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Law Firm Suggests Changes to Proposed Whistleblower Regs

FEB. 18, 2013

Law Firm Suggests Changes to Proposed Whistleblower Regs

DATED FEB. 18, 2013
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February 18, 2013

 

 

Re: Internal Revenue Service Proposed Rules [REG-141066-09]

 

Dear Sir or Madam:

Kindly accept this letter as an official comment, written in response to the above-referenced proposed rules, as recently published in Vol. 77, No. 243 of the Federal Register. Additionally, we formally request the opportunity to present our comments and concerns at a public hearing. The proposed changes to the existing regulatory framework pose a tremendous threat to the success of the Internal Revenue Service's ("IRS") whistleblower program and are in stark contrast to Congressional goals and intent.

At the outset we note that Senator Charles E. Grassley's January 28, 2013 response to the proposed regulatory changes summarizes their negative ramifications in a clear and concise manner. As the architect of the IRS whistleblower program, Sen. Grassley's observations and concerns should be given substantial deference. Accordingly, we urge the Department of Treasury ("Treasury") and the IRS to adopt Sen. Grassley's recommendations and comments in full.

That being said, we would be remiss not to offer the following comments, concerns, and recommendations with regard to the proposed regulatory changes.

 

A. "COLLECTED PROCEEDS" AS DEFINED IN § 301.7623-2 OF THE PROPOSED CHANGES SHOULD NOT BE LIMITED TO FUNDS RECOVERED UNDER THE INTERNAL REVENUE CODE

 

The proposed definition of "collected proceeds" specifically limits the purview of the whistleblower program to proceeds generated under the Internal Revenue Code ("Title 26"). Restricting a potential whistleblower's reward, to funds recovered under the provisions of Title 26, unnecessarily limits the scope of the whistleblower program, ignores the realities of tax fraud, and will limit the opportunities for the IRS to recover previously unknown substantial tax frauds or deficiencies. The proposed regulatory changes eliminate rewards for recoveries under Titles 31 (Money and Finance) and 18 (Crime and Criminal Procedure). To achieve this end, the proposed regulations narrowly construe the phrases "underpayment of tax" and "internal revenue laws" in direct contravention of Congressional intent and common rules of statutory construction. This dramatic limitation will negatively impact the whistleblower program in a significant manner.

As Treasury and the IRS know full well, the reporting requirement of the Bank Secrecy Act, the Report of Foreign Bank and Financial Accounts ("FBAR"), is an invaluable resource in combating tax fraud. Ignoring this reality and the fact that the IRS oversees FBAR reporting, the proposed regulations argue that FBAR violations are not violations of internal revenue laws and do not necessarily result in the underpayment of tax. This argument is nonsensical.. As Sen. Grassley notes, such information can be "indispensable in detecting underpayments of tax, without directly relating to the underpayments themselves.1" Despite the fact that information regarding FBAR violations may, and often does, directly lead to the recovery of unpaid taxes, the proposed regulations offer no compensation to its source.

For example, under the proposed regulations, a whistleblower is not eligible for an award for providing the IRS with information about a U.S. taxpayer's undisclosed and untaxed foreign accounts, even if it results in the collection of huge penalties by the IRS in lieu of "taxes." In light of the ongoing difficulties the IRS is facing in the fight against offshore tax evasion, the IRS should be encouraging whistleblowers to come forward with this type of information. To the contrary, the proposed regulations send the opposite message -- that whistleblowers will not be rewarded for bringing this information to the attention of the IRS. This is in direct conflict with the letter, spirit and intent of the statute.

Congressional intent aside, the proposed regulations ignore the harsh realities, negative impacts, and inherent risks faced by whistleblowers. In practice, those who provide information on tax fraud are often CPAs, CFOs, and other individuals in the higher echelons of their respective professions. These individuals have much to lose, facing possible retaliation, termination, and/or being blackballed. The decision to "blow the whistle" is never easy and may pose serious mental and/or physical health risks. Knowing the threat to themselves and their loved ones, motivated whistleblowers nonetheless come forward with valuable information that enables the IRS to recover fraudulently withheld taxes. Without a doubt, for many, the deciding factor is knowing that the government will reward them.

The proposed regulatory changes, restricting whistleblower rewards to funds recovered under Title 26, eliminates the incentive to report substantially related information such as FBAR violations, based on an arbitrary and narrow construction of two phrases. This will no doubt lead to a decline in the number of whistleblowers who choose to come forward with such information. Ultimately, the regulations as proposed will cripple the IRS whistleblower program.

