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Hearing to expose IRS informant program to scrutiny

The National Debt Clock, which displays the current United States gross national debt and each American family's share, hangs on a wall next
The National Debt Clock, which displays the current United States gross national debt and each American family's share, hangs on a wall next

By Nanette Byrnes

(Reuters) - Seven years after Congress passed a new whistleblower law for the Internal Revenue Service, the tax-collecting agency stands accused of not doing enough, or of not acting swiftly enough, to reward informants who expose tax improprieties.

On Wednesday, under growing pressure from the senator who spearheaded the 2006 legislation, the IRS holds a hearing on proposals it has crafted only now for implementing elements of the law.

Separately, come June, in the first hearing of its kind, the Tax Court is demanding that the IRS explain whether it has made a decision on the claims of a former banker who asserts that six years on, he still is waiting for the IRS to tell him the status of his whistleblower claims against a former employer.

The new proposals to be debated on Wednesday include rules for submitting information to the IRS and the criteria for determining the size of an informant award, among others. In a nod to delays, the new rules include allowing whistleblowers, should they die during the process, to leave any award recovery to heirs. After the hearing, the IRS will weigh the feedback it received before putting in place final regulations.

The senator who pushed for the 2006 law, Chuck Grassley, an Iowa Republican, complains the IRS risks alienating informants by taking years to process claims and then keeping them in the dark. He takes issue with provisions in the regulations which he feels wrongly limit potential whistleblower awards.

The IRS declined to comment, but in a February 11 letter to the senator, Acting Commissioner Steven Miller said the IRS had "made significant progress in implementing the law" and that while the number of awards made is "relatively small," he expects the pace of award grants to increase.

The 2006 law required the IRS to pay awards of 15 to 30 percent for information leading to additional tax collection on disputes involving $2 million or more, and establishing a new whistleblower office reporting directly to the IRS commissioner. Prior to the 2006 law whistleblowers were rewarded but awards to informants were at the IRS's discretion, and generally small.

MIXED PERFORMANCE

In broad terms, the IRS whistleblower program has brought in more tax revenue under the new rules than it had prior to 2006, but its performance has been mixed.

Whistleblower tips last year led to $592 million in additional IRS tax collections, nearly four times as much as the $156 million collected in 2008, according to the agency.

The IRS does not disclose how many whistleblower awards it has made based on the 2006 rules, arguing that to do so could jeopardize taxpayer privacy. Lawyers who represent whistleblowers estimated that the number of awards has been 10 or fewer.

The IRS's only public whistleblower award was September's record-setting $104-million payment to former UBS AG banker Bradley Birkenfeld. A convicted felon, Birkenfeld turned in clients he had formerly helped to stash money in secret Swiss accounts. His work helped the IRS collect hundreds of millions of dollars in taxes.

New whistleblower tips to the IRS fell to 332 last year from a 2009 high of 472, according to the IRS, at a time when whistleblowing tips at other agencies have been on the rise.

For instance, a newly relaunched SEC whistleblower program got more than 3,000 tips in 2012, alleging securities and other types of frauds. At the Justice Department, new whistleblower cases rose 71 percent to 647 in 2012, from 379 in 2008. The IRS declined comment on the comparison.

Compared to programs at the Justice Department, the Securities and Exchange Commission and the Commodity Futures Trading Commission, the IRS program offers the fewest protections for whistleblowers, said Tom Devine, of the Government Accountability Project, a non-profit group that advocates for whistleblowers.

IRS whistleblowers have no legal protection against retaliation by former employers, something the proposed regulations don't take on. Unlike other programs, there are no deadlines by which the IRS must decide a case, and no requirement that it communicate with the whistleblower after submission of a tip.

TAX COURT CASE

In the case of the whistleblower whose complaint will be heard in Tax Court, Joe Insinga, 62, alleges that his former employer Rabobank Group , a Dutch financial concern, helped a number of large corporate clients lower their taxes inappropriately. To support the case, which he brought to the IRS in 2007, he says he provided the tax agency with loan applications, an internal audit report and other documents.

Frustrated for not knowing the status of his case or whether he will ever get the monetary reward he had hoped for, Insinga went to Tax Court in March 2012.

He asked the court to compel the IRS to indicate whether a reward would be forthcoming or not. The IRS responded by arguing that the Tax Court had no jurisdiction in the case. But the court rejected this and last month set a hearing for June 18.

In his order calling for the hearing, Tax Court Judge David Gustafson wrote that could include trying to find out whether the IRS has completed its consideration of Insinga's claim, and if not, what it is still doing on the claim and what it plans to do in the future.

Insinga's case could have wide implications if the Tax Court upholds his position and forces the IRS to be more forthcoming with the more than 1,000 informants the IRS says are actively involved in its program.

The validity of Insinga's claims about Rabobank could not be determined. Rabobank declined a request for an interview, but a spokeswoman said in a statement that Insinga's assertions mischaracterize the facts.

Rabobank does not engage in activities to mislead tax authorities and has always cooperated with all government requests, she said. It is unknown whether the IRS has acted on Insinga's information against Rabobank or any other party.

Some former IRS staffers said it was not surprising that some cases stretch out as long as seven years, given that time-consuming audits can be involved.

After seeing companies he had identified settling tax issues with the IRS for hundreds of millions of dollars, Insinga says the long wait has caused regrets. "If I knew in 2007 what I know today, I would never do it again," he said in an interview.

(Additional reporting by Patrick Temple-West in Washington; Editing by Kevin Drawbaugh, Howard Goller and Phil Berlowitz)

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