PITTSBURGH — Even as the IRS orders Americans to pay their income taxes, federal revenue collectors are failing to take full advantage of a seven-year-old law that encourages tipsters to turn in tax-cheating bosses, neighbors, relatives, and exes, according to attorneys who represent whistleblowers.
Since the Tax Relief and Healthcare Act went into effect in 2007, the Internal Revenue Service whistleblower program has drawn tens of thousands of tips. Missing, though, is much of a payoff for all but a tiny fraction of whistleblowers.
Under the act, if a whistleblower brings the IRS a tip on a tax dodger that results in recovery for the government of $2 million or more, the agency has to give the whistleblower a cut. From 2008 through 2012, according to IRS reports, the agency’s Whistleblower Office received 1,917 allegations that have the potential to bring in $2 million each.
During those years, though, IRS investigators converted only 38 whistleblower tips that generated collections of $2 million or more. The IRS hasn’t yet released completed data for fiscal 2013, and a spokesman did not respond to repeated requests for updated information.
In fact, IRS officials did not respond to repeated requests for comment for this story.
Ralph Minto, a Pittsburgh tax attorney, said he has, since 2007, helped to steer to the IRS about 10 people who had information that could result in multimillion-dollar tax collections.
The payoff? “Nothing,” Mr. Minto said. “They took [the information], and that’s the last you hear of it.”
Although IRS officials did not respond to requests for comment, Stephen Whitlock, director of the IRS Whistleblower Office, said in a Jan. 22 Web seminar for the American Bar Association that slow flow of payments to tipsters is driven by the lengthy tax investigation and collection process.
“The taxpayer has rights throughout the process,” he said. “We have to conduct an audit. We have to assess tax. The taxpayer can go through an administrative appeal. They can take a judicial appeal.”
While the IRS has paid roughly $230 million to whistleblowers since 2008, nearly half of that went to one man — who went to prison before getting his reward. In at least two cases, the IRS is accused in court of acting on whistleblower information, reeling in tens of millions of dollars, but refusing to pay the tipster.
“There’s a lot of pending cases that they are not zeroing in on,” said Sen. Charles Grassley (R., Iowa), who led the charge to mandate IRS whistleblower payments. “It’s taking them forever to make decisions, and whistleblowers in the meantime don’t get adequate updates or any information whatsoever.”
Two years after the Civil War’s end, Congress allowed the secretary of the treasury — whose bureaus include the IRS — to pay people who tattle on tax cheats. The theory: Given the career risks inherent in whistleblowing, especially when you tell on your employer, the least the government can do is give tipsters a share of the take.
Faced with perennial questions about the IRS’ effectiveness at collecting taxes — recent estimates are that hundreds of billions of dollars go unpaid every year — Mr. Grassley led the charge to make some payments mandatory.
If you tip off the IRS to a business, or a high-income individual, who is shorting the tax man, and the government as a result ends up getting $2 million or more, you’re usually entitled to 15 percent to 30 percent of the collections.
The IRS’ top lawyer when Tax Relief Act went into effect, Donald Korb, opposed the program, fearing it would turn Americans into “in essence, the equivalent of spies for the IRS.”
“I saw the whole IRS whistleblower process as basically a sordid business which has the potential to lead to some sort of scandal at the IRS down the road,” said Mr. Korb, now at the Washington, D.C., firm Sullivan & Cromwell.
The law spurred surging reports to the IRS Whistleblower Office, from 3,704 in 2008 to 8,634 in 2012. During those years, tips to the office resulted in tax collections of nearly $1.5 billion.
Compared with the 33,000 tips the Whistleblower Office received during those five years, the 38 recoveries of $2 million or more seem paltry to some observers.
“There’s no doubt that the failure to give awards is having a chilling effect,” said Stephen Kohn, executive director of the National Whistleblower Center, a nonprofit based in Washington.
Mr. Whitlock, in his comments recorded at the American Bar Association seminar, said the IRS in fiscal 2013 paid about $50 million to whistleblowers. No details of those payments were available.
A single anonymous whistleblower landed the bulk of that, a payment of $38 million. That whistleblower’s attorney, Scott Knott of Ferraro Law Firm in Washington, said that much of the IRS bureaucracy is still hostile to the program.
“Many people within the IRS believe that Congress foisted this program on them, that they didn’t ask for it, that they don’t want people’s help, that whistleblowers make more work for them,” he said. Even when the IRS pursues a tip, he said, “they may settle for pennies on the dollar.”
Prison before payment
The risks and rewards of telling are nowhere clearer than in the biggest whistleblower case in U.S. history, brought by former banker Bradley Birkenfeld.
Birkenfeld, an American living in Switzerland in the 1990s, marketed the tax avoidance services of banking giant UBS to Americans. Birkenfeld helped his clients to falsify documents to conceal hundreds of millions of dollars in assets, according to the indictment filed against him in the Southern District of Florida in 2008.
