The New Whistleblower's Handbook
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In 2009, the inspector general of the Department of Treasury examined the IRS’s compliance with the law and determined that the Grassley Amendment “provides the IRS with an opportunity to recover potentially billions.” The inspector general also documented the radical growth in claims after the enactment of the Grassley Amendment. For example, in 2007, 83 whistleblower claims were filed, with evidence/allegations documenting $8 billion in tax fraud. The next year, 2008, the number of claims rose to 1,890, and the amount of these claims totaled $65 billion. By September 2016 the number of open submissions under review was over 10,000.
Between December 2006 and August 2012 the IRS was building its whistleblower program. However, hundreds of claims were unpaid and whistle-blowers were angry over the snail’s pace with which the office was adjudicating claims. That perception changed when the IRS Whistleblower Office issued a ruling on the Birkenfeld case and made the largest award ever paid to a single whistleblower. Remarkably, the IRS’s first major ruling was approximately $10 million larger than any reward paid by the Justice Department to an individual whistleblower in twenty-five years. This differential not only sent a message that the IRS was serious about rewarding tax whistleblowers, it also demonstrated how large many of the tax frauds are and the potential that corporate insiders can exploit if they properly use the law.
In the four years following Birkenfeld’s historic ruling (2013–16) the IRS paid awards to an additional 751 whistleblowers. Total payments topped $271 million.
Factors Used by the IRS to Judge Awards
When putting together an IRS reward filing, it is important to know the factors applied by the IRS when it evaluates a claim to determine at what percentage to set the award.
The “positive factors” set forth in the IRS’s Internal Revenue Manual (Part 25, Chapter 2) are:
• Did the whistleblower act “promptly to inform the IRS or the taxpayer of the tax noncompliance”?
• Did the “information provided” identify an “issue or transaction of a type previously unknown to the IRS”?
• Was the “information provided” “particularly difficult to detect through the IRS’s exercise of reasonable diligence”?
• Did the whistleblower present his or her information “thoroughly” and present “factual details of tax noncompliance in a clear and organized manner”?
• Did the whistleblower’s information save “IRS work and resources”?
• Did the whistleblower provide “exceptional cooperation and assistance during the pendency of the action(s)”?
• Whether “the information provided identified assets of the taxpayer that could be used to pay liabilities, particularly if the assets were not otherwise known to the IRS.”
• Whether “the information provided identified connections between transactions, or parties to transactions, that enabled the IRS to understand tax implications that might not otherwise have been understood by the IRS.”
• Whether “the information provided had an impact on the behavior of the taxpayer, for example by causing the taxpayer to promptly correct a previously-reported improper position.”
The following factors will be used by the IRS to reduce (but not deny) a reward:
• Whether the whistleblower “delayed” reporting the violations;
• Whether the whistleblower’s actions “contributed to the underpayment” of taxes;
• Whether the whistleblower interfered or harmed the IRS investigation;
• Whether the whistleblower violated instructions given by the IRS, or violated a confidentiality agreement or other contract entered into with the IRS.
Another ground for reducing an award is whether the whistleblower “profited from the underpayment of tax or tax noncompliance identified.” Profiting from the underlying violations is not grounds for denying a reward, but if the whistleblower is found criminally guilty of planning and initiating the violations, there may be grounds for an outright denial.
How the Law Works
The basic rules that govern the IRS whistleblower law are as follows:
1. Taxes Covered. As already stated, the tax whistleblower law is not limited to tax fraud. It covers any underpayment of taxes, fraudulent or not. The law provides for whistleblower rewards for information that results in the IRS’s “detecting underpayments of tax” or “detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws.” The law also covers those who conspire to violate the laws. The monetary basis for which a reward is paid includes not just the back taxes, but any “penalties, interest, additions to tax, and additional amounts” obtained by the U.S. government on the basis of the whistleblower’s information.
2. Proceedings Covered. The whistleblower is eligible for a reward if monies are recovered by the United States “based on” their information, regardless if the money is obtained from an administrative proceeding, a judicial proceeding, a settlement, or “any related action.” However, unlike the False Claims Act, the whistleblower does not have the right to initiate legal proceedings against the taxpayer. It is up to the IRS and/or the U.S. government to file the lawsuit, or reach a settlement with the “taxpayer.” Once the United States collects the back taxes, interest, penalties, and so on, the whistleblower then becomes entitled to his or her percentage share from the monies recovered by the United States. If the United States does not initiate legal or administrative action against the “taxpayer,” the whistleblower cannot file his or her own lawsuit against the “taxpayer.”
3. Who Can File. Any person can file an IRS whistleblower claim. The applicant for the reward does not have to be an employee of the targeted company. He or she can be an outside contractor, a banker, a business partner, or any other person who is able to obtain credible information of a major tax fraud or underpayment.
