The number of payments from the IRS to whistleblowers under the revised section 7623(b) is not projected to grow dramatically in fiscal 2013, and processing times for whistleblower claims remain long, the IRS Whistleblower Office said on February 13 in its fiscal 2012 report to Congress, but practitioners told Tax Analysts that they remain hopeful for improvement.

Only five claims have been paid out under section 7623(b), which was enacted in 2006 to supplement prior whistleblower legislation. In September 2012 former UBS banker Bradley Birkenfeld was awarded $104 million for helping the IRS collect more than $5 billion in unpaid taxes from banks and individuals.

The IRS’s most recent report shows that fiscal 2012 submissions increased slightly from fiscal 2011 levels, from 314 to 332, but both years’ totals were far below the 422 submissions for fiscal 2010. The IRS paid out 128 claims in fiscal 2012, but only 12 of those involved collections of more than $2 million and most were submitted under the pre-2006 law — what is now section 7623(a). The number of claims paid under section 7623(b) was so low that it didn’t qualify for separate reporting, the IRS said.

Practitioners said the IRS was to blame for the lower figures for 2011 and 2012. “We believe that this leveling off of claims was due to the lack of publicity about the program, which was itself likely due to the failure of the IRS to pay any awards until the very end of fiscal 2012,” said Scott A. Knott of the Ferraro Law Firm. However, “since the news of the two large awards paid late last year, we have seen a significant increase in activity by tax whistleblowers evaluating potential claims,” Knott said. In addition to the award to Birkenfeld, the IRS paid out $38 million to an anonymous corporate tax whistleblower whom Knott represented.

Senate Finance Committee member Chuck Grassley, R-Iowa, who spearheaded the 2006 amendments to section 7623, said in a release that the drop and subsequent leveling off of new whistleblower claims is alarming. “I’m concerned that the delay in awards and the way the IRS treats whistleblowers might be contributing to the drop in whistleblower cases,” he said.

Proposed regulations (REG-141066-09 ) issued by Treasury and the IRS in December will contribute to a drop-off in future whistleblower claims, and although the IRS has made some progress in tracking and processing claims, it must do more to give whistleblowers the confidence to come forward, Grassley said.

The proposed regs sought to address computational determinations and details for submitting information and filing claims for awards. Practitioners criticized the regs’ interpretation that non-Title 26 amounts recovered, like those for foreign bank account report violations, are not “underpayments of tax” and do not constitute collected proceeds for the purposes of whistleblower awards.

More Staff Needed

As of December 10, 2012, the Whistleblower Office’s open section 7623(b) claims had increased 11 percent over its level at the end of fiscal 2011, from 8,643 to 9,636. In fiscal 2012 those outstanding claims included 10,043 taxpayers, 1,126 whistleblowers, and 1,449 submissions, the IRS said.

Although the average claim processing time for initial review by the Whistleblower Office was down slightly in 2012, to 117 days from 131 days, the processing time for a field examination was up 42 percent, to 424 days from 299 days in 2011. Reviews involving a subject matter expert saw a decrease in processing time, from 382 days to 260 days, but the time spent in Appeals was up slightly, from 200 to 233 days. The time spent in review by the Criminal Investigation division was down dramatically, to 61 days from 842 days in 2011, the IRS said.

The most significant jump in processing time occurred during award evaluation, although those numbers may have been affected by changes to the definition of award evaluation between 2011 and 2012. The average award evaluation time for fiscal 2012 was 1,141 days, a 300 percent increase from 285 days in 2011.

The Whistleblower Office’s staff doubled in size from 18 to 36 during fiscal 2012, primarily because of the January 2012 transfer of the Informant Claims Examination Unit out of the Small Business/Self-Employed Division, but practitioners complained that it’s still too small.

“The amount of time it takes to move a whistleblower claim is making molasses look like a derby winner,” said Dean A. Zerbe of Zerbe, Fingeret, Frank & Jadav PC, who represented Birkenfeld. “Given the length of time for submissions to be processed and awards to be made, it is vital that there be earlier and more open communication with whistleblowers.” That requires proper staffing, said Zerbe, who previously served as Grassley’s senior counsel and tax counsel on the Finance Committee.

Noting Grassley’s own repeated observations that the office needs more staff, Andrew R. Carr of Bateman Gibson LLC said, “The small number of analysts conducting a program of this size and scope is simply insufficient to handle the volume and complexity of the issues and cases presented.”

Given the tremendous return on investment (ROI) that informant programs achieve in areas such as healthcare fraud, “there is no reason a far better ROI could not be achieved in the context of rooting out tax cheats,” Carr said, adding that “there are fewer moving parts in these IRS cases” than there are in investigations involving the Justice and Health and Human Services departments, resulting in “a whole lot of money left on the table.”

Carr said that in his view, the IRS report “is knowingly and materially misleading on what ‘use’ of a whistleblower’s information qualifies for an award under the statute.” Nothing in the statute requires information provided by an informant to have “substantially” or “materially” contributed to the initiation of an investigation, he said. “This gives an agency that has shown that it is averse to paying awards too much discretion,” Carr said.

Silver Lining

The IRS report does contain some good news. “Last year the IRS collected more than half a billion dollars as a result of information provided by whistleblowers, so in spite of all the criticisms of the IRS whistleblower program and the opportunities the IRS has already missed, they have some real results to show for it,” said Gregory S. Lynam of the Ferraro Law Firm.

“This report reveals that over the last five years the IRS has collected nearly $1.5 billion as a result of the IRS whistleblower program, and even after paying out just under $200 million in awards, it is still one of the most cost effective enforcement tools the IRS has,” Knott said. “Based on the claims that we have filed over the last five years, we expect that these collections are just the tip of the iceberg.”

Zerbe acknowledged the problems highlighted in the IRS report but said “a report that showcases that awards have finally been issued under the new laws is unquestionably good news.” The IRS has the opportunity to improve the program by making common-sense changes to the proposed regulations and by responding to whistleblowers’ concerns, Zerbe said.

Amy S. Elliott contributed to this article.