Our colleagues Ernest E. Badway, Joshua Horn, and Benjamin H. McCoy have published an alert about the United States Supreme Court’s unanimous ruling narrowing the class of would-be whistleblowers under the Dodd-Frank Act. In the case, announced on February 21, 2018, the Court held that the statute requires whistleblowers to first report potential securities violations to the Securities and Exchange Commission in order to obtain its protections. In its decision in Digital Realty Trust Inc. v. Somersthe Court held that “Dodd-Frank’s anti-retaliation provision does not extend to an individual, like Somers, who has not reported a violation of the securities laws to the SEC.” You can read their alert here.

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The Securities and Exchange Commission today announced an award of more than $4.1 million to an individual who alerted the agency to a widespread, multi-year securities law violation and continued to provide important information and assistance throughout the SEC’s investigation.  Today’s award follows the announcement on November 30 that the SEC had awarded more than $8 million each to two separate individuals. In total, SEC enforcement actions involving whistleblower awards have now resulted in more than $1 billion in financial remedies ordered against wrongdoers.

Today’s announcement involved a former company insider. “Company insiders often have valuable information that can help the SEC halt an ongoing securities law violation and better protect investors,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “The breadth of the SEC’s whistleblower program is demonstrated by this case, where the whistleblower, a foreign national working outside of the United States, affirmatively stepped forward to shine a light on the wrongdoing.”

On November 30, the SEC announced awards of more than $8 million each to two whistleblowers whose critical information and continuing assistance helped the agency bring the successful underlying enforcement action. The first whistleblower alerted SEC enforcement staff of the particular misconduct that would become the focus of the staff’s investigation and the cornerstone of the agency’s subsequent enforcement action.  The second whistleblower provided additional significant information and ongoing cooperation to the staff during the investigation that saved a substantial amount of time and agency resources.

The SEC’s whistleblower program has now awarded more than $179 million to 50 whistleblowers since issuing its first award in 2012.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards.

Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

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IRS Whistleblower Annual Report 2015In 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:

Figure 2

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:

Figure 3.

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.