Tax Whistleblowers: Incomplete Data Hinders IRS's Ability to Manage Claim Processing Time and Enhance External Communication
Published: 2011-08-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Tax Relief and Health Care Act of 2006 expanded the Internal Revenue Service's (IRS) whistleblower program, increasing rewards for submitting information on others' tax underpayments to up to 30 percent of collected proceeds. The expanded program targets tax underpayments over $2 million and could reduce the gap between taxes owed and taxes paid. IRS's Whistleblower Office has received over 1,300 submissions qualifying for this new program since 2007. GAO was asked to assess (1) how IRS manages the expanded program, (2) how IRS communicates with whistleblowers and the public, and (3) any lessons from IRS's or other government whistleblower programs that could improve IRS's expanded whistleblower program. GAO analyzed IRS documents and data and interviewed IRS officials, whistleblower attorneys, and federal and state whistleblower program officials.
section_title: What GAO Found
paragraphs: Whistleblower claims can take years to go through the IRS review and award determination process. As of April 2011, about 66 percent of claims submitted in the first 2 years of the program, fiscal years 2007 and 2008, were still in process. According to IRS officials, claims can take years to process because IRS must take various steps to ensure the integrity of claim reviews and resulting taxpayer examinations. Further, taxpayers subject to examination can exercise rights that can add years to the process. IRS does not collect complete data on the time each step takes or the reasons claims are rejected. Without such data, IRS may be unable to identify potential improvements to claim processing efficiency. Furthermore, not all the IRS divisions that review whistleblower claims have time targets for their subject matter expert reviews. Nor does the Whistleblower Office have a systematic process to check in with the divisions about the time taken for their initial reviews. IRS is limited in what information it can share with whistleblowers about the status of claims because of statutes protecting the privacy of tax information. For example, because IRS cannot disclose if it is examining a taxpayer, it cannot inform whistleblowers on the progress of their claims or the reasons their claims are rejected. One mechanism through which the Whistleblower Office can communicate program results is its mandated annual report to Congress. However, the most recently released report, for fiscal year 2010, did not contain information on case processing times or specific data on why IRS rejected claims. Collecting additional data and including it in the report could improve the transparency of the program and Congress's ability to oversee it. Federal and state whistleblower programs have features with potential benefits that could improve IRS's expanded whistleblower program, including options that increase interaction or information shared with whistleblowers and options that attempt to improve the accountability for claim processing. While there are potential advantages to all identified options, it is difficult to determine if the advantages outweigh the disadvantages for many options. Furthermore, IRS would be limited by taxpayer data protections in implementing some of the options.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS collect more information--including data on the time each step takes for all claims and reasons for claim rejection--in its claim tracking system, establish a process to follow up on claims that exceed review time targets, and include more information on these issues in its annual reports to Congress. In written comments on a draft of this report, IRS generally agreed with our recommendations.

section_title: Letter
paragraphs: For decades the Internal Revenue Service (IRS) has had the authority to  pay awards to whistleblowers who submit information about others’ tax  underpayments. The Tax Relief and Health Care Act of 2006 expanded  this authority to make it more attractive for whistleblowers to provide  information to IRS, which could help IRS reduce the tax gap—the  difference between what is owed in taxes and what is paid voluntarily and  on time. IRS’s most recent estimate of this gross tax gap was $345 billion  for 2001. The act, which targets tax amounts in dispute of more than     $2 million, requires IRS to pay whistleblowers up to 30 percent of the  collected proceeds, including additional tax, interest, penalties, and other  amounts it collects as a result of information whistleblowers provide. The  act also directed IRS to establish a Whistleblower Office to administer the  expanded whistleblower program. Since the Whistleblower Office was  established in early 2007, IRS has received over 1,300 whistleblower  submissions qualifying for the expanded program, alleging tax  noncompliance by more than 9,500 taxpayers. As of May 12, 2011, IRS  has paid a small number of awards under the expanded program. IRS  has determined that information on awards paid is protected from  disclosure in the same manner as taxpayer return information and  disclosure of the number of awards paid would violate IRS’s privacy  protections.
You asked us to review IRS’s expanded whistleblower program to  determine whether it is operating effectively and to what extent  improvements could be made. In response, this report’s objectives are to  (1) assess how IRS manages the expanded whistleblower program;       (2) evaluate how IRS communicates with whistleblowers and the public;  and (3) determine what lessons, if any, can be learned from IRS’s and  whistleblowers’ past experiences with the Whistleblower Office and other  governmental efforts that could improve IRS’s expanded whistleblower  program.
To assess how IRS manages the expanded whistleblower program, we  analyzed the Internal Revenue Manual and other IRS documents and  data, interviewed officials from IRS’s Whistleblower Office and operating  divisions which investigate whistleblower claims, and reviewed GAO’s  existing body of work on internal control standards. To evaluate how the  Whistleblower Office communicates with whistleblowers and the public,  we interviewed IRS officials and private attorneys who represent multiple  tax whistleblowers. To determine what lessons can be learned from IRS’s  and others’ experiences with whistleblower cases, we reviewed  documents and interviewed officials from federal agencies and state tax  agencies with whistleblower reward programs. We also interviewed  attorneys who represent tax whistleblowers to discuss their experiences  with submitting whistleblower claims to IRS. Whistleblower attorneys have  a clear financial interest in the outcome of whistleblower claims. However,  interviewing them allowed us to obtain broad viewpoints of the IRS  whistleblower program while keeping whistleblowers’ identities  confidential. For more information on our scope and methodology, see  appendix I.
