By Eileen K. Leslie, CPA, CFE
December 20th , 2016
Whistleblowers helped the IRS collect more than $2 billion in additional taxes from 2011 through February 2016. Despite this success in uncovering tax fraud and noncompliance, the IRS Whistleblower Office is often criticized as being slow moving and poorly organized.
As a forensic accounting expert for either the plaintiff or defendant in civil and criminal cases, I have experienced first-hand why parties to an IRS tax dispute might want to take a “trust but verify” approach when dealing with the IRS.
While working on a criminal case in which a national restaurant chain franchisee was accused by the IRS of under-reporting revenue from certain store locations, I observed the IRS as it unreasonably pursued the business owner, alleging tax loss amounts significantly higher than those actually calculated. Based on the excessive tax loss calculation, the business owner could have faced significant jail time.
In fact, the franchisee acknowledged that he had under-reported income and ultimately pled guilty. I was able to prove, however, that the IRS significantly overstated the tax loss associated with the omitted income. By working through past tax returns and the financial statements of the business, I proved that the tax loss was much less than the IRS alleged after considering certain operating expenses, charitable contributions and other legitimate deductions affecting the calculation of tax.
The taxpayer avoided jail time, and resolved the case with the payment of the accurate tax loss, penalties, and interest, in addition to one guilty plea of Making a False Tax Return. The franchisee was then able to put the incident behind him and return his attention to running his business.
While working as a financial analyst at the U.S. Attorney’s Office, it was imperative for me to remain fair and impartial to all parties involved in the matter during my investigations to ensure the proper pursuit of taxpayer funds when warranted. I acted as the government’s financial and investigative expert, and worked directly with agency representatives, relators and defendants. My primary responsibility was to identify the facts, investigate the allegations, perform forensic financial analysis as necessary and calculate damages on False Claims Act (FCA) and related whistleblower cases.
I now put my experience with the U.S. Attorney’s Office to work on behalf of plaintiffs and defendants in whistleblower and qui tam disputes.
Common Bureaucratic Obstacles in an IRS Whistleblower Case
Recent reports that fault the IRS for deficiencies in its handling of whistleblower claims underscore the importance of thorough preparation by IRS whistleblowers and qui tam counsel.
The Government Accountability Office (“GAO”) issued a report to Congress in October, 2015, which stated that timeliness and communication issues can discourage qualified IRS whistleblowers from pursuing viable claims.
Most recently, the Treasury Inspector General for Tax Administration made a series of recommendations in an August 2016 report titled, “The Whistleblower Program Helps Identify Tax Noncompliance; However, Improvements Are Needed to Ensure That Claims Are Processed Appropriately and Expeditiously.”
The $2 billion in additional taxes collected resulted from 732 claims in which a whistleblower award was paid. Collectively, these whistleblowers earned $363 million in rewards. Delays in processing times are common, with most of the awards paid taking an average of 5 to 8 years to reach closure.
While 732 paid claims may sound like a large number, it should be viewed in the perspective of total claims made. On average, only 2.5 percent of the thousands of IRS whistleblower claims filed in recent years successfully completed the lengthy review process.
The most common reasons cited for claim rejection and closure are identified below.
• Allegations were non-specific, non-credible, or speculative
• Information was already known to the IRS
• Threshold level required for IRS action was not met
• Insufficient time remaining on statute of limitations or statute expired
Types of IRS Whistleblower Rewards
The IRS offers two types of whistleblower rewards:
IRC Section 7623(a). Under this informant claims program, whistleblowers may receive awards with a maximum of 15 percent of the amount collected, up to $10 million. Smaller cases that do not meet a $2 million minimum or $200,000 in individual income fall into this category.
IRC Section 7623(b). Whistleblower claims exceeding $2 million in combined taxes, penalties and interest may qualify for an award of 15 to 30 percent of the amount collected. If an individual non-compliant taxpayer is a subject in the dispute, their annual income must be in excess of $200,000.
Tax issues underlying a whistleblower claim vary widely, but frequently involve the under-reporting of income, the use of undisclosed offshore accounts, or failure to pay employment taxes.
The award rules vary slightly between the two types of programs, so many potential whistleblowers work with an attorney or other whistleblower expert when preparing a claim for submission. Whistleblower attorneys, in turn, often rely on the work of a certified public accountant (CPA) with expertise in taxation and fraud investigations to fully document the extent of improprieties in financial reporting and tax filings.
A summary of IRS whistleblower claims paid in recent years appears below.
Table 1: IRS Whistleblower Collected Proceeds and Awards Paid for Fiscal Years 2011-2015
Source: WO Annual Reports to Congress for FYs 2011 through 2015, as contained on page 11 of the 8/30/16 report of the Treasury Inspector General for Tax Administration.
Recommendations for Improvement in the IRS Whistleblower Program
The Inspector General recommended that the Director of the IRS Whistleblower Program take the following steps to improve overall performance levels:
1. Contact whistleblowers with I.R.C. § 7623(a) claims when clarification is needed. This can help to eliminate inappropriate claimants earlier in the process, while also confirming claims that warrant further evaluation.
2. Improve the ability to monitor claim processing times. Measure timeliness of handling through various review stages.
3. Provide better support, including details, for claims that are rejected or denied.
4. Implement better controls to enhance oversight of the claims handling process.
5. Create a “Balanced Performance Measurement System” for the IRS Whistleblower Office. This will include more effective metrics and reporting for business results.
6. Establish a structured quality review process based on specific procedures, time frames, and data accuracy.
7. Enhance the initial data input process when a claim is initially reported. This will include the use of better verification filters, such as validation checks for dates and status fields.
8. Identify ineligible whistleblowers earlier in the review process.
Other recommendations focused on technical aspects of data management and the claims intake process.
How to Improve the Likelihood for Success in an IRS Whistleblower Claim
Investigative CPA provides collaborative case analysis and skilled fraud investigation services to ensure thorough evaluation of alleged false claims, effective case management and solid damage calculation. Drawing on the government experience of founder Eileen Leslie, our unique perspective enables us to enhance the presentation of a whistleblower case in a way designed to increase the credibility of the allegations.
About Investigative CPA, LLC
Investigative CPA, LLC (www.investigativecpa.com), founded by Eileen K. Leslie, specializes in False Claims Act (FCA) investigations on a national basis.
Ms. Leslie is a Certified Public Accountant (CPA, 2004), a Certified Fraud Examiner (CFE, 2007), and holds a Master of Taxation (2003). She worked for the Department of Justice in both the United States Attorney’s Office (2010 to 2014) and the Federal Bureau of Investigation (FBI, 2004 to 2007). Additionally, she has held positions in public, private and forensic accounting firms. She is also a proud United States Air Force veteran.
She works closely with qui tam attorneys and government agencies nationwide to investigate FCA claims, uncover fraud, calculate damages, and provide forensic financial consulting services. She strives to achieve maximum recovery of damages to the government and other injured parties, when appropriate.
Beyond FCA investigations, Ms. Leslie has performed a variety of criminal fraud investigations and non-government civil fraud examinations and fraud assessments. She has also investigated violations of the Anti-Kickback statute and the Stark Law.
Contact Ms. Leslie at 205-660-0322 or email to discuss a potential whistleblower case or other fraud matter.
This article is provided for educational purposes only. It is not intended to provide legal advice or an expert opinion in regard to any topic discussed. The blog should not be used as a substitute for legal advice from a licensed attorney in your state.
Material for this article was taken from a collection of industry sources relating to the subject. Every case is different and circumstances vary widely depending on the governing state or federal law, policy provisions, and related considerations.