The Audit

06:50 AM - June 22, 2012

Bloomberg blows the whistle on the IRS

The agency hamstrings a program designed to bring in tips on tax evasion

By Ryan Chittum

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Finally, some good news for whistleblowers! It’s incredible what enough bad press will do. We’re incredibly pleased that not only did the IRS set a time limit for initial review of cases, they also limited the time to 90 days. A huge improvement to the years that often pass between submission of a claim and any response from the IRS.

Continue reading our take on this issue over at The Corporate Observer. (http://www.thecorporateobserver.com/2012/06/22/hope-for-current-and-future-irs-whistleblowers-the-irs-is-finally-trying-to-fix-the-irs-whistleblower-program/)

#1 Posted by TheCorpObserver, CJR on Fri 22 Jun 2012 at 10:40 AM

Wow, it's nice to see that 3 of 1,300 whistleblowers have been rewarded. According to bloomberg, ZERO had collected rewards from the beginning of 2011.

http://www.bloomberg.com/news/2010-12-15/irs-paid-no-rewards-to-informants-in-u-s-whistleblower-program.html

"All of the cases resulted from claims submitted before the 2006 law change. The agency attributed the decline largely to a new policy giving taxpayers more appeal rights."

In the more recent article, "He attributed the slow pace to taxpayers appealing IRS rulings. The agency says prospective whistle-blowers should expect to wait as long as seven years for an award."

I find it amazing that "The 35 staff members in the IRS whistleblower office don’t pursue claims themselves. Instead, they try to enlist overworked auditors on the IRS’s enforcement staff, whose ranks dropped by more than 500 agents and revenue officers last year."

WTH? I remember back in 2006 how understaffed the IRS was:

http://www.nytimes.com/2006/07/23/business/23tax.html

What is going on?

#2 Posted by Thimbles, CJR on Fri 22 Jun 2012 at 02:12 PM

Back in the day it was about:

http://www.nytimes.com/2007/01/12/business/12tax.html

"“They are giving away the store,” one agent in New Jersey said.

Agents told of being refused access to specialists, including economists, engineers and historians, because if these specialists developed an issue the audit would have to continue past the deadline.

“They are not letting us do our job, which is to enforce the law,” said one I.R.S. auditor who handles the most complicated international cases.

Ms. Nolan, the official in charge of the division, said that such comments reflected the difficulty many I.R.S. veterans were having in adapting to new policies, not any flaws in those policies.

Mr. Lynch, the auditor who retired in California, and many others complained that the effect of the policy was to allow the Bush administration to achieve administratively a further easing of the corporate income tax burden far beyond what Congress has approved legislatively.

According to Melanie Fox, the only current auditor besides Mr. Johnson who agreed to be quoted by name, a large number of the most experienced corporate auditors plan to retire as quickly as they can because they feel their efforts are not respected.

“A lot of audit experience is about to walk out the door,” Ms. Fox said. “And then what will happen?”"

What is it now?

http://blogs.reuters.com/david-cay-johnston/2012/01/17/honey-they-shrunk-the-irs/

"So why would President Barack Obama and Congress cut the IRS budget? Their actions illuminate the rise of corporate power and values, and the diminishing voice of Joe Sixpack, thanks partly to how we finance election campaigns. Then there is the growing army of corporate lobbyists and the Supreme Court’s decision in Citizens United, which allows corporations (and unions) to spend all they can afford on influencing elections...

Two decades ago, when the economy was a third smaller, the IRS staff numbered about 118,000. Now it numbers 95,000 and is on the way to about 90,000. The likelihood of a big company being audited has plummeted 50 percentage points from 72 percent in 1990 to 22 percent in 2010.

Big company audits are now limited to specific issues known to the companies in advance, not unlike when cops tip off owners of favored gambling dens before a raid. Each audit also begins with an “estimated time to completion.” Working auditors tell me this is really a hard deadline that allows companies to run out the clock with delays in producing documents.

Some IRS tax detectives privately ridicule this system, calling it “audit lite.”..

IRS budget cuts worsen budget deficits and send a corrosive signal that only chumps file honest tax returns."

Hell, only chumps do the honest work at the IRS. Let's go back to whistleblowers like Bradley Birkenfeld.

#3 Posted by Thimbles, CJR on Fri 22 Jun 2012 at 02:21 PM

A quibble about the Bloomberg article is their use of the word tipster.

"The IRS whistle-blower program -- created by Congress in 2006 to boost tax revenue by giving incentives to tipsters -- has become the place where allegations of tax avoidance go to die. "

NO! The word 'tipster' and the word whistleblower are not equivalent in IRS circles.

If you are classified as a 'tipster', you get NO money from recovered funds.

The guy responsible for pushing the cases brought to light by Birkenfeld was a guy by the name of Kevin Downing. According to here:

http://www.reuters.com/article/2012/05/31/us-usa-swiss-downing-idUSBRE84U1EG20120531

"Stephen Kohn, executive director of the National Whistleblower Center, said Downing was "hostile toward whistleblowers" and considered his client, former UBS AG private banker Bradley Birkenfeld, "merely a tipster" rather than a key to unlocking the case against UBS.