We conducted this performance audit from September 2010 to August  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: In 1867, Congress enacted legislation that allowed the government to pay  awards to individuals who provided information that aided in detecting  and punishing those guilty of violating tax laws. Initially, Congress  appropriated funds to pay these awards at the government’s discretion. In  1996, Congress expanded the scope of the program to also provide  awards for detecting underpayments of tax and changed the source of  awards to money IRS collects as a result of information whistleblowers  provide.
The Tax Relief and Health Care Act of 2006 created an expanded  whistleblower award program to complement the existing whistleblower  program. Table 1 shows the distinctions between the two programs,  which we refer to as the original and expanded programs. This report  focuses on the expanded program.
The act also directed IRS to create the Whistleblower Office, which is  responsible for managing and tracking whistleblower claims from the time  IRS receives them to the time it closes them, either through a rejection  letter or an award payment. The Secretary of the Treasury is required to  submit an annual report to Congress on the activities and outcomes of  both the original and expanded whistleblower programs. As of May 2011,  the Whistleblower Office had 20 staff members.
IRS’s review of whistleblower claims involves a series of steps and IRS  can reject claims throughout the process. Although IRS’s Whistleblower  Office manages the whistleblower program, conducts initial reviews of  claims, and makes award determinations, IRS’s operating divisions are  responsible for investigating claims and conducting examinations under  the expanded program. The Office of Chief Counsel is not involved in  every whistleblower claim but reviews whistleblower claims for legal  issues when the Whistleblower Office or operating divisions request such  assistance. IRS’s Criminal Investigation (CI) unit also investigates fraud  identified by whistleblower claims. A claim may transfer from CI to an  operating division if CI is initially involved but declines to pursue the claim.  Conversely, an operating division can involve CI if it determines during an  examination that there is a criminal component to a claim. While the act  establishing the expanded whistleblower program does not offer specific  protections for whistleblowers, the Whistleblower Office has several  policies and procedures to protect the identity of a whistleblower.
Whistleblowers may not submit claims anonymously, as submissions  must be made under penalty of perjury and IRS needs to assess the  credibility of whistleblowers and the information they provide. Likewise,  certain individuals, such as some federal employees, are prohibited from  receiving whistleblower awards and the Whistleblower Office must know  the identity of the whistleblower to enforce this restriction. Table 2 is a  simplified outline of the whistleblower claim process for the expanded  program.
Whistleblower awards are mandatory if IRS takes administrative or  judicial action that results in collected proceeds based on the  whistleblower’s information. IRS is clarifying the definition of collected  proceeds. Currently, the Internal Revenue Manual section on  whistleblower awards defines collected proceeds as only new monies  collected. Recently, IRS issued proposed regulations that would clarify  the definition of collected proceeds to include denials of refunds and  reductions in overpayment credit balances when calculating a  whistleblower’s award. If IRS pays an award to a whistleblower, its  policy is to withhold 28 percent in tax from all whistleblower payments, as  award payments are taxable income. IRS withholds tax to reduce the  risk of tax underpayment on what can potentially be large amounts of  income.
At the federal level, there are several other agencies that offer awards for  those who bring forth information that could lead to the government  recouping money. The Department of Justice receives allegations of fraud  against the government under the False Claims Act, although tax cases  are specifically excluded. The False Claims Act includes a qui tam  provision that allows whistleblowers to pursue claims on behalf of the  government if the government elects not to proceed on the claims brought  by the whistleblower. The Centers for Medicare and Medicaid Services  offers awards to those who provide information on health care fraud. The  Securities and Exchange Commission and the Commodity Futures  Trading Commission are each implementing whistleblower programs and  consulted IRS for advice. Three states—New York, Florida, and  Texas—also have tax whistleblower reward programs. New York’s  program has a tax qui tam provision that was enacted in August 2010.  Oregon also has a tax whistleblower reward statute, but the program is  inactive.
section_title: Whistleblower Claims Can Take Years to Process but the Whistleblower Office Does Not Have Complete Data on Claim Processing Time
paragraphs: Whistleblower claims can take years to go through the IRS review and  award determination process. For example, as of April 25, 2011:    about 66 percent of claims submitted in the first 2 years of the  program, fiscal years 2007 and 2008, were still in process;  less than 7 percent of claims submitted in fiscal years 2007 and 2008  that were still in process were in the Whistleblower Office final review  or Whistleblower Office award evaluation steps; and    447 claims submitted in fiscal year 2010 had been in the  Whistleblower Office initial claim review step at least 200 days.
For each year since 2007, table 3 shows the number of claims at each  step of the review process as tracked within E-TRAK, a claim  management information system IRS developed and launched in January  2009. The table does not include claims receiving awards because of  IRS’s concerns about disclosing tax information.
