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Whistleblower News May 2011
1. May 2011
Inside this Edition:
Focus On The IRS Informant Reward Program
IRS Informant Reward Program - Overview
IRS Proposes Amendments To Its Informant Reward Program
IRS Whistleblower Paid $4.5 Million: First Award Under IRS Whistleblower Program
Treasury Department Inspector General Calls For Audit Of IRS' Handling of
Whistleblower Claims
IRS Statistics On Underpayments of Federal Taxes
False Claims Act Whistleblower News
U.S. Supreme Court Rules that FOIA Requests Trigger Public Disclosure Bar
SEC Adopts Final Regulations For Whistleblower Program
Recent Whistleblower Events
IRS Informant Reward Program - Overview
In 2006, the Congress enacted a new whistleblower law that enables private individuals to
report: (1) underpayments of tax; and (2) persons otherwise guilty of violating the internal revenue
laws. The passage of the IRS Whistleblower Law was significant because the False Claims Act
does not apply to claims made under the Internal Revenue Code.
The IRS Whistleblower Law, like the False Claims Act, rewards whistleblowers who report
2. allegations of fraud on the government. In general, a whistleblower can receive an award of
between 15% to 30% of the collected proceeds (including penalties, interest, additions to tax and
additional amounts).
The IRS Whistleblower Law is, however, very different from the False Claims Act. The process
and procedure for reporting fraud under the IRS Whistleblower Law are substantially different from
the qui tam whistleblower provisions of the False Claims Act. For example, whistleblower reports
under the IRS Whistleblower Law are not, as in False Claims Act cases, raised in a lawsuit filed in
federal court and served on the Attorney General and Local United States Attorney. Instead,
whistleblower reports are handled by the IRS Whistleblower Office and disputes may be appealed
to the Tax Court.
There are also many substantive differences between the IRS Whistleblower Law and the False
Claims Act. For example, the IRS Whistleblower Law applies, in the case of individual taxpayers,
only to those individuals: (1) with a gross income above $200,000 for the relevant taxable year; and
(2) when the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2
Million. The False Claim Act, by contrast, contains no such monetary thresholds.
IRS Proposes Amendments to Its Informant Reward Program
In 2006, Congress passed the Tax Relief and Health Care Act, which created the IRS
Whistleblower office and made rewards to whistleblowers less discretionary than in the past. Under
Internal Revenue Code 7623(a), the IRS shall pay awards to people who provide "specific and
credible information" to the IRS if the information results in the collection of taxes, penalties, interest
or other amounts from a noncompliant taxpayer. The IRS wants specific information about
significant tax issues. "Significant" is defined by the IRS as taxes, penalties, and interest owed in
excess of $2 million. This is not the venue to report speculative concerns, air personal disputes,
drop a dime on a former spouse, or to report isolated events such as a waiter failing to declare his
tips as income.
There are two basic tracks currently in place for whistleblower complaints that are filed with the
IRS. On the first track, whistleblowers submit information concerning amounts in dispute (back
taxes, interest, and penalties) in excess of $2 million. In these cases, the IRS is looking for non-
compliant taxpayers with annual gross income of more than $200,000. If the IRS successfully
obtains a recovery from a non-compliant taxpayer, the IRS is required to pay the whistleblower
between 15 and 30% of the recovery. Whistleblowers on this track who are not satisfied with the
reward may appeal to the United States Tax Court located in Washington, D.C.
The second track applies to cases involving less than $2 million in dispute. If the IRS obtains a
recovery in these cases, payment of a reward to the whistleblower is discretionary, with a maximum
of 15% of the recovery up to a maximum of $10 million. Whistleblowers on this track cannot appeal
to the United States Tax Court.
On January 18, 2011, the IRS published notice of proposed rulemaking that will redefine how
whistleblowers may be compensated by the government. The proposed amendments allow for
rewards to be paid to whistleblowers if the information they provide results in the denial of a claim
for a refund that the IRS would have otherwise paid or reduces an overpayment credit balance. In
other words, if the whistleblower's tip prevents the IRS from paying an improper refund to the
putative defendant, the amount of that refund will be included in the calculation of the recovery by
3. the government. This represents a significant change from the law as it currently stands. It seeks
to monetize prospective violations as opposed to recovering amounts that previously were paid.