Birkenfeld provided information about the bank's dealings with tax-evading clients and exposing what Downing later called in court papers a "massive tax fraud scheme" at the bank.

In 2005, under Downing's direction, UBS entered into a deferred-prosecution agreement and paid a $780 million fine for tax-evasion services sold through its private bank to wealthy Americans. In January 2010, Birkenfeld began serving a 40-month prison term in Pennsylvania for admitting to conspiracy in helping a former wealthy client, California property billionaire Igor Olenicoff, conceal large sums at UBS."

What's going on here? According to Time (google for the link)

"[T]o reveal more about his clients, they say, Birkenfeld needed some legal cover — like a subpoena, which Justice did not offer — because he would be violating strict bank-secrecy laws in Switzerland, where he was living.

What is clear is that Justice was playing hardball. It refused to grant Birkenfeld a cooperating witness agreement — at which point some lawyers would have advised their client to cease cooperation — and instead offered a temporary, so-called queen for a day agreement, giving him much less protection for what he voluntarily disclosed. At one point they even dismissed Birkenfeld as a mere tipster, not a whistle-blower. "Those who seek to be treated as true whistle-blowers need to know they must come in early and give complete and truthful disclosures, with no dissembling or holding back or spinning," said John A. DiCicco, Justice's top tax lawyer, in an e-mail to TIME."

So that turned out nice. Where's Dowling now?

http://blogs.reuters.com/taxbreak/2012/06/04/u-s-tax-prosecutor-downing-resigns-joins-miller-chevalier/

"The U.S. prosecutor most responsible for piercing the veil of Swiss bank secrecy has joined the law firm of Miller & Chevalier, where he will focus on defending banks and other institutions involved in tax-related matters and controversies."

Good for him.

#4 Posted by Thimbles, CJR on Fri 22 Jun 2012 at 02:44 PM

iWatch's Michael Hudson published a piece on this beat a while back:

http://www.iwatchnews.org/2011/06/22/4979/irs-red-tape-old-guard-slow-whistleblowing-corporate-tax-cheats

"The tipster program has been hampered by excessive secrecy and continuing animosity toward whistleblowers within the agency’s old guard, whistleblower advocates say. And recent IRS policy moves, they say, could further restrict the ability of informants to collect bounties for turning in corporations and wealthy individuals who stiff the government out of millions — and sometimes billions — in tax dollars...

In the 4½ years since Congress moved to jump-start the program, just one cash award under the new rules has been made public — a $4.5 million payout to an accountant who reported a $20 million tax underpayment by an undisclosed Fortune 500 firm.

“The IRS is so concerned about the privacy of fraudsters that it seems like they’re almost unable to operate in the whistleblower arena,” said Patrick Burns of Taxpayers Against Fraud, a group that lobbies for whistleblowers and whistleblower attorneys...

Eight years after the initial tip — and nearly two years after the businessman was convicted — the IRS has yet to reward the whistleblower.

The whistleblower died of natural cases while he was waiting for a decision from the IRS, according to Michael Fitzgerald, an attorney who represented the man and now represents his widow. Fitzgerald, who won’t reveal his clients’ names, said that, even after the guilty plea, the IRS has refused to provide information about the status of the reward.

“This poor lady has been stonewalled,” Fitzgerald said. “My client is in IRS purgatory.”"

#5 Posted by Thimbles, CJR on Fri 22 Jun 2012 at 02:53 PM

This is completely anecdotal, but worthy of some investigation, a comment from somebody who seems to have insider knowledge (thus the pseudonym 'Insider'):

http://federaltaxcrimes.blogspot.ca/2012/05/kevin-downing-is-resign-53112.html#comments

"This drew an immediate and angry reaction from a DOJ Tax Division prosecutor named Karen Kelly, sitting not too far from Kevin Downing. She raised her voice and, almost rising out of her chair in anger, said, "You're not a whistleblower! You're just a tipster!"..The IRS representative at the meeting was Treasury Agent Matthew Kutz. At the outset, Attorney David Dickieson, one of Birkenfeld's lawyers, handed an IRS Form 211 (whistleblower claim form) to Kutz, as this mode of delivery of the claim form had been suggested by the IRS before the meeting (this is when Karen Kelly vented her ire). This Form 211 was never seen again after this meeting. The claim form was never delivered to - or filed with - the IRS, by Kutz. Instead, it was deep-sixed, a fact that was not discovered until the following year. Kevin Downing presiding over these meetings. Do you suppose he knows exactly what happened to that Form 211? Of course, he does."

Again, anonymous hearsay, but intriguing.

From a more reputable source:

http://www.bloomberg.com/news/2012-05-31/tax-division-s-downing-said-to-resign-from-justice-department.html

"Senator Rand Paul, a Kentucky Republican, is blocking an amendment to a U.S.-Swiss tax treaty, slowing Switzerland’s handover of data on thousands of Americans with bank accounts hidden from the IRS.