According to Whistleblower Office and operating division officials, it can  take IRS significant time to review and examine whistleblower claims for  various reasons.    Some whistleblower claims are highly complex and are submitted with  large amounts of supporting documentation. Evaluating large amounts  of data is time-consuming.    Both the Whistleblower Office and the SMEs need to understand the  relationship between a whistleblower and a target taxpayer in order to  make determinations about the qualifications of the claim. For  example, certain individuals are not eligible for awards under the  expanded whistleblower program, including federal employees who  learn of tax noncompliance in the course of their work activities or  individuals who are current representatives, such as attorneys or  accountants, of a targeted taxpayer.    SMEs review information that whistleblowers provide to determine if it  may be tainted, meaning it may be subject to attorney-client privilege  or any other legal protections that would preclude IRS from using it in  an examination. If SMEs determine that information may be tainted,  the Office of Chief Counsel reviews the claim and determines which  documents should and should not be forwarded to an examination  team.    SMEs can request debrief meetings with whistleblowers to clarify the  tax noncompliance issues alleged or to determine the source of  submitted information to ensure it is not privileged. According to  operating division officials, arranging and holding these meetings can  add time to the SME review process; for example, if IRS counsel is  not immediately available or whistleblowers need to arrange to travel  to an IRS office.    SMEs have other work priorities that may delay their review of  whistleblower claims. SMEs may have expertise in specific areas of  tax compliance, such as employment tax or estate and gift tax. LB&I,  SB/SE, and TE/GE have between 7 and 10 SMEs each; they do not  work exclusively on whistleblower claims and support other  examinations and IRS programs.    Within the examination step, operating divisions do not prioritize  whistleblower claims; they are treated the same as all other  examinations. According to IRS officials, each claim should rise on  its own merits alongside other cases that have been selected for  examination by other programs.
After the examination step, whistleblowers will likely still have to wait  several years before IRS can determine if they are due an award due to  factors outside the Whistleblower Office’s control. Taxpayers can appeal  IRS’s assessment of tax, and if a taxpayer and IRS cannot reach  agreement on the outcome of the case through the appeals process, the  taxpayer may have the case reviewed by the U.S. Tax Court, U.S. Court  of Federal Claims, or a U.S. district court. Furthermore, the Whistleblower  Office generally does not pay claims until after IRS collects all proceeds  from taxpayers, the 2 years taxpayers are granted to request refunds of  their payments has elapsed, and in some cases, IRS has completed all  taxpayer examinations resulting from a single award claim form (Form  211). Whistleblower Office officials said that the 2-year wait was important  because taxpayers, regardless of whether they were the subject of a  whistleblower investigation, have the right to request a refund, even on  issues that whistleblowers identified. Likewise, the officials said that  waiting until all claims under one submission are complete can be to the  benefit of whistleblowers if, for example, claims only meet the disputed  tax amount criteria for the expanded program when considered in  aggregate. Other than for claims being appealed, IRS classifies these  types of claims in E-TRAK as suspended. Table 3 provides data on the  number of claims that were in suspended status as of April 25, 2011.
We also identified other factors that could affect claim processing times.  As discussed, Whistleblower Office analysts and SMEs review the  relationship of a whistleblower to a targeted taxpayer when assessing the  credibility of information whistleblowers provide. Although Form 211 asks  whistleblowers to explain their relationship to target taxpayers, the  question is part of a broader question asking whistleblowers to describe  the documents they provided. Operating division SMEs told us that  sometimes the relationship information is not provided or is included  within the attached documents, where it can take significant time to find  and understand the relationship. Furthermore, Form 211 does not ask  other questions that help IRS evaluate whistleblowers’ submissions, such  as if the whistleblowers have supplied the same information to other  government agencies, submitted all information they have supporting a  claim, or are federal employees. Operating division officials told us that  having this relationship and other information more clearly identified at the  beginning of the whistleblower claim review process could help them  process claims more efficiently.
subsections: section_title: The Whistleblower Office Does Not Have Complete and Accurate Data on Claims Processing, Including Time in Each Step
paragraphs: Although table 3 highlights the length of time taken to review claims, the  Whistleblower Office does not collect complete and accurate data in E- TRAK about several aspects of claims processing that could be used to  manage the whistleblower program. For example, the Whistleblower  Office and operating divisions do not have complete data on the length of  time claims spend at each step of the review process to inform the  decision making for establishing appropriate review time targets. We  requested aggregate data on the median time claims spend in each step  by fiscal year of claim receipt and data on how often the Whistleblower  Office and subject matter experts complete the initial reviews within a  given number of days, but Whistleblower Office officials told us time data  from E-TRAK would be incomplete for various reasons.
First, the Whistleblower Office does not update E-TRAK with data on time  taken for each step for all claims. If one submission includes claims for  multiple taxpayers, the Whistleblower Office updates time information for  only one master claim within the submission and references all related  claims to the master claim. E-TRAK records time data for related claims  only if the time in a step for a related claim diverges from that of the  master claim. Without significant data analysis, Whistleblower Office  officials are not able to determine how often this divergence occurs.
Therefore time data cannot be reported on a per-claim or per- whistleblower-submission basis, but can be reported as a combination of  the two.
