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May 13, 2013
Tax Analysts Exclusive: A Whistleblower's Cautionary Tale
by Jeremiah Coder

Full Text Published by Tax Analysts®

By Jeremiah Coder -- jcoder@tax.org

Whistleblower cases often play out like soap opera love affairs: Intense, short-term passion devolves into disillusionment, recriminations, and eventually a long, drawn-out fight over who is entitled to what.

One tax informant case follows that pattern and reveals the tension when the government first encourages whistleblowers to provide data and then becomes standoffish once it has what it wants.

Tax Analysts reviewed an informant's file of his submitted whistleblower case to the IRS. The Service recently denied the claim after keeping it in the pipeline for more than five years. Tax Analysts was granted access to the documents on the condition that the identities of the whistleblower and the U.S. taxpayer would remain anonymous.

The documents include a copy of an 11-page letter from the whistleblower to Senate Finance Committee member Chuck Grassley, R-Iowa, that details alleged wrongdoing, mismanagement, and malfeasance at the IRS Whistleblower Office concerning the submission. Tax Analysts also viewed 16 exhibits attached to the letter that attempt to corroborate the allegations. Those exhibits consist largely of correspondence from the IRS instructing the whistleblower to gather specific documents in support of the IRS's ongoing investigation.

After sending the letter to Grassley in March, the whistleblower met with one of the senator's tax staff attorneys in April to discuss it. The whistleblower sent copies of the letter to other lawmakers and officials, including Finance Chair Max Baucus, D-Mont.; IRS Whistleblower Office Director Stephen Whitlock; acting IRS Commissioner Steven Miller; IRS Criminal Investigation division Chief Richard Weber; and Timothy Camus, Treasury Inspector General for Tax Administration deputy inspector general (investigations and internal affairs).

According to the documents, the whistleblower, a U.K. resident, filed a claim with the IRS telling the agency about a prominent U.S. attorney who had earned between $30 million and $40 million in unreported offshore income and kept the money in several undeclared offshore bank accounts in various jurisdictions. The alleged tax evasion came to light during a legal investigation in the United Kingdom of the U.S. individual's fraudulent business dealings, in which the whistleblower played a central investigative role. In early 2008 the IRS quickly put CI agents on the case, using personnel in the U.S. Embassy in London, where the IRS has a permanent criminal attaché.

The whistleblower voluntarily provided some documents to the IRS during the initial debriefings, but the agents directed the whistleblower several times to retrieve more documents from a list of items that the agents identified as important for their investigation. For six months the IRS special agents pursued the whistleblower via telephone and e-mail, asking about his progress in obtaining the requested documents.

According to the whistleblower, at one point the IRS agents were so eager to obtain the additional documentary evidence that they contacted the whistleblower's superior at the law firm where the whistleblower worked as a freelance legal specialist and told him to give the remaining documents to the whistleblower. The agents instructed the whistleblower's superior not to contact any U.S. or U.K. regulatory bodies concerning the evidence of fraudulent tax and nontax transactions. The whistleblower says that process seriously compromised his legal career.

Despite extensive debriefings by government agents, the whistleblower said he isn't sure what the IRS has done to pursue the alleged tax evasion. The IRS agents initially told the whistleblower the evidence indicated it would take about two years to resolve the claim. But over five years, the whistleblower continued to provide the IRS with more materials supporting his submission, which the IRS readily accepted without giving any indication of its progress on the matter. The IRS pressured the informant not to report the claim to any other regulatory or investigative body, including the California attorney general, the California Bar Association, and the California Franchise Tax Board, as well as the U.K. Ministry of Justice and HM Revenue & Customs.

Finally, in February the IRS informed the whistleblower by letter that it had rejected his award on the grounds that the submitted information did not lead to any collected proceeds of unpaid taxes.

While the IRS may have reasons for denying the award claim that will never become public, the process raises questions about the agency's attention to the section 7623(b) reward program. According to the whistleblower, the CI agents who debriefed him in 2008 -- 18 months after the revised statute was enacted -- were unaware of the section 7623(b) program and the existence of the IRS Whistleblower Office.

The IRS agents claimed that an award was discretionary and emphasized to the whistleblower that the amount he would receive would be influenced by his degree of cooperation. Notice 2008-4, 2008-2 IRB 253, provides that "the Whistleblower Office will acknowledge receipt of a claim in writing," but the whistleblower said it took the IRS 18 months from the time the claim was filed to acknowledge his claim.

The case seems to have raised some eyebrows; the whistleblower said TIGTA's Internal Affairs Division has initiated an investigation and is interviewing IRS employees involved in the matter. Because of confidentiality rules, TIGTA could not confirm to Tax Analysts whether the case file number is valid. When complete, any TIGTA investigative report into the contents of the letter to Grassley will be available only to members of Congress and to senior IRS managers.

Bungled Evidence?

