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IRS whistle blower who questioned paper industry tax break fights to keep his job

(Bill O'Leary/The Washington Post)
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An Internal Revenue Service lawyer is waging a battle to stay in his job a year after the agency punished him for speaking to news organizations about a scheme that enabled paper companies to collect about $2 billion in tax refunds and helped the industry weather the Great Recession

The IRS has recently taken the opposite side in a similar case involving Sunoco and ExxonMobil, which are requesting $1.65 billion in tax refunds based on guidance issued by the IRS to justify the agency’s earlier support of the paper industry.

The IRS, in opposing the oil giants’ claims, finds it is arguing against itself. The cases are pending in federal courts.

William Henck, the IRS lawyer, was first investigated for speaking to reporters in 2013. In 2016, after being threatened with termination, loss of pension benefits and substantial legal fees, he agreed to a one-month suspension without pay and to leave the agency at the end of November this year. He would keep his pension under that arrangement.

Now, after nearly 30 years at the agency, he wants the IRS to amend the deal to allow him to continue working another four years. Ignoring advice from his lawyers, who urged him to abide by the agreement, he has appealed to the Treasury Inspector General for Tax Administration to assist him.

He is hoping the inspector general will withdraw its earlier report concerning his activities and pursue allegations he has made about wrongdoing at the agency in his case and others.

“I’m a federal employee. I took an oath to this country,” Henck said. “What I’m guilty of is contempt of management.” He said that if he is not allowed to remain, it will discourage others’ willingness to become whistle blowers.

An IRS spokesman Bruce Friedland said that federal law prohibits the agency from commenting on employees or taxpayers.

The broader controversy began in 2009 when the IRS said that paper companies — which had been generating power by burning a pulping byproduct known as “black liquor” since the 1930s — could add a few drops of diesel and qualify for the 50-cent-a-gallon alternative fuel mixture tax credit.

Tax credits are generally used to reduce taxes paid by individuals or companies. But this was a refundable tax credit, which means that money-losing companies that owed no taxes could collect cash payments from the Treasury for the amount of the credits.

As a result, as the economy reeled from the financial crisis in 2009, the Treasury ended up paying roughly $8 billion to ailing paper companies in what amounted to a major, but never openly debated, federal bailout.

The move riled members of Congress who had intended the credit to promote pioneering techniques for turning plant matter into fuel. But Congress took no action and let the portion of legislation that created the black liquor credit expire at the end of 2009.

The paper companies initially treated the tax credits as taxable income. But in 2011, the paper companies filed amended returns saying that the credits should not be taxed.

Henck was the legal adviser to a team that looked at the issue. In keeping with agency guidelines, Henck would not identify any taxpayer or anything about any company’s returns. But he told The Post in a July 19, 2013, article that “IRS examination agents were told to stand down and not challenge the position that the refundable credits were not taxable income.” He said those instructions came from senior IRS officials. The agency at that time had issued no written guidance.

The issue was genuinely a difficult one, tax experts say. Food stamps, the earned-income tax credit and low-income housing credits are not taxed. But other tax credits are taxed as income.

On Aug. 29, 2013, the IRS issued written public guidance saying that the credits should not be taxed.

In 2015, the IRS opened an investigation into whether Henck had violated codes prohibiting the release of taxpayer information, known as a 6103 violation. He denied that vigorously and had not shared any such information with The Post.

Henck said that the allegations were made by “a chief counsel executive [who] knowingly made false statements to federal agents” about a meeting that Henck said never took place. The investigation lingered an unusually long time and The Post wrote about it July 19, 2016.

Two days later, the IRS told Henck he would be terminated.

The two sides subsequently settled, though Henck remained unsatisfied. In an effort to build his case for staying at the IRS longer, he has collected a variety of laudatory notes and emails from colleagues. And, he notes, he has served as an acting manager as recently as May, which he says suggests that the agency has confidence in his abilities.

On Aug. 9, Henck met with TIGTA agents and asked them to withdraw the inspector general’s report that Henck said is based on bad information from IRS managers.

Meanwhile, the IRS written guidance has put the agency on the defensive when it comes to policy.  In 2013, the agency was making the case against treating the biofuel credit as taxable income for the paper industry.

“Where Congress has decided that a particular credit should itself be treated as an additional item of gross income, it has done so expressly,” the agency said in 2013. “In our view, in the absence of a specific statutory provision or judicial doctrine requiring inclusion, federal tax credits are not gross income for purposes of determining a taxpayer’s federal income tax liability.”

Now the IRS is taking the other side with Sunoco and ExxonMobil. Sunoco has sued the IRS for $306 million in refunds involving the Alcohol Fuel Mixtures credit that was in a 2004 Highway Trust Fund bill. The IRS called Sunoco’s interpretation “flawed” and a government lawyer argued that doing so would be a “double benefit” for the company.

Sunoco lost but has appealed. ExxonMobil has filed a similar case seeking $1.35 billion in refunds.

Correction: A previous version of this story incorrectly stated that food stamps are non-taxable refundable tax credits. They are non-taxable income.