Grassley’s legislative efforts are a step in the right direction, he thinks deadlines for IRS decision-making are necessary when it comes to whistle-blower awards.

“It will help knowing the status of the award, but some cases are taking too long for decisions to be made,” Zerbe said.

As a next step, the IRS Whistleblower Improvements Act of 2017—which has been endorsed by the National Whistleblower Center and Taxpayers Against Fraud—will be assigned to the Finance Committee. Grassley is a senior member and former chairman of the committee, and Wyden is ranking member.

“This reform provides critical protection for those courageous enough to risk losing their jobs to report illegal tax schemes,” said Stephen M. Kohn, executive director of the National Whistleblower Center.

In the interim, Cummings encourages all whistle-blowers to come forward if they have evidence of fraud, waste or abuse.

“The last thing we need is for our federal employees to have any kind of chilling effect,” Cummings said.

With assistance from Aaron E. Lorenzo.

To contact the reporters on this story: Matthew Beddingfield in Washington at mbeddingfield@bna.com and Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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