By David S. Hilzenrath
Washington Post Staff Writer
Thursday, July 1, 2010; A11
Congress has called on the Internal Revenue Service to pay rewards to whistleblowers on the theory that they may be the agency's best hope for penetrating tax-evasion schemes, but a recent change in an IRS manual could in certain cases block those rewards.
The change is another in a series of discouraging signals to whistleblowers, some of whom have long complained that the IRS gives them a cold shoulder.
"There's apparently an institutional resistance to rewarding whistleblowers that will take some time to dissipate," said Michael A. Sullivan of the law firm Finch McCranie, who represents whistleblowers. "Counterproductive rules such as this one may be a result of that resistance," he said.
When information from whistleblowers helps the IRS recover unpaid taxes, the informants are entitled to as much as 30 percent of the proceeds. However, the new manual explains that the tipster is out of luck if, instead of yielding a payment to the IRS, the tip stops a refund or reduces a credit.
"I have serious concerns that the new IRM provisions will deter whistleblowers from filing claims," Grassley said in a June 21 letter to Treasury Secretary Timothy F. Geithner, whose department includes the IRS.
Grassley, who spearheaded a 2006 revision of the whistleblower law, wrote that "naysayers" at Treasury and the IRS may be undermining it.
The IRS would not answer questions about the revised manual. "The senior leadership of the Internal Revenue Service believes that the Whistleblower provisions are an important and valuable tax administration tool that can help to improve tax compliance," IRS spokesman Frank Keith said in a two-sentence written response. "We are fully committed to using these provisions for the benefit of all taxpayers in this country who pay the taxes they owe."
The new manual appears to conflict with a federal regulation that says rewards can be paid "if the information leads to the denial of a claim for refund that otherwise would have been paid."
The manual also says rewards cannot be paid based on criminal fines, but the federal whistleblower law, as described on a page of the IRS's own Web site, says whistleblowers are eligible for rewards based on "penalties . . . and other amounts collected as a result of any administrative or judicial action resulting from the information provided."
Allegations that IRS employees are hostile to whistleblowers are nothing new. In a statement to the Senate Finance Committee in 2004, an unnamed informant from a Wall Street bank said his dealings with the IRS were frustrating and often unproductive as he tried to expose tax schemes costing the government at least $400 million annually. IRS employees did not understand the financial intricacies and did not welcome his assistance, he said.
Part of the problem was that auditors did not want to reopen audits that had been closed; another factor was that auditors seemed loyal to companies they audited from on-site offices and at which they might one day seek employment, the informant said.
After leaving his position as chief counsel of the IRS during the Bush administration, Donald L. Korb publicly opposed the whistleblower program.
"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," Korb, now a lawyer in private practice, said in a January interview with the publication Tax Notes. "The IRS didn't ask for these rules; they were forced on it by the Congress," he said.
Whistleblowers have helped the government collect substantial sums. Former Swiss banker Bradley C. Birkenfeld led the U.S. government to obtain a $780 million settlement with UBS, Switzerland's largest bank. The bank admitted that it helped clients in the United States hide money from the IRS.
Erika A. Kelton of the law firm Phillips & Cohen said one of her clients who works on Wall Street blew the whistle on tax shelter schemes used by several dozen companies. Kelton said the information her client gave the IRS years ago has led to the recovery of more than $14 billion.
So far, the client, whom she would not identify, has received "well less than 1/4 of 1 percent" of the amounts attributable to his information, Kelton said. The whistleblower office at the IRS sought to issue a higher reward in 2008, and an ad hoc review board at the IRS agreed, but a top IRS official overrode that decision, Kelton said.
In his letter to Treasury, Grassley demanded an explanation of the case, saying the decision to overrule the independent whistleblower office was "contrary to law."
Staff researcher Eddy Palanzo contributed to this report.