 

B. FACTORS USED IN CONSIDERATION OF AMOUNT AND PAYMENT OF AWARD AS SET FORTH IN § 301.7623-4 OF THE PROPOSED CHANGES

 

The proposed regulatory changes enumerate specific factors to be considered by the IRS in its decision to reward a whistleblower. The language of two of these factors, as set forth in § 301.7623-4, is problematic and should be clarified.
i. What is an "Issue of a Type Previously Unknown To The IRS?"
As proposed, § 301.7623-4(b)(ii), states that "[t]he information provided identified an issue of a type previously unknown to the IRS." (emphasis added). The regulations are silent, however, as to the meaning of the term "issue." Taken at face value, the term "issue" as used, can be construed generally (e.g., FBAR violations, tax evasion, etc.) or specifically (i.e., the specific facts contained in a whistleblower's information). Rather than focus on "an issue", the regulations should refer to "facts" because otherwise this regulation as proposed could be interpreted to disqualify awards in many whistleblower cases assuming that the reported information presented an "issue" that the IRS was previously aware even if not specific to the taxpayer at issue. Clearly, this was not the intent of the Section 7623 when it was enacted.

In particular, the quality and reliability of a whistleblower's information should be considered when calculating his or her award. This is only true, however, in the context detailed above. The value of a whistleblower's information is not in the novelty of the type of scheme he or she has uncovered, but rather the extent to which it first alerts the IRS to the existence and perpetration of an actual scheme. To construe the meaning of this regulation in the more general sense is unrealistic, will discourage whistleblowing, and ultimately undermine the program. For this reason, we specifically request that Treasury and the IRS clarify the phrase within the final regulations to reflect the more specific meaning offered above.

ii. The Amount Of A Whistleblower's Award Should be Judged by the Merits of His or Her Claim, not the IRS's Proactivity
In the proposed regulations, § 301.7623-4(b)(v), states:

 

[t]he individual (or the individual's legal representative, if any) provided exceptional cooperation and assistance during the pendency of the action(s), for example by providing a useful technical or legal analysis of the taxpayer's records in response to a request from the Whistleblower Office, the IRS, or the IRS Office of Chief Counsel. (emphasis added).

 

As drafted, this section directly ties the calculation of a whistleblower's award to the level of proactivity with which the IRS elects to address his or her information. This proposed provision is patently unfair to whistleblowers because it ignores the realities of the IRS whistleblower program. As anyone who has experience with the IRS Whistleblower program knows, there is practically no communication from the IRS to whistleblowers or their attorneys. With few exceptions, other than form letters confirming the assignment of a claim number and subsequent minimal telephone or email contact to arrange for an interview, the IRS does not communicate anything to claimants or their representatives. The point being that the IRS may never request any information from claimants. In reality, whistleblowers and/or their representatives bring forth valuable information, and continue to do so unsolicited, in an effort to move investigations forward. What the IRS does with that evidence and information, in most cases, is unknown. Notwithstanding, whistleblowers often willingly provide "useful technical or legal analysis" and "exceptional cooperation and assistance" despite the IRS level of engagement, not as a result of it.

A whistleblower's reward should be judged by the nature, quantity, and quality of his or her information, irrespective of whether the IRS "requested" the information or not. The language of § 301.7623-4(b)(v) should be revised accordingly. Therefore, we respectively request that the proposed regulations be amended to eliminate the superfluous language "in response to a request from the Whistleblower Office, the IRS, or the IRS Office of Chief Counsel" as it does not reflect the true nature of the IRS program and unfairly prejudices whistleblowers.

 

C. THE PROPOSED REGULATIONS SHOULD BE AMENDED TO FACILITATE GREATER COOPERATION BETWEEN THE IRS AND WHISTLEBLOWERS

 

The IRS whistleblower program, as currently administered, does little to facilitate a cooperative relationship between informants and/or their legal representatives and the agency. In fact, as briefly discussed above, the process is, for the most part, unilateral. The proposed regulations fail to address this fact and should be amended in an effort to increase the functionality of the program and to encourage more whistleblowers to come forward.

The current lack of cooperation between the IRS and whistleblowers inevitably results in unnecessary redundancy, wasted administrative resources, the failure to take advantage of the specialized knowledge and skills of many whistleblowers and their attorneys, and resulting inefficiencies. Certainly the IRS benefits from whistleblowers' information. But perhaps the greatest asset of the agency during an investigation is the continued involvement and cooperation of the whistleblower. As noted above, these individuals are often highly educated executives and/or financial professionals with intimate knowledge of the inner workings of the target of an investigation. The IRS is in a position to work proactively with these individuals to ensure a speedy and thorough process.