“Birkenfeld provided his information to the Department of Justice criminal investigators,” said Mr. Kohn, who became one of the whistleblower’s attorneys after his conviction. “Brad walks in, gives information that would implicate him in a tax crime, they indict him.”
Birkenfeld served about three years in prison for conspiracy to defraud the United States. After his 2012 release, he moved to New Hampshire. He was not available for interviews.
While he served his sentence, his attorneys provided the IRS with a road map to the tricks used by Swiss banks to shelter the incomes of American clients from the tax collector. UBS paid a $780 million settlement, and an IRS amnesty program yielded $5 billion in revenue that had been hidden in Switzerland.
After his release, under the whistleblower law, the IRS paid Birkenfeld $104 million. Mr. Kohn called it “the only reward ever given to someone convicted of a felony related to [the subject of] their whistleblowing.”
To the U.S. Chamber of Commerce, the case reflects a worst-case scenario for business.
“If the Birkenfeld example is going to be a common one, clearly it’s going to be problematic,” said Matt Webb, senior vice president at the U.S. Chamber of Commerce Institute for Legal Reform. “If you’ve got folks who are part of a bad scheme who are in jail profiting from [the whistleblower program], that’s a bad way to run a railroad in our view.”
Scant paper trail
Because the Birkenfeld matter involved a prosecution and a nine-figure settlement, it occurred in the public eye. By contrast, most tax matters are resolved privately, leaving little public paper trail — and no way for a whistleblower to know whether their tip has been pursued.
“There have been matters where initially there has been lots of discussion and follow-up and then what seems to be a very healthy relationship [between the tipster and the IRS], and then dead silence and the case seems to languish,” said attorney Erika Kelton of the Washington-based law firm Phillips & Cohen.
Two would-be whistleblowers accuse the IRS of pursuing their tips and leaving them out of the proceeds.
One is Albert G. Hill III, great-grandson of oil tycoon H.L. Hunt. In 2008, he alleged to the IRS that his relatives hid a $1 billion trust fund when they paid the tax due on Haroldson Lafayette “Hassie” Hunt, Jr.’s estate following his 2005 death.
According to recent court filings by Mr. Hill’s attorneys at Los Angeles firm Irell & Manella, the tip to the IRS resulted in a payment of more than $100 million to the government. That could entitle Mr. Hill to a whistleblower payment of $15 million to $30 million. According to Mr. Hill’s lawsuit, the IRS has paid him nothing, arguing that it didn’t rely on his tips to collect the proceeds.
A trial on the matter is set for July in Washington.
Heading for trial is the case of Joseph Insinga, a former managing director of Rabobank in the Netherlands.
Mr. Insinga’s attorney, Andrew Carr of Memphis, said the former banker told the IRS about six Fortune 100 companies for which Rabobank was handling offshore, tax avoidance transactions.
He said the IRS was silent on what it did with the tip, but through public filings of the six companies he and Mr. Insinga discovered that the tips resulted in “several hundred millions of [dollars of] taxes recovered.”
The IRS, said Mr. Carr, took the position that Mr. Insinga’s information “was helpful, but they already knew about it, or they would’ve discovered it” without him.
Stuck in the system
Philadelphia attorney Eric Young landed for an anonymous client the first mandatory whistleblower award, totaling $4.5 million on a $20 million recovery by the IRS.
He said he has other cases that “in my opinion are as good or better than that case that for whatever reason seem to be languishing in the system.” Of dozens of other whistleblowers he shepherded to the IRS, just one has received payment, he said.
When IRS Criminal Investigations gets involved, pursuit of the tax cheat becomes much more vigorous, Mr. Young said, though even then “whistleblowers can be forgotten.”
Senator Grassley said he hopes IRS Commissioner John Koskinen “is going to make it work as intended.”
If not, some whistleblower attorneys hope that Congress gives private citizens the right to sue tax cheats on behalf of the government, in return for a share of the eventual proceeds.
Under a law called the False Claims Act, individuals are suing private entities that defraud the government, recovering $3 billion a year for Uncle Sam and pocketing shares approaching $400 million annually. That law doesn’t apply to tax matters, so citizens don’t have the right to sue companies for shorting the IRS.
For now, the senator said he’ll keep pushing the agency to take whistleblowers more seriously.
“The IRS whistleblower program has the potential to dwarf recoveries under the False Claims Act,” said Patrick Burns, co-director of Taxpayers Against Fraud. “There is that much tax avoidance and tax cheating going on in this country.
“But for that to happen, the IRS has to create a public-private partnership. It has to respect whistleblowers.”
Block News Alliance consists of The Blade and the Pittsburgh Post-Gazette. Rich Lord is a staff writer for the Post-Gazette.
Contact him at: email@example.com, 412-263-1542, or on Twitter @richelord.