Second, IRS did not consistently record time data for submissions before  the introduction of E-TRAK in January 2009. Time data on claims that  completed each step before this date are incomplete; while time data may  have been recorded for some submissions, it was not required for all  submissions. Whistleblower Office officials stated that E-TRAK was  designed to be a claim management tool to track claim progress rather  than one designed to report and monitor overall program performance.  According to one Whistleblower Office official, IRS does not use  aggregate time information in the day-to-day operations of the program  and, therefore, did not build these capabilities into E-TRAK when  designing it. Because E-TRAK already has the data field available for  tracking time information, the cost of tracking such information for all  claims would be limited to the time needed for analysts to input the  additional data field in the claim file.
Other aspects of E-TRAK limit the accuracy of Whistleblower Office data.  For example, E-TRAK may show more time than is accurate for some  claim review process steps because of E-TRAK’s method for accounting  for certain events. The Whistleblower Office can perform an initial review  and assign a claim to a SME for review. If a SME later returns the claim to  the Whistleblower Office to be reassigned to a different operating division,  E-TRAK does not reset the day count on how long the claim has been  with the Whistleblower Office. E-TRAK will show the day count for  Whistleblower Office initial review as the time the claim was received until  the time the claim was reassigned to the second operating division for  review. Similarly, if a SME requests legal advice from Chief Counsel’s  Office, E-TRAK continues to count the time the claim is with Chief  Counsel’s Office as being with the SME. As such, E-TRAK data can make  it appear that claims spend more time in certain steps than they actually  spend, making it difficult for management to have an accurate picture of  the program’s operations and make informed resource allocation  decisions.
The Whistleblower Office only began tracking the point in the process at  which whistleblower claims were rejected in January 2009, when E-TRAK  was introduced. As table 2 showed, IRS can reject whistleblower claims  at almost any point in the process. For example, claims may not fit the  criteria for the award program, IRS may already have the information the  whistleblower submitted, or an examination may result in no change in tax  assessed, among other reasons. Table 4 shows the breakdown of when  in the process IRS rejected claims. Of the claims where the rejection step  was tracked, over half were rejected after examination in the  Whistleblower Office final review. All claims that were rejected before  January 2009 are labeled as not tracked in table 4.
Although the Whistleblower Office has begun to track the step in the claim  review process at which claims are rejected, E-TRAK does not include  data fields for tracking the reasons why claims are rejected, although the  information is contained in the text fields of the claim files. Without  reviewing all closed claims, Whistleblower Office management cannot  know how frequently claims are rejected for each reason. Tracking this  information could help the Whistleblower Office make some program  management or resource allocation decisions and in reporting  information. For example, whistleblower attorneys we interviewed were  concerned that claims that take years to process risk being rejected  because the statute of limitations for assessment may expire before IRS  completes an examination. Whistleblower Office officials could not  provide E-TRAK data on the exact number of times claims are rejected  because the statute has expired because E-TRAK does not track why  claims are rejected, but they stated that it is not a frequent outcome.  Without data in E-TRAK on rejection reasons, the Whistleblower Office  cannot know how frequently claims are rejected because the statute has  expired. Whistleblower Office officials said that while this information  would be helpful, collecting it is not yet a priority.
Furthermore, IRS could not provide data on specific reasons why claims  were suspended because E-TRAK only tracks this information in the  comments section of claim files, which do not require standardized  language to allow for accurate searching, according to a Whistleblower  Office official. Without this data in E-TRAK, Whistleblower Office officials  did not know how many claims were in the 2-year period during which the  taxpayer can request a refund. Having such information may aid the  Whistleblower Office in planning for future work related to likely award  payments. Adding a field to E-TRAK to capture both reasons why claims  are in suspended status and why they were rejected would likely require  limited resources to reprogram E-TRAK. Additional limited resource  needs would include the time needed for analysts to input the reason  when updating the claim file.
Having more complete data available to Whistleblower Office  management would be consistent with key internal control standards for  maintaining relevant and reliable information to help agencies achieve  their objectives. Without complete and accurate data on claim  processing time, the Whistleblower Office may not be able to identify  certain aspects of the program, if any, that could be improved to increase  claim processing efficiency. Moreover, according to IRS’s overall strategic  goals for 2009-2013, the agency should act quickly to initiate compliance  contacts, complete audits, and collect taxes in order to reduce the  administrative burden on IRS and reduce overall costs, such as penalties  and interest, for the taxpayer. This lack of complete data limits the  Whistleblower Office’s ability to provide program information to Congress  and the whistleblower community, which may erode confidence in the  program.
section_title: The Whistleblower Office Does Not Have a Systematic Process to Manage the Timeliness of All the Processing Steps It Oversees
paragraphs: Whistleblower claims can take years to process due in part to steps  (some required) outside the Whistleblower Office’s control, such as  examinations of taxpayers’ returns, taxpayer appeals, and taxpayer rights  to request a refund up to 2 years after making a payment. However, the  Whistleblower Office can do more to manage the time taken for the parts  of the process it does influence. The Whistleblower Office and some  operating divisions have time targets for their initial claim reviews;  however, other operating divisions do not have targets and the  Whistleblower Office does not have a systematic process to check in on  claims once they are with the operating divisions for review. To monitor  the time taken for the Whistleblower Office initial claim review step, the  Whistleblower Office established a target of 60 days to review a claim.