In his recent response to the proposed regulations, Sen. Grassley, vociferously decries the lack of communication between the agency and whistleblowers. Indeed he notes that at its inception, the program envisioned whistleblowers doing much of the heavy lifting during an investigation. However, with its unwillingness to offer greater cooperation to informers, the IRS makes this vision impossible. Our firm, having represented numerous IRS whistleblowers over the course of the last several years, shares Sen. Grassley's frustrations.

The benefits offered by heightened cooperation are simply unbounded. The sooner an investigation is brought to fruition, the sooner it frees additional resources to move forward in combatting other fraud. This will of course lead to greater recovery of funds by the Treasury and a greater deterrent effect to would-be fraudsters.

The IRS' apparent unwillingness to implement procedures that will enable it to work collaboratively with whistleblowers and their representatives, not only contravenes Congressional intent, but causes direct harm to taxpayers because the end result is that many clear-cut tax fraud cases go unpunished. As advocates for whistleblowers, we often counsel clients that despite their willingness to risk their personal, professional, and financial security, proceeding under the IRS program is a lengthy, difficult, and uncertain venture. The proposed regulations do nothing to change this view.

Only by amending Section 6103 to permit greater communication between the IRS and whistleblowers and their attorneys with regard to filed claims and resulting investigations, can the IRS Whistleblower program reach its true potential. The current state of the program and the proposed regulations as drafted do nothing to minimize the growing reluctance of many IRS whistleblowers who may be thinking of coming forward. The regulations governing the IRS whistleblower program should reflect not only the inherent and serious risks undertaken by whistleblowers, but their immeasurable value in helping to ensure the success of resulting investigations and substantial recoveries for the taxpayers. Accordingly, we ask that § 301.6103 be amended to facilitate a meaningful and open cooperation between the IRS and whistleblowers.

 

D. THE DEFINITION OF "COLLECTED PROCEEDS" SHOULD NOT IMPEDE REWARDS FOR INFORMATION RESULTING IN REDUCED NET OPERATING LOSSES

 

The manner in which the IRS chooses to treat whistleblowers, whose information leads to reduced net operating losses ("NOLs"), certainly affects the overall program. NOLs can be used to recover past tax payments or to reduce future tax payments. The proposed regulations' narrow definition of "collected proceeds" excludes a future refund claim resulting from the denial of NOLs. As Senator Grassley correctly points out in his recent letter:

 

a whistleblower could blow the whistle, reduce a big bank's NOLs by $100 million and if the bank doesn't pay any tax that year, the whistleblower is out of luck, even if the next year the bank pays $100 million, thanks to the whistleblower's wiping out those NOL's the previous year.2

 

In the Senator's example, but for the whistleblower's claim, the treasury would not have collected taxes or denied a refund, in future eligible years. Despite the clear nexus between the whistleblower's information and the future taxes collected and/or refund denial, the proposed definition provides zero financial incentive for whistleblowers to come forward in such a scenario.

Having represented numerous whistleblowers since the implementation of the 7623(b) program, this narrow definition is particularly troubling in common situations where a whistleblower first attempts to report and correct fraudulent NOLs internally only to be ignored by his or her employer. The whistleblower is then forced to decide whether to blow the whistle and notify the IRS or do nothing. A whistleblower's decision to report the company's unlawful NOLs to the IRS can further alienate and often lead to the dismissal of the whistleblower. This alienation and/or dismissal is the result of the appearance of auditors probing into the exact issues that the whistleblower originally brought to the attention of his or her employer.

This troubling situation is only compounded by the fact that there is no express anti-retaliation provision under § 7623. We can only assume that the IRS values the receipt of information that would disallow a company's NOLs. It follows, that the value it accords to such information should be reflected within the regulations. Therefore, the narrow definition of collected proceeds as it relates to the future use of NOLs should be amended to include the same. If not, the IRS runs the risk of alienating whistleblowers who will likely be discouraged from coming forward with evidence of fraud due to the uncertainty of their right to any reward and the lack of any express protections under the whistleblower statute.

 

E. CONCLUSION

 

The information and assistance of whistleblowers is an extremely effective and cost efficient means of battling tax fraud. Despite great personal risks, knowledgeable individuals choose to come forward for a litany of reasons, but most often due to government provided incentives. The regulatory proposals at issue, fail to reflect these facts and seriously jeopardize the IRS whistleblower program. As a result, we respectfully request that Treasury and the IRS consider and adopt the comments and proposals contained herein, as well as, those contained in Sen. Grassley's January 28, 2013 correspondence.
Very truly yours,

 

 

Eric L. Young, Esquire

 

Young Law Group

 

Philadelphia, PA

 

FOOTNOTES

 

 

1 January 28, 2013, Letter to Acting Secretary Wolin, Acting Commissioner Miller, and Assistant Secretary Mazur.

2Id.

 

END OF FOOTNOTES
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