In order to assist the Internal Revenue Service in processing the mountain of whistleblower claims it is receiving, the Justice Department’s Tax Division has indicated that it is open to receiving certain claims – as long as they are based upon “specific, credible, and solid information” in which the tax amount exceeds $2 million.
Since Reconstruction, the IRS has been authorized by Congress to pay monetary awards to whistleblowers for information leading to detecting underpayments of tax or bringing to trial and punishment persons guilty of violating tax laws. The IRS rarely exercised that authority, and few whistleblower rewards were paid out. In 2006, Congress passed legislation requiring creation of a formal IRS Whistleblower Office and amended the statute to authorize payment of so-called “discretionary awards” (pursuant to IRC § 7623(a)) and “mandatory awards” (pursuant to IRC § 7623(b)).
The mandatory award provisions apply when amounts in dispute exceed $2 million and, if against an individual taxpayer, when the taxpayer’s gross income also exceeds $200,000 for any taxable year subject to the action. The award amount is at least 15 percent but not more than 30 percent of the collected proceeds, as determined by the Whistleblower Office based upon the whistleblower’s contributions to the IRS enforcement action. However, the award can be 10 percent or less of the collected proceeds if the whistleblower was not the originating source of the information, such as when the information came from the news media or a judicial or administrative hearing. In addition, the award can be reduced if the whistleblower planned and initiated the tax noncompliance, and the award can be denied if the whistleblower is convicted of criminal conduct that led to the tax noncompliance.
The discretionary award provisions apply when amounts in dispute are below the $2 million thresholds as well as for all information provided before December 20, 2006. The award amount is determined by the Whistleblower Office based on the extent of the whistleblower’s contributions and is not subject to any statutory minimum payment. Prior to 2006, the IRS policy for discretionary awards was a maximum 15 percent of collected taxes and penalties, limited to a maximum award of $10 million. This discretionary award policy continued with some minor modifications until 2010, when the policy was changed to match the mandatory award criteria for award payments.
The number of whistleblower claims submitted to the IRS has for the most part steadily increased since 2011. The following chart shows the number of submissions by whistleblowers from 2011 through March 2016, divided between discretionary and mandatory claims:
Upon receipt, each of the foregoing submissions is assigned a claim number by the IRS Whistleblower Office. Some submissions may produce multiple claims if more than one taxpayer is included in the allegation. As a result, the number of claims usually exceeds the number of submissions, as the following chart demonstrates:
As this data demonstrates, the number of claims to be processed by the IRS Whistleblower Office is steadily increasing. In FY2015 alone, the IRS received over 1,000 submissions per month, and FY2016 is on pace to match that number.
To keep pace with this steady increase in claims, the IRS Whistleblower Office has increased its staff from 20 employees in FY2011 to 61 employees as of the end of FY2015. Nonetheless, the average time to process whistleblower claims dramatically increased in FY2015 as compared to prior years. For mandatory claims (those in excess of $2 million) that resulted in a paid award, the IRS took, on average, over six years to fully process and pay the claim. For discretionary claims that resulted in a paid award, the IRS took, on average, nearly nine years to process and pay the claim.
To help address this growing backlog, the Justice Department’s Tax Division has indicated that it is willing to review certain mandatory whistleblower claims. Caroline Ciraolo, Principal Deputy Assistant Attorney General of the Tax Division, suggested that whistleblower counsel provide copies of their client’s claims to the DOJ in addition to the IRS. In an interview with Tax Analysts, Ciraolo said, “[w]e are encouraging counsel who represent whistleblowers with specific, credible, and solid information regarding material violations of the internal revenue laws to submit that information to the IRS Whistleblower Office, and to the extent someone has credible, substantiated information of material domestic or international criminal tax violations that are related to an ongoing investigation or worthy of potential investigation, we are encouraging them to share that information, through counsel, with the [Justice Department].” Tax Notes, October 10, 2016, at 235. Ciraolo further stated that any whistleblower claims submitted to the Tax Division should include a cover letter from counsel with a copy of the whistleblower form submitted to the IRS which is known as Form 211, “Application for Reward for Original Information.” Given the substantial number of whistleblower claims currently in IRS inventory, it is unclear whether Tax Division review of larger, mandatory claims will speed up that process, but counsel representing whistleblowers with credible information would be well-advised to accept Ciraolo’s invitation and submit copies of such claims for DOJ review.