Claims in the Whistleblower Office initial review step more than 60 days  are flagged in E-TRAK, which triggers an inquiry by Whistleblower Office  analysts and management to determine and validate the reason for the  delay. SB/SE and CI have targets for SME reviews, at which point claims  that eclipse the target are flagged for follow-up. SB/SE’s target, which  was formally established in March 2011, is a series of 30-day targets for  various activities of the SME review process, such as the process for  reviewing information for taint concerns and optional debrief meetings  with whistleblowers. SB/SE’s overall target is 240 days and CI’s target is  90 days to perform the initial SME review. Whistleblower Office officials  could not provide complete data on how often claims meet these targets.  LB&I and TE/GE do not have targets for how long initial reviews should  take, although TE/GE policy directs SMEs to follow up on all claims at  least once quarterly and LB&I SMEs report to their managers on claims  over 200 days old.
The Whistleblower Office does not have a systematic process to check in  with the operating divisions to review claims based on the length of time  they have been in the SME review step, and the operating divisions do  not have full access to E-TRAK to be able to generate reports on claims  assigned to them. Without a systematic process to check in on all claims,  the Whistleblower Office risks having claims not receiving the attention or  resources they need to be completed, and operating division  management may not have the information needed to make effective  SME resource allocation decisions. Whistleblower Office officials told us  they send a list of claims inventory to each operating division monthly,  ordered by oldest claim first. They further stated that this report is only for  informational purposes because the Whistleblower Office does not have  the resources to check in with the operating divisions regularly on specific  claims. Operating division officials told us they do not receive this report  monthly but may receive it quarterly, or sometimes less frequently. Some  SMEs have had access to E-TRAK to update information since  September 2010, but they are limited in what information they can input  or search, making it incumbent on the Whistleblower Office to provide to  them certain data about assigned claims. The Whistleblower Office plans  to allow SMEs greater access to E-TRAK in the future. For example, LB&I  officials told us they are working with the Whistleblower Office to expand  their E-TRAK access to allow them to directly run their own reports from  E-TRAK, including reports that could show claims that have been in the  SME review step the longest.
section_title: Restrictions on Disclosing Tax Information Limit IRS Communication on Specific Claims, but Increased Communication on Overall Results Could Improve Program Transparency
paragraphs: IRS is limited in what information it can share with whistleblowers and  other stakeholders throughout the whistleblower claim process. Section  6103 of the Internal Revenue Code prohibits the unauthorized disclosure  of tax information. According to IRS, disclosing to a whistleblower that  IRS is examining a taxpayer reveals tax information; therefore, IRS does  not inform whistleblowers on the progress of their claim other than to  confirm that the claim is either open or closed. Furthermore, IRS does not  publicly report or comment on specific whistleblower awards, which it also  considers to be tax information. IRS will report only on aggregate  whistleblower award information once the Whistleblower Office has paid a  number of awards sufficient to avoid improper disclosure.
Because section 6103 restricts IRS in the amount of information it can  share with whistleblowers and whistleblower claims can take years to  resolve, whistleblowers may not hear from the Whistleblower Office for  years once claims are accepted. According to Whistleblower Office  officials, even though IRS tells whistleblowers about the restrictions on  providing status updates and the potential for claims to take years to  complete, the Whistleblower Office fields numerous calls daily from  whistleblowers asking for updates on the status of their claims. Several  times per month, the Whistleblower Office also responds to members of  Congress asking for status updates on behalf of whistleblowers who are  their constituents. The Whistleblower Office responds to these requests  only by stating if a claim is open or closed. Responding to these types of  requests diverts Whistleblower Office resources from processing claims.
During the Whistleblower Office and SME initial reviews and examination,  IRS has little contact with whistleblowers. Operating divisions may offer  debrief meetings to whistleblowers to clarify information about their  submissions, but these meetings may be the only interaction between  IRS and whistleblowers until IRS rejects a claim or decides to issue an  award. Examiners do not actively involve whistleblowers in their work  because they need to build their case independent of the whistleblower’s  involvement to be able to corroborate the information provided and to  ensure they do not receive tainted information.
There are some statutory exceptions to section 6103 that allow IRS to  disclose tax information when it is necessary in conducting investigations  and gathering information to administer the tax code. Under section  6103(k)(6), IRS may disclose taxpayer return information to a  whistleblower to the extent necessary for investigative purposes.  Another exception, section 6103(n), allows IRS to enter into contracts  with outside parties for services for purposes of tax administration. IRS  could enter into a section 6103(n) contract with whistleblowers for analytic  services and could disclose tax information necessary to obtain those  services. Whistleblowers who enter into section 6103(n) contracts must  comply with IRS’s safeguards of tax information and are subject to  statutory civil and criminal penalties for unauthorized disclosure, which  include fines and jail time. If IRS discloses tax information to  whistleblowers under section 6103(k)(6), whistleblowers would not be  subject to penalties for unauthorized disclosure.