4. Procedure for Filing. IRS whistleblower claims are filed directly with the IRS. There is no lawsuit. There is no public filing. Nothing is officially “served” on the employer or the individual who violated the tax laws. You do not have to tell your boss about the tax fraud or file an internal complaint. Doing so could result in your boss retaliating, especially if the IRS were to open an investigation on the very issues you tried to get fixed.
5. IRS Form 211. The IRS has created a form to be used for filing a whistleblower claim. The form, entitled “Application for Award for Original Information,” is better known simply as “Form 211,” named after its official IRS form number. Under IRS rules, Form 211 must be completed in its entirety and should include the following information:
• Date claim is being submitted;
• The whistleblower’s name and contact information (and name of his or her spouse, if applicable);
• The whistleblower’s date of birth and taxpayer identification number (Social Security number);
• “Specific and credible information concerning the person(s) that the claimant believes have failed to comply with tax laws and which will lead to the collection of unpaid taxes”;
• A “description of the amount(s) and tax year(s) of Federal tax owed” and “facts supporting the basis for the amount(s) claimed to be owed”;
• All available “documentation to substantiate the claim,” including information such as financial records, bank account locations or numbers, “books and records,” and documents that contain information concerning the disputed transactions or analyses;
• An explanation as to “how the information” that forms the basis of the claim “came to the attention of the claimant.” This includes details on how the whistleblower “acquired” the information and a “complete description of the claimant’s present or former relationship (if any)” to the person accused of failing to pay taxes;
• “Any and all other facts and information pertaining to the claim.”
6. Information Wanted by the IRS. In the IRS’s own words: “The IRS is looking for solid information, not an ‘educated guess’ or unsupporte
d speculation. We are looking for a significant Federal tax issue—this is not a program for resolving personal problems or disputes about a business relationship.” If the whistleblower’s allegations cannot be “independently corroborated,” a claim will be denied.
7. Lawful Disclosures/Obtaining Documents. A whistleblower cannot and should not violate the law in order to obtain information about tax frauds. The IRS’s guidance on filing claims states as follows: “Under no circumstances do we expect or condone illegal actions taken to secure documents or supporting evidence.” If the whistleblower knows about the existence of supporting evidence, but cannot lawfully obtain that information, the IRS suggests that the whistleblower “should describe these documents and identify their location to the best of his or her ability.” In other words, do not steal information. Instead, carefully describe where the documents are hidden so that the IRS can lawfully obtain it through a subpoena or other legal means. In these circumstances, sometimes the whistleblower carefully places supporting documents in a specific location at work and then notifies the government where the document(s) can be found.
8. Confidentiality. The IRS Manual requires the Service to “protect the identity” of any person seeking the whistleblower reward “to the fullest extent permitted by law.” The Service’s rules require the protection of a whistleblower’s identity under IRC 6103(h)(4). This provision treats a whistleblower’s information on a similar basis as the commission treats other taxpayer information: completely confidential. But the IRS warns that “under some circumstances” the whistleblower’s identity may have to be disclosed, such as if the whistleblower “is needed as a witness in a judicial proceeding.” But these limited disclosures are covered under special rules. The IRS states that the “circumstances” where such a disclosure is needed are “rare” and that the “Service will make every effort to notify the whistleblower before deciding whether to proceed in such a case.” Furthermore, the Tax Court issued a ruling acknowledging the whistleblower’s need for confidentiality and permitting claims to proceed on an anonymous basis.
9. Anonymous Submissions. The statute requires that all claims under the Grassley Amendment be filed “under penalty of perjury.” In other words, the whistleblower making the claim must personally sign Form 211/written submission and must swear that he or she has “examined” the “application” and any “accompanying statement and supporting documentation” and must affirm that the “application is true, correct and complete, to the best of” his or her “knowledge.”
Because the application must be filed under the penalty of perjury, the IRS guidance states that claims cannot be submitted “anonymously or under an alias.” Furthermore, the whistleblower’s lawyer cannot simply sign the submission. The whistleblower must personally sign the form. If a joint claim is being filed, all the claimants must personally sign the form and swear to the truthfulness of the information. However, under IRS rules whistleblowers can obtain Confidential Informant status in order to protect their identity.
10. Where to File/The Whistleblower Office. The Grassley Amendment also mandated the IRS to create a special “Whistleblower Office.” The office is required to “analyze information” received from whistleblowers and has the statutory authority to issue the award to the whistleblower. The decision to make a payment to a whistleblower is made by the director of the Whistleblower Office, not the secretary of Treasury or the head of the IRS. Form 211 is filed with the Whistleblower Office.
The Whistleblower Office is the principal point of contact between the whistleblower and the IRS. It is responsible for both conducting the investigation into the tax violations and deciding whether the whistleblower should receive a reward. However, other offices within the IRS can be assigned investigatory responsibilities. Unlike the False Claims Act, in which the whistleblower can become a party to the litigation against the defendant, under the Internal Revenue Code the investigation into the merits of the whistleblower’s claim is conducted solely by the IRS. It is within the “sole discretion” of the IRS as to whether or not to seek any additional “assistance” from the whistleblower after the claim is filed.
