Bloomberg News has an eye-opening investigation into what we now know is the failed IRS Whistleblowers Program.

That program is supposed to pay people who tip the IRS off to tax fraud 30 percent of any recovery, but Jesse Drucker and Peter S. Green report that just three of 1,300 whistleblowers have been given awards since it was created six years ago. Not all or maybe even most whistleblowing claims actually point to real fraud, but it’s implausible that 99.8 percent of them don’t. Bloomberg gives us a good idea of why the success rate is so low by tracing the story of one complaint.

That anecdote involves former employees of a tax firm called Alliantgroup who say the company helped its clients evade taxes. The IRS’s agents wanted to impanel a grand jury to investigate the case, but agency brass shut them down without ever even talking to the whistleblowers, Bloomberg reports.

What makes this case smell particularly bad is Alliantgroup isn’t some run-of-the-mill firm. It’s vice chairman is Mark W. Everson, who ran the IRS under George W. Bush (and was later fired as CEO of the American Red Cross for an affair with a subordinate), and several former members of Congress and congressional staffers.

The IRS was well aware of the political connections, as Bloomberg shows by getting hold of internal documents (though we’re not told how it got them):

Alliantgroup’s political connections were also raised in several internal IRS memos…

Following a conference call on the allegations about Alliantgroup, Onken, the IRS analyst, scrawled one word next to Everson’s name in a handwritten memo: “Concern.”

That concern was heightened in May 2010 when Onken received a phone call from her boss, Whitlock. He told her (former Senate Finance senior counsel Dean) Zerbe and Everson were meeting with the IRS later that week, according to Onken’s notes. “He didn’t know what the topic/purpose of the mtg was,” she wrote.

The former top officials met with current top officials, naturally.

Bloomberg makes it clear that the whistleblowing process is broken even beyond exceptionally politically connected companies like Alliantgroup. In that case, one arm of the IRS wouldn’t talk to the whistleblowers’ arm because it thought it might already have the same info and apparently didn’t want to fork over 30 percent of any future recovery. But that’s just part of the reluctance to investigate complaints, though. The agency has done about everything it can to avoid even talking to whistleblowers:

The IRS doesn’t talk to whistle-blowers more frequently because of concerns about violating strict laws protecting taxpayer privacy, (deputy commissioner Steven T.) Miller said…

The IRS generally doesn’t permit its most knowledgeable examiners — field agents handling audits — to speak to the whistle-blowers at all, the agency says. That is because of fears of accidentally sharing confidential information with whistle-blowers, said Marty Basson, an attorney who retired last year from the IRS office that handles those claims.

Imagine if the FBI decided it didn’t want to let its agents interview witnesses for fear that they might violate suspects’ privacy somehow. That’s essentially what the IRS is doing here.

Bloomberg reports on one internal Alliantgroup document that looks like a smoking gun. A manager specifically asks about changing a person’s title or job description to qualify them for research tax credits, and actually gets hold of him:

In an interview, Gavankar, who left the company in 2008, said that while he didn’t recall the specific e-mail exchanges, it was common to shoehorn employees’ job descriptions into positions that would help generate credits.

“I wasn’t comfortable with that,” he said. “Not having a formal tax background, we did what the partners taught us to do.” Gavankar previously worked as a software engineer.

You have to wonder whether the IRS ever talked to this guy either.

Bloomberg’s story, which came out on Tuesday, is already making an impact. It reports today that he IRS has responded with an internal memo telling staff that whistleblowers are a priority, that it will undertake a “comprehensive review” of the program, and that it will enforce a 90-day maximum time period for reviewing whistleblower claims.

Excellent work here by Bloomberg.

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