The decision to enter into section 6103(n) contracts rests with the  operating divisions; it is not directed by Chief Counsel or the  Whistleblower Office, although they may provide advice to the operating  divisions. Section 6103(n) contracts are intended to be used rarely by IRS  in processing whistleblower claims, and as of April 28, 2011, IRS had  not entered into any contracts with whistleblowers. Operating division  officials stated they have not yet had a claim that necessitated this  increased level of interaction with a whistleblower to gather information  about the taxpayer.
According to operating division, Chief Counsel, and Whistleblower Office  officials, IRS does not have specific criteria for when a section 6103(n)  contract should be offered to a whistleblower, other than it should be used  rarely. According to IRS officials, each claim needs to be examined based  on its facts and circumstances and generally IRS has the authority and  tools to collect any information that a whistleblower could bring forward.  Although no section 6103(n) contracts have been offered, IRS officials  told us that one situation where a section 6103(n) contract would be  useful is if, in the course of an examination, a taxpayer provided  documents or testimony to IRS that contradicted information a  whistleblower provided. IRS agents could use a section 6103(n) contract  to share some tax information with the whistleblower in investigating the  inconsistency.
Also, rejection letters IRS sends to whistleblowers do not state why IRS  denied a request for an award. IRS officials told us that to provide the  reason would violate section 6103. For example, the Whistleblower Office  may reject a claim because an examination did not result in an additional  tax assessment, but sharing this fact with the whistleblower discloses that  IRS conducted an examination. Whistleblowers whose claims for awards  are denied can challenge IRS’s decision in U.S. Tax Court, although it is  uncertain if they will learn the reason for the claim rejection during the  appeal process. According to Whistleblower Office officials,  whistleblowers have appealed more than 20 award denials under the  expanded whistleblower program and they expect the frequency of these  appeals to increase.
According to whistleblower attorneys we interviewed, whistleblowers can  be frustrated by the lack of communication from IRS regarding their  claims. Because some whistleblowers risk their careers by filing a claim,  they want to know that IRS is maximizing the information they provide.  The attorneys said that IRS not interacting with the whistleblower for long  periods of time and not using whistleblowers as resources during  investigations discourages whistleblowers and may deter some from  coming forward with claims, although we could not verify the latter point.
The Director of the Whistleblower Office told us that many of the steps  IRS takes in the whistleblower process, including limiting interaction with  the whistleblower, are aimed at protecting all interested parties—the  privacy of the taxpayer’s information, the identity of the whistleblower, and  the integrity of the IRS examination. For example, IRS examiners need to  build cases independent of whistleblowers and corroborate all of the  information whistleblowers provide. This independent process ensures  that examinations are not overly influenced by whistleblowers who have a  financial stake in the outcome of examinations; that the identity of a  whistleblower is not disclosed; and that taxpayers receive fair and  defensible examinations.
One mechanism through which the Whistleblower Office communicates  program progress and outcomes to the whistleblower community is the  Whistleblower Office’s annual report to Congress, which outlines the  program’s operations for a given fiscal year. This report, which is required  by the act that established the Whistleblower Office, is to include an  analysis of the program’s operations and outcomes and any legislative or  administrative recommendations on how to improve the program. The act  does not specify what data IRS should include in the report. The reports  issued to date contain limited data on claims submitted to the expanded  whistleblower program. For example, the 2010 annual report, the most  recent report available, included the number of whistleblowers and the  number of taxpayers identified, but did not provide data on the time taken  for claims to move through the process or specific information on rejected  claims. The lack of such data limits Congress’s ability to effectively  oversee the program. Reporting such additional data could also improve  the transparency of the program, which may result in additional  whistleblowers coming forward.
subsections: section_title: Some Whistleblower Attorneys Said Award Payment Issues May Discourage Whistleblowers
paragraphs: As IRS begins paying awards under the expanded whistleblower  program, some in the whistleblower community are frustrated by some  issues that they see as unfair to whistleblowers. For example, according  to whistleblower attorneys we spoke with, net operating loss (NOL)  carryforwards remain an issue with the whistleblower program because  they are excluded from the definition of collected proceeds. If a  whistleblower’s information results in a reduction in NOL, IRS may not  realize a financial benefit for years until the company has a positive tax  liability. If the NOL is not exhausted within 10 years or the taxpayer goes  bankrupt, IRS may never realize a financial benefit. When whistleblowers  bring information to the IRS, they may not know the NOL position of the  taxpayer on whom they are blowing the whistle. According to  whistleblower attorneys, denying an award because a targeted taxpayer  has a NOL carryover is inherently unfair if IRS eventually receives a  financial benefit when the NOLs are exhausted. Some of the attorneys  noted that this issue may discourage whistleblowers from coming forward  because it adds additional uncertainty to the process and may make  submitting a claim not worth the risks to their careers. IRS officials told us  that they plan to develop further guidance on collected proceeds and  NOLs.