The whistleblower said he suspects that his claim was denied because the IRS agents didn't follow proper procedures to ensure that the gathered documents would be admissible in court. If true, the IRS's mishandling of the case is troubling and raises the question whether other worthy claims have been denied for similar reasons.

The IRS agents' initial eagerness to pursue the case may have led to its eventual demise. The informant said the CI agents involved were lackadaisical in documenting the chain of evidence and document verification. That behavior contradicts the methods the IRS laid out in internal agency guidance.

In a February 17, 2010, memo detailed at Internal Revenue Manual section 25.2.2.6, Miller, then IRS deputy commissioner for operations, stated that subject matter experts handling whistleblower claims "must be sensitive to potential evidentiary issues that may limit the ability of the IRS to defend deficiency adjustments and assessments in any subsequent litigation." Regarding the potential evidentiary limitation involving the use of tainted information, "the IRS must determine whether the information is subject to a privilege and, if so, whether the privilege has been waived and the extent of any unwaived privilege," the memo states. The whistleblower said IRS agents didn't record or take notes during his briefings and that he was ignored when he raised concerns with government representatives.

The IRS told Tax Analysts that the agency doesn't keep data on the frequency of tainted information in whistleblower cases but that screening for potential privilege issues is routine for all whistleblower cases reviewed by subject matter experts.

The U.K. whistleblower offered several times to enter into a section 6103(n) confidentiality agreement but said the IRS ignored each request without explanation. Many practitioners have complained that the IRS's apparent avoidance of those agreements not only deprives the government of additional information that could help it pursue claims but also acts as another communication barrier. IRM section 25.2.2.7 states that a formal section 6103(n) agreement will be a "rare circumstance" used to share information, but the IRS seemed to contemplate use of those agreements in 2011 final regulations (T.D. 9516), although it has acknowledged it has yet to use the procedure. (Prior coverage: Tax Notes, Mar. 21, 2011, p. 1399.)

Valid Determination?

The whistleblower said another detail of his case caught TIGTA's attention: The alleged denial letter from the IRS Whistleblower Office has an official's signature that does not match up with the official's signature on prior documents. The denial letter, purportedly signed by IRS Whistleblower Office Program Manager Robert Gardner, contains a signature that is markedly different from ones on previous official letters in the case. Contrary to the IRM's guidelines, the letter did not have the official's unique IRS employee number. The mismatch has left the whistleblower questioning whether he received a legitimate denial letter. He contacted the IRS Whistleblower Office to confirm whether the signature on the determination letter was legitimate but did not receive a response.

The IRS told Tax Analysts that all decisions to deny a section 7623(b) claim are made solely by senior IRS Whistleblower Office management -- that is, either the office's director or the chief of case development. Whistleblower Office analysts who are assigned claims are authorized to sign denial letters, the IRS said.

The allegations in the case raise questions about why the IRS took so long to develop procedures to ensure that awards are available for whistleblower claims when appropriate. Whistleblower representatives have complained for years that the IRS has allowed the revised reward program to lag, falling behind the growing caseload and failing to timely address key legal issues involving operation of the statute.

The whistleblower told Tax Analysts that his experience with the IRS Whistleblower Office has left him demoralized. "In addition to the hope of receiving an award, I thought I was helping to right a great injustice," he said. "Having cooperated fully with the IRS, I have instead been ignored for the better part of five years and have now paid the ultimate price by having my legal career wrecked by the IRS." He said his dealings with the IRS cost him his legal job in the United Kingdom and have prevented him from practicing law in the United States. "The treatment of my whistleblower submission is indicative of a systemic failure of the IRS management to properly manage the IRS whistleblower program according to the legislative intent of Congress," he said.

The restricted nature of communication in the whistleblower claim process continues to affect many aspects of the IRS's section 7623(b) program. The IRS can deny awards to claimants without explanation. And despite a memo from Miller last summer setting informal guidelines of action within 90 days at each stage of the whistleblower claim review process, practitioners say the IRS rarely adheres to those timelines.

The Government Accountability Office made several recommendations in 2011 addressing serious perceived shortcomings in the IRS whistleblower program, including that the IRS should "track the reasons for claim rejections by broad categories." The GAO website, which tracks when agencies finish implementing its report suggestions, lists the whistleblower recommendations as outstanding and incomplete.

Practitioners are wary of the recent spate of IRS denials in whistleblower cases. Ever on the defensive, informants are wondering if the perceived increase stems from the Service's intent to dispose of cases before final whistleblower regulations are issued that might contain favorable provisions in determining an award amount. However, the IRS said there has been no meaningful change in the number of whistleblower case closures in the past few months.

Although tax informants and their representatives have praised Miller as being publicly more receptive to the program, the agency has yet to turn the corner in improving the whistleblower program.

The whistleblower told Tax Analysts he hopes his communications with Grassley, congressional tax staff, and TIGTA help provide a "tipping point" leading to Senate oversight hearings concerning the management of the IRS whistleblower program over the past six years.


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