The latest annual report from the IRS Whistleblower Office, released January 5, shows the office awarding significantly fewer claims and drastically reducing the combined dollar amounts for such awards in 2017.

According to the Whistleblower Office’s fiscal 2017 report, only 367 claims were awarded a combined total of less than $34 million in 2017. By contrast, fiscal 2016 saw 761 claims receive $61 million collectively. The number of awards is still higher than the 204 from 2015. As a percentage of the amounts collected, the awards in 2017 rose slightly to 17.8 percent from the previous year’s 16.6 percent.

The time it took to process awards did not change substantially between years, with the average still exceeding seven years for both section 7623(a) and (b) claims. In 2017 nearly 12,000 claims were received by the office, compared with almost 14,000 received the year before, with most of the drop occurring in claims to the Criminal Investigation division.

The decline in award payments “shows a stagnation that needs to be addressed by the IRS, Greg Lynam of the Ferraro Law Firm said, also citing the new submission statistics. “Nearly all new submissions” are related to Small Business/Self-Employed Division issues, he said. “A dearth of [Large Business and International Division] cases — by their very nature high-value — means the IRS is not going to be able to make large award payments down the road,” Lynam said, adding that only two section 7623(b) awards in 2017 related to LB&I made up the “lion’s share of award dollars” recovered by his firm.

In 2017 only 135 claims were made to LB&I under section 7623(b) , compared with 184 in 2016. Lynam added that the 456 cases in litigation may also be having a chilling effect, arguing that the Tax Court should set the standard of review for whistleblower cases, and that once de novo review is in place the IRS will modify some of its positions.

One bright spot for whistleblowers highlighted by the report is the 50 percent increase in section 7623(b) awards, which climbed from 18 to 27, under the provision dictating payouts between 15 and 30 percent of collected proceeds for claims above the relevant thresholds.

The number of open claims fell from 29,835 in 2016 to 28,197, although so too did the number of claims closed during the year, which dropped from 21,124 in 2016 to 14,445. As with 2016, the most common reason for claim closure, representing 57 percent of the total, was that the claims were rejected because the allegations were not specific or credible, or were speculative in nature.

Dean Zerbe of Zerbe, Miller, Fingeret, Frank & Jadav PC said whistleblowers could use the annual report’s outline of reasons for denying a claim as a checklist for what the IRS seeks in whistleblower submissions: specific named taxpayers, actual information in hand that goes beyond theories, and significant dollar issues that are within the statute of limitations.

Scott A. Knott of Ferraro said the statistic for “no change” audits, which represented only 6 percent of closures, continued to be a positive for the program.

“This statistic should be even lower than 6 percent because the IRS includes adjustments that are made but that have non-Title 26 collected proceeds, like [foreign bank account report] penalties, within the same statistic. The end take-away from the . . . statistic is that whistleblowers that provide high-quality information to the IRS are not likely to see a claim denied because the IRS couldn’t make the adjustment stick at audit.”

Zerbe also reflected on the report as a case of “glass half-full and half-empty.” The marked increase in the mandatory whistleblower awards and the efforts to speed up the award process have to be weighed against the significant dollar award drop, he said.

“Of greater concern is the reduction in the number of claims submitted in 2017 that potentially qualify for the mandatory award program, especially involving large businesses and criminal” conduct, Zerbe said.“My hope is that this reduction in submissions is temporary, but I fear that it reflects, in part, uncertainty about the whistleblower award program,” Zerbe said, pointing to the definition of collected proceeds as one source of uncertainty.

The issue surrounding collected proceeds has been at the center of a dispute in a closely watched whistleblower case on which Zerbe is lead counsel. In April the government filed its notice of appeal on a Tax Court decision that gave broad reading to section 7623(b)(1) and held that the payment of civil forfeitures and criminal fines constituted collected proceeds for purposes of calculating whistleblower awards.

A Game Changer?

In his letter within the report, Lee Martin, director of the IRS Whistleblower Office, said that the office “continued [its] ambitious efforts to implement improvements and enhancements” in the wake of criticism from the Government Accountability Office and the Treasury Inspector General for Tax Administration over timeliness, lack of communication with stakeholders, and potential for award inconsistency.

Zerbe praised Martin for being a vocal advocate for the program, but said such support should also come from CI, LB&I, SB/SE, and the IRS commissioner, as well.

One hot-button issue for practitioners in recent years has been the IRS’s continued failure to develop section 6103(n) contracts for whistleblowers. The GAO had called on the IRS to develop guidance for determining when such contracts could be beneficial for examiners and outline steps for requesting such a contract.

While return information is generally confidential under section 6103, section 6103(n) contracts allow for the disclosure of taxpayer information when necessary for “the providing of other services, for purposes of tax administration.”

The report champions the guidance it issued on the matter in April 2017. That memo cites several instances when a 6103(n) contract should be considered for unrecorded transactions, when the whistleblower has substantial industry expertise in complex transactions or emerging compliance issues, and when substantial factual development based on the whistleblower’s knowledge could be beneficial. When it was released publicly, practitioners were encouraged by the tone of the memo but wondered whether the lengthy procedural hurdles put in place would continue to hinder the contracts’ use.

“CI and DOJ have long been able to work with informants, including whistleblowers who have provided information through the Whistleblower Office, with positive results that otherwise would not have been obtained,” Erica L. Brady of Ferraro said. “Similar collaboration with the civil operating divisions would be game changing for tax administration.”