Furthermore, according to the attorneys, IRS’s 28 percent tax withholding  policy on expanded whistleblower program award payments could result  in IRS overwithholding taxes for some whistleblowers, especially those  who are represented by attorneys. Attorney fees, which may be              30 percent or more of the total award, are deductible from gross income  and reduce the taxable amount of an award. IRS previously did not  withhold taxes on payments made under the original whistleblower  program, where awards have been capped at $10 million, but it has  recently begun withholding on any awards totaling over $10,000.  Overwithheld funds can be refunded when the whistleblower files a tax  return for the tax year of the award, but there could be a year or more  between award payment and the refund of the overwithheld portion of the  award. IRS does not have a process in place to negotiate an adjusted  withholding rate with whistleblowers based on their individual  circumstances because the ability to deduct attorney fees is dependent  on whistleblowers paying their attorney after receiving awards, which may  not always happen. Whistleblower Office officials told us they would  rather have a single rate that applies to all whistleblowers paid more than  $10,000 than become involved in the independent relationship between  whistleblowers and their attorneys.
section_title: Other Agencies and Whistleblower Attorneys Identified Options That Could Potentially Improve IRS’s Whistleblower Program but Involve Trade-Offs
paragraphs: Federal and state whistleblower programs we reviewed have features  with potential benefits that could improve IRS’s expanded whistleblower  program. Whistleblower attorneys we interviewed also suggested  changes they thought could improve the program. Based on these  program reviews and interviews, we compiled options that could apply to  IRS’s whistleblower program, analyzed their potential advantages and  disadvantages, and identified strategies that could mitigate the  disadvantages. These options, along with the advantages,  disadvantages, and mitigation strategies, are presented in table 5,  approximately in order of their place in the whistleblower claim review  process.
While there are potential advantages to all identified options, it is difficult  to determine if the advantages outweigh the disadvantages for many  options. For options that could involve the disclosure of tax information,  Treasury guidance states that any proposed exception to section 6103  must demonstrate substantial benefits. Whether informing  whistleblowers about why their claims were rejected would produce  benefits, such as fewer appeals, is unclear. The Director of the  Whistleblower Office did not see net benefits from developing criteria on  when section 6103(n) contracts would be appropriate or desirable, due to  the varying facts and circumstances of whistleblower claims.
Likewise, it is unclear whether greater Whistleblower Office claim vetting  would improve the efficiency of investigations and what additional  resources might be needed. Adding a qui tam provision—which allows  autonomy for whistleblowers and their counsel to pursue claims  independently in court after the agency chooses not to pursue—could  encourage IRS to make more timely decisions on whether to pursue a  claim. However, a qui tam provision would alter the tax examination  process in uncertain ways. Because the suit would likely be focused on  the issue identified by the whistleblower, IRS officials said a qui tam  provision might favor maximizing the whistleblowers award rather than  identifying the correct tax liability.
section_title: Conclusions
paragraphs: The goal of the expanded whistleblower program is to encourage  whistleblowers to come forward with information on substantial tax  underreporting that, collectively, could help IRS reduce the tax gap and  encourage greater voluntary compliance. For the program to be  successful, whistleblowers need to have confidence in the program’s  processes and outcomes. IRS’s claim review process is designed to  ensure the integrity of the program, and the many steps involved can take  years to complete. Some of the steps in the process are necessarily  outside the Whistleblower Office’s control in order to, for example, protect  the independence of examinations and avoid superseding other  enforcement priorities.
However, without more complete data about claim processing time and  outcomes, IRS has limited information about the efficiency of the  program. Such data could help IRS management assess the efficiency of  current processes and evaluate potential improvements. In addition to  collecting more complete data, establishing time targets for all operating  division initial reviews and following up on claims that exceed these  targets could serve to indicate the priority whistleblower claims should  receive, set expectations for the length of time they should generally take  to review, and focus attention on claims exceeding time targets.
Other steps could improve whistleblower submissions and reporting to  Congress. Collecting additional information on Form 211 could aid IRS in  evaluating whistleblowers’ credibility and perhaps speed up the claim  review process. Including more information in the annual Whistleblower  Office report to Congress could enhance Congress’s ability to oversee the  program and increase public confidence in the program, which could  encourage more whistleblowers to submit claims.
section_title: Recommendations for Executive Action
paragraphs: To improve the effectiveness of IRS’s expanded whistleblower program,  we recommend the Commissioner of Internal Revenue direct the  Whistleblower Office Director to take the following seven actions:  record time-in-step information for all claims by identified taxpayer in  E-TRAK;    adjust E-TRAK’s tracking feature to more accurately count the number        establish a process by which the Whistleblower Office routinely  of days claims remain in each step;  track the reasons for claim rejections by broad categories;  track the reasons claims are listed as suspended by broad categories;  follows up on claims that have been in the operating division SME  initial review step more than a targeted number of days;  redesign Form 211 to include stand-alone questions on the following  information:        whether the whistleblower has submitted the information to any  the relationship of the whistleblower to the target taxpayer,  the employer of the whistleblower,  other federal or state agencies, and    whether the whistleblower has included all information relevant to    provide additional summary statistics in future annual reports to  Congress, including data on the length of time claims remain at each  step of the review process, data on the length of time from claim  receipt to payments, reasons for claim rejections, aggregate  information on awards paid, and total amount of whistleblower  payments.
Further, we recommend that the Commissioner of Internal Revenue direct  the Commissioners of LB&I and TE/GE to develop targets for how long  SME reviews should take before being flagged for follow-up.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue and offered other agencies we spoke with the opportunity to  comment on the draft. IRS and SEC provided technical comments, which  we incorporated into the report as appropriate. We received written  comments from IRS’s Deputy Commissioner for Services and  Enforcement, which are reprinted in appendix II.
