Tax Whistleblowers: Incomplete Data Hinders IRS's Ability to Manage Claim Processing Time and Enhance External Communication
Released: 2011-09-09T00:00:00

Letter

Background

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.

Whistleblower Claims Can Take Years to Process but the Whistleblower Office Does Not Have Complete Data on Claim Processing Time

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.

The Whistleblower Office Does Not Have Complete and Accurate Data on Claims Processing, Including Time in Each Step

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.

The Whistleblower Office Does Not Have a Systematic Process to Manage the Timeliness of All the Processing Steps It Oversees

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.

Restrictions on Disclosing Tax Information Limit IRS Communication on Specific Claims, but Increased Communication on Overall Results Could Improve Program Transparency

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.

Some Whistleblower Attorneys Said Award Payment Issues May Discourage Whistleblowers

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.

Other Agencies and Whistleblower Attorneys Identified Options That Could Potentially Improve IRS’s Whistleblower Program but Involve Trade-Offs

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Appendix I: Scope and Methodology

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.

Appendix II: Comments from the Internal Revenue Service

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

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.