By JAKE WIENS
Considering the current state of our nation's finances, it would seem safe to assume that the Internal Revenue Service (IRS) would jump at any opportunity to bring in more revenue. But a letter recently sent by whistleblower groups argues that the IRS is unnecessarily hamstringing its own whistleblower program—a program intended to bring in billions in new revenue—by misinterpreting Congress’s intent behind the program.
As reported by Tax Analysts (registration required), the letter points to guidance in the Internal Revenue Manual (IRM), which is not legally binding but is nonetheless significant as it guides IRS officials as they administer programs, that appears to conflict with decades of legislative history.
The IRM says that the IRS can reduce or deny a whistleblower’s reward if the whistleblower “planned and initiated” actions that led to the underpayment of taxes. According to the authors of the letter, the IRM defines the concept of “planned and initiated” too broadly. The long-understood intent of Congress, according to the letter, is that only a “chief architect” of a tax evasion scheme would qualify as a person who “planned and initiated” a scheme. But, as currently classified by the IRM, “planned and initiated” could apply to “an advisor to a decision maker,” or anyone who “knew or should have known that tax noncompliance” was likely to result from their conduct.
Such a broad definition includes just about every whistleblower with actionable information. As we’ve noted previously, “white collar crimes are both difficult to detect and almost impossible to prosecute without an insider. In most cases, these insiders will have some involvement in the wrongdoing that they are exposing.” In other words, sometimes it takes a rogue to catch a rogue.
This principle is perhaps best illustrated by the case of former UBS banker Bradley Birkenfeld. Birkenfeld voluntarily provided the Department of Justice (DOJ) and IRS with information about UBS’s efforts to help wealthy Americans evade taxes by hiding their assets in Switzerland. Birkenfeld’s disclosures have been instrumental to DOJ’s ongoing investigation of Swiss banking, which has brought in over a billion dollars in new revenue.
But, as we wrote back in 2009, Birkenfeld’s hands were by no means clean:
“To be sure, Birkenfeld is no saint. In pleading guilty to conspiring to defraud the United States, Birkenfeld signed a statement of facts detailing his role in soliciting wealthy Americans to evade taxes through the services provided by UBS.”
To put matters in perspective, however, Birkenfeld was essentially nothing more than a salesman for an institutionalized tax evasion program by UBS that had existed long before Birkenfeld ever began working at UBS and likely would have continued to exist long after he left if not for his disclosures.
In other words, Birkenfeld is exactly the sort of person the IRS whistleblower law is intended to encourage to step forward. But according to the IRM guidance, he would likely be classified under the IRM as having “planned and initiated” the tax evasion scheme. And as a result, would likely receive a far smaller reward or no reward at all.
Citing former Senate Finance Committee staffer Dean Zerbe, Tax Analysts paints a sobering picture of the effect the IRM may have on IRS whistleblower program:
The overly broad guidance on the planned and initiated limitation is discouraging key whistleblowers from coming forward to talk about offshore banking and tax shelters. By inappropriately casting too wide a net of who may be denied or limited an award for planning and initiating, the IRS is giving a straight-arm to the most valuable whistleblowers and has undermined the success of the whistleblower law.
Is that the kind of whistleblower program that best serves the public?
The Government Accountability Project, National Whistleblowers Center, and No FEAR Coalition signed the letter to IRS Commissioner Douglas Shulman. Read the letter here.
Jake Wiens is a POGO Investigator.
Image by Flickr user Enter The Story.