The Deputy Commissioner stated that IRS generally agreed with our  recommendations, and said it would incorporate the recommendations as  IRS continues to make improvements to the operating processes and  procedures of the whistleblower program. The Deputy Commissioner  noted, however, that resource availability could affect the implementation  of recommended improvements. He stated that recommended  modifications to E-TRAK to more accurately reflect program information  will be considered as part of an overall evaluation of E-TRAK adjustments  and enhancements, which will begin in the near future, and that IRS  would make the appropriate improvements as feasible given resource  constraints and competing priorities. Also, the Deputy Commissioner  agreed to consider whether time targets for operating divisions are  appropriate as part of IRS’s efforts to ensure that subject matter experts’  initial review of whistleblower cases is completed in a timely manner. IRS  will consider including additional summary statistical information in its  annual report to Congress, but did not specify what information.
We acknowledge that resources must be considered when considering  improvements to the whistleblower program, but IRS risks not being able  to maximize the program’s effectiveness without implementing the  recommendations in this report. Collecting more data on review  timeliness and outcomes and establishing time targets could help IRS to  make more effective decisions on allocating its resources and aid its  ongoing program assessment. Congress has expressed concern about  the limited data available about the whistleblower program and including  more information and data in the Whistleblower Office annual report could  improve oversight of, and increase confidence in, the program.
As agreed with your offices, unless you publicly release the contents  earlier, we plan no further distribution of this report until 30 days from its  issue date. At that time, we will send copies to the Secretary of the  Treasury, the Commissioner of Internal Revenue, and other interested  parties. The report will also be available at no charge on the GAO Web  site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-9110 or at whitej@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To assess how the Internal Revenue Service (IRS) manages the  expanded whistleblower program, including communicating within IRS,  we reviewed the Tax Relief and Health Care Act of 2006, which required  that IRS establish the Whistleblower Office and administer the expanded  award program; reviewed IRS documents on the whistleblower program,  including Internal Revenue Manual section 25.2.2, which outlines roles  and responsibilities in the expanded whistleblower program; and reviewed  GAO’s body of work on internal control standards. We also interviewed  staff from the IRS Whistleblower Office, representatives from the three  business operating divisions—Small Business/Self Employed, Large  Business and International, and Tax Exempt and Government Entities— that handle whistleblower claims, and representatives from other IRS  divisions—Chief Counsel and Criminal Investigations—that are part of the  whistleblower process. We also spoke with nine attorneys who represent  tax whistleblowers to determine the concerns of whistleblowers regarding  the length of time the whistleblower claim review process takes. Seven of  these attorneys were a nongeneralizable sample of attorneys  recommended by IRS as frequent representatives of whistleblowers  submitting claims to the whistleblower program. Whistleblower attorneys  have a clear financial interest in the outcome of whistleblower claims.  However, interviewing them allowed us to obtain broad viewpoints of the  IRS whistleblower program while keeping whistleblowers’ identities  confidential. To report statistics on whistleblower claims, we analyzed  data from the Whistleblower Office’s E-TRAK system. We found that the  data generated from E-TRAK on claim status was sufficiently reliable for  the purposes of our report.
To evaluate how IRS communicates with whistleblowers and the public,  we reviewed Internal Revenue Code section 6103, which governs the  protection of tax information. We interviewed staff from the IRS  Whistleblower Office and the operating divisions and other offices that are  part of the whistleblower process. We interviewed the attorneys for their  opinions on how IRS communication procedures affect whistleblowers  and the processing of whistleblower claims. We also spoke with the  National Taxpayer Advocate to identify potential privacy concerns for  targeted taxpayers.
To determine what lessons, if any, can be learned from IRS’s and  whistleblowers’ past experiences with the Whistleblower Office as well as  other governmental efforts that could improve the IRS whistleblower  program, we identified federal and state programs that were similar to  IRS’s whistleblower program. At the federal level, we interviewed officials  from programs that provide financial awards for bringing information to  the government on specific issues that result in awards paid to  whistleblowers. Specifically, we interviewed officials from the Department  of Justice, which administers claims made under the False Claims Act;  the Incentive Rewards Program at the Centers for Medicare and Medicaid  Services; and the new whistleblower programs established under the  Dodd-Frank Wall Street Reform and Consumer Protection Act at the  Securities and Exchange Commission and the Commodity Futures  Trading Commission. We identified states with tax whistleblower reward  programs—New York, Florida, and Texas—and interviewed  representatives from these programs and reviewed relevant program  documents. To identify potential lessons learned from IRS’s past  experiences, we spoke with IRS officials and attorneys who represent tax  whistleblowers and reviewed academic literature on tax whistleblowers.  From these interviews and document and literature reviews, we created a  list of options and asked IRS and whistleblower attorneys on their  thoughts of the advantages and disadvantages of these options in the  context of the IRS whistleblower program.
We conducted this performance audit from September 2010 to August  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Internal Revenue Service
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Jeff Arkin, Assistant Director;  Amy Bowser; Jeffrey Niblack; Danielle N. Novak; and Cynthia Saunders  made key contributions to this report.