The protocol, negotiated in September 2009, would amend a 1996 treaty and make it more difficult for Switzerland to refuse requests from the IRS for tax information about U.S. customers of Swiss banks."

Oh really Mr. Paul? Does "small government" mean supporting tax cheats and law breakers? Making poor people who can't afford to play in swiss banks pay the taxes of those who can?

Nice.

"Kathryn Keneally, was confirmed March 29 as assistant attorney general in the tax division after the position had long gone unfulfilled. She leads more than 300 civil and criminal lawyers who handle a wide range of investigations and litigation.

Bloomberg News reported March 27 that the division lost almost 30 percent of its 95 prosecutors in the previous month, slowing a U.S. crackdown on offshore banks that enabled tax evasion, according to four people familiar with the matter."

Jesus, next to working a New Orleans paper, working for the IRS has to be one of the least secure jobs going right now. Doesn't Michelle Bachman offer any support for her old workmates?

#6 Posted by Thimbles, CJR on Fri 22 Jun 2012 at 04:58 PM

Erica Kelton writes a blog for Forbes on fraud and whistleblowers. She puts up a paper explaining where the IRS deadlock seems to occur:

http://www.forbes.com/sites/erikakelton/2012/03/02/irs-whistleblowers-see-little-reward/

"The anti-whistleblower attitude was succinctly expressed by former IRS Chief Counsel Donald Korb shortly after he left the IRS and joined a white collar law firm [ Sullivan & Cromwell LLP ] that defends companies against the IRS. In a 2010 interview with the publication Tax Notes, he said:

“The new whistleblower provisions Congress enacted a couple of years ago have the potential to be a real disaster for the tax system. I believe that it is unseemly in this country to encourage people to turn in their neighbors and employers to the IRS as contemplated by this particular program. The IRS didn’t ask for these rules; they were forced on it by the Congress.”"

That revolving door seems to spin a bit among the IRS senior staff.

"From my vantage point, the IRS Whistleblower Office does its best but faces stiff headwinds from the IRS Office of Chief Counsel (OCC), which has stymied the whistleblower program by interpreting the 2006 law in ways that discourage whistleblowers and undermine the program’s potential for success.

The list of problematic guidance from OCC is long and includes rules that have:

Narrowed the sources of recovery that are the bases of whistleblower awards.

Imposed unprecedented withholding requirements on whistleblower awards.

Created roadblocks to IRS interactions with whistleblowers such as the 2008 “one-bite” rule (now relaxed) that limited receipt of information to an initial meeting.

Defined “planners and initiators” of the tax scheme — who by law receive only a reduced award (if any) — in a manner that could block employees whose involvement is far removed from the true architects of a scheme from receiving a reward.

Whistleblowers and their lawyers also are frustrated that the IRS has created a black hole for whistleblower claims, so they get little or no information about the claims’ status.

Perhaps the paramount frustration, however, is due to the apparent unwillingness of the IRS to take advantage of whistleblowers’ expertise and allow them to assist the IRS in certain, limited circumstances. This assistance clearly is contemplated by the 2006 law and could be allowed without violating confidentiality restrictions through the use of special confidentiality agreements known as “6103(n) contracts.” Why the IRS has ignored resources that it is free to tap is a mystery, especially as the agency suffers through staffing cutbacks."

Interesting. Of course if you wanted 39 pages of detail, you could look at this:

http://www.gao.gov/products/GAO-11-683

The details on page 6 showing all the places where a whistleblower can get their status rejected and claim denied is informative.

There really needs to be a lot more accurate press coverage on the IRS right now, because the only news the public seems to get on IRS issues is how the "IRS is Hiring Thousands of Armed Tax Agents to Enforce Obamacare"!!11! (Thanks fox news.) The reality is the IRS is WAAAY understaffed, not enforcing law on rich individuals and business, and may well be a revolving door agency.

That should get fixed.

#7 Posted by Thimbles, CJR on Fri 22 Jun 2012 at 05:19 PM

Be nice too if they put back all of the IRS agents who have been fired and if people who have major connections to former presidents or congress were not allowed to keep on serving in other administrations. A government that can get those social security payments out on time is certainly capable of checking incoming information...perhaps a quick audit of every return with a $50,000 or more refund, or flags. I do wonder why they are so concerned about privacy when the last administration approved outsourcing of tax returns, yours and mine if you get the wrong accounting firm, to other countries.

#8 Posted by taxpayer, payer, payer, payer, CJR on Sun 24 Jun 2012 at 11:14 AM

You've got a point about privacy. Until you brought it up, I had forgotten Grassley's effort to outsource IRS functions to private debt collectors.

http://www.washingtonpost.com/wp-dyn/content/article/2008/04/14/AR2008041402808.html

http://www.nytimes.com/2006/08/21/opinion/21krugman.html

#9 Posted by Thimbles, CJR on Sun 24 Jun 2012 at 12:12 PM