Paul L. Caron

Tuesday, June 19, 2012

The IRS Whistleblower Office: Where Allegations of Tax Cheating Go to Die

Bloomberg:  IRS Resists Whistle-Blowers Despite Wide U.S. Tax Gap, by Jesse Drucker:

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. Over the past five years, more than 1,300 claims have been filed against almost 10,000 companies and individuals, alleging tax underpayments of at least $2 million apiece.

Just three awards have been paid. The IRS won’t disclose the total dollar amount. Taxpayers annually owe $385 billion more than the IRS is able to collect, the agency said.

By contrast, the U.S. Treasury has recovered more than $21 billion since 1986 due to whistle-blower tips under a similar law that covers other federal agencies. ... The IRS is “demoralizing whistle-blowers” Senator Charles Grassley, who sponsored the whistle-blower law, wrote to Treasury Secretary Timothy F. Geithner in April. “The IRS does not have a problem attracting whistle-blowers. The IRS’s current problem is processing and compensating whistle-blowers in a timely manner,” said Grassley, an Iowa Republican. As a result, “I am now concerned that whistle-blowers will stop coming forward.”

Even as the U.S. grapples with a $1.2 trillion budget deficit, the IRS won’t aggressively pursue whistle-blower tips because of fears that will spur accusations from Congress of heavy-handed enforcement, said Bryan Skarlatos, a tax-litigation lawyer at Kostelanetz & Fink LLP....

The reluctance of the IRS to talk directly to whistle-blowers is common, according to lawyers who file such claims. “You have an agency that is virtually completely non- communicative,” said Erika A. Kelton, an attorney at Phillips & Cohen LLP in Washington, which represents about 40 tax whistle-blowers. Since sophisticated tax shelters are complex, “when you have an insider who can shortcut things for you, why not take him up on it?”

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.

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A few years back, the Eighth Circuit ruled in Snider v. U.S. that IRS special agents could not reveal the identity of the subject of a criminal tax inquiry to witnesses they were questioning in the investigation. ("We'd like to ask you some questions about a taxpayer we have under investigation, but we can't tell you his name." For real.) The IRS' concern about accusations of illegal disclosures is real, because section 6103--the IRC's confidentiality provision--has been interpreted and applied in unreasonably ways by the courts.

Posted by: Publius Novus | Jun 19, 2012 10:53:32 AM