11. Acknowledgment of Claim. The Whistleblower Office will acknowledge receiving a claim, in writing. Each claim is given a formal claim number. The whistleblower has to be sure that this acknowledgment letter is received, as it is his or her proof that a claim was filed and documents the date the claim was formally received by the Whistleblower Office.
12. Amount of Reward. The reward provision is modeled on the FCA. If the IRS collects taxes “based on information” provided by the whistleblower, the whistleblower is entitled to a reward of between 15 percent and 30 percent of any amount recovered by the IRS. These are the same percentages permitted under the FCA; however, they can be reduced if the whistleblower is not an original source of the allegations (for example, if information on the tax fraud was previously disclosed in the news media or other public proceeding) or if he or she initiated and planned the tax fraud. A similar reduction provision exists in the FCA. The law also permits the whistleblower to obtain a reward based on monies collected from “related actions.” The scope of a “related action” is currently unclear, but based on strong legal precedent it should be broad.
According to guidance published by the Whistleblower Office, the percentage of a recovery paid by the IRS to the whistleblower is “in proportion to the value of the information furnished voluntarily.” Whistleblowers should make a “full disclosure” of all relevant evidence. Rewards are paid when the IRS “determines that the information submitted contributed to the Service’s detection and recovery of tax.” The law also permits the whistleblower to obtain a reward based on monies collected from “related actions.” The scope of a “related action” is currently unclear, but based on strong legal precedent it should be broad.
13. Judicial Review. The whistleblower has the right to appeal award-determination decisions of the Whistleblower Office to the U.S. Tax Court. Appeals must be filed within thirty days of the Whistleblower Office’s ruling. The Tax Court has issued rules for these appeals (Rule 340-344). They require that the whistleblower file a petition with the Tax Court, setting forth the date the Whistleblower Office made its determination and an explanation as to why the whistleblower “disagrees with the determination” of the Whistleblower Office, a statement of facts that supports the whistleblower’s appeal, and a specific “prayer” for “relief,” along with other information.
14. When Payments Are Due. Under the law, the IRS will not pay the whistleblower until the IRS actually obtains the money from the delinquent “taxpayer” and the deadline for appealing the payments or obtaining a refund expire. If the delinquent taxpayer challenges the IRS’s actions administratively or in court, the payment to the whistleblower will be “delayed until that litigation has been concluded with finality.” Given the number of claims being filed by whistleblowers, the small number of employees currently staffing the IRS Whistleblower Office, and the necessity to await final payment to the IRS before any monies are paid to the whistleblower, payments to whistleblowers are taking years to adjudicate and resolve.
15. Financial Threshold. The Grassley Amendment targets large taxpayers. Consequently, the IRS rewards program now has two parts. The first part is based on the 1867 law. It covers small tax frauds and underpayments (under $2 million). The amount of any reward paid to informants under this program is strictly discretionary, and there is no appeal of an IRS denial of a claim. The second part of the IRS program was created by the Grassley Amendment. This part of the program mandates that the IRS pay rewards, sets the percentage amounts for such rewards, and provides a judicial review. However, the amount of the tax fraud/underpayment must meet minimum dollar thresholds to be covered.
The IRS Whistleblower Office describes these thresholds as follows: “To be eligible for an award under [the Grassley Amendment] the tax, penalties, interest, additions to tax, and additional amounts in dispute must exceed i
n the aggregate $2 million and, if the allegedly noncompliant person is an individual, the individual’s gross income must exceed $200,000 for any taxable year at issue in a claim.”
16. No Bar to Recovery If You Participated in the Fraud. Whistleblowers who participated in the fraud are entitled to a full reward. This aspect of the law dates back to the original False Claims Act signed by President Lincoln. The Civil War Congress that drafted the original FCA was very clear that the law was designed to encourage “rogues” to step forward and turn in other “rogues.” The genius of the law was that it was designed to use greed to fight greed.
17. “Planning and Initiating” Tax Frauds. Congress drew a distinction between persons who simply participate in tax frauds and those who actually “plan and initiate” the fraud. This makes sense. For example, if an accountant plans and initiates a tax fraud on behalf of a client and then turns in the very fraud he planned and put into effect, should that accountant be able to profit from the illegal scheme he or she devised?
Because of this very rare hypothetical possibility, Congress provided for a reduction in any reward owed to a whistleblower who “planned and initiated the actions that led to the underpayment of tax” or who planned and initiated the tax fraud. Under this provision, the IRS can reduce the reward owed to any such person based on the culpability of that person. The reward can be reduced to any level, including zero. The IRS Manual explains that “if the whistleblower participated substantially in the actions that resulted in the underpayment of tax, the Whistleblower Office may deny an award.”
18. Criminal Convictions. If the whistleblower is criminally convicted of a crime related to his or her role in planning and initiating the tax violations, the whistleblower is disqualified from any reward. This is a very narrow exception.