Similarly, if the whistleblower provides the IRS with information that a putative defendant tried to
claim a fraudulent loss as an offset to tax liability, the resulting amount of taxes owed will be
included when calculating the whistleblower's reward.
These proposed changes, if adopted, will open the whistleblower program up to a whole new
population of citizens with credible information. Claims for rewards that would have previously been
denied may now be granted. For more information on the IRS Whistleblower Program, visit
http://www.falseclaimsact.com/irs_whistleblowers_law_overview.php
IRS Whistleblower Paid $4.5 Million: First Award Under IRS
Whistleblower Program
An accountant who reported to the IRS that his employer was underpaying its taxes was
recently awarded $4.5 Million by the IRS. This represents the first award paid to a tax whistleblower
under the IRS Whistleblower Program. The $4.5 Million award represented a 22% share of the
taxes recovered (as discussed above, the IRS Whistleblower Program entitles the Whistleblower to
receive between 15% and 30% of the amount recovered). The payment of this award is an
encouraging sign for the many other whistleblowers who have been stepping forward to report
under the IRS Whistleblower Program, as well as for those who are contemplating blowing the
whistle.
Treasury Department Inspector General Calls for Audit of IRS'
Handling of Whistleblower Claims
In its 2011 Annual Audit Plan, the Treasury Department's Inspector General for Tax
Administration recently stated that one objective of the Inspector General's Audit was:
At the suggestion of the Congress, determine whether the IRS has taken effective
corrective actions to address previously identified weaknesses in processing
claims from whistleblowers. Specifically, determine if the Whistleblower Office's
new procedures are contrary to Congress' intent and will deter whistleblowers
The announcement of this Audit Objective is an encouraging sign that Congress' repeated
calls for more effective procedures in handling whistleblower claims have had an impact within the
IRS. This follows on the heels of the recent amendments to the IRS Whistleblower Program
discussed above.
IRS Statistics on Underpayments of Federal Taxes
The IRS periodically releases estimates of the tax gap - the difference between taxes owed and
taxes paid in a timely manner. The latest IRS estimates show a tax gap of about $350 billion for tax
4. year 2001. The tax gap consists of three components - non-filing (taxes not paid by those with a
filing requirement who fail to file), underreporting (taxes underpaid by those who file but underreport
what they owe), and underpayment (taxes not paid by those who fail to remit reported amounts
owed when due). IRS reports the tax gap for separate tax sources, including individual income
taxes, corporate income taxes, employment taxes, and estate taxes.
At a meeting held in June 2010, the IRS Tax Gap Subgroup, for example, concluded that the
non-filing gap for estate taxes in tax year 2004 (at the midpoint of a confidence interval) was $2.5
billion, or about 9.2 percent of tax liability. The estimate is similar in magnitude to estimates for
earlier years using a different methodology.
The latest estimate of the underreporting gap was $1.9 billion in 2004, (with a confidence
interval ranging from $0.7 billion to $3.0 billion). Based on the statistical confidence intervals, IRS
staff concluded that the results were not significantly different from the estimates previously
released for tax year 2001.
These results demonstrate a tremendous level of underreporting and underpayment of federal
taxes. The IRS Whistleblower Program was designed to assist in the collection of such
underreporting and underpayment of taxes by incentivizing whistleblowers to assist the government
in the collection of the underpayment of taxes.
FALSE CLAIMS ACT WHISTLEBLOWER NEWS
U.S. Supreme Court Rules that FOIA Requests Trigger Public
Disclosure Bar
On May 16, 2011, the United States Supreme Court ruled, in Schindler Elevator v. United
States ex rel. Kirk , Case No. 10-188, that a federal agency's written response to a Freedom of
Information Act (FOIA) request for records constitutes a "report" within the meaning of the False
Claims Act's public disclosure bar. The public disclosure bar of the FCA generally forecloses
private parties from bringing qui tam suits to recover falsely or fraudulently obtained federal
payments where those suits are "based upon the public disclosure of allegations or transactions in a
criminal, civil, or administrative hearing, in a congressional, administrative, or Government
Accounting Office report, hearing, audit, or investigation, or from the news media." 31 U.S.C. §
3730(e)(4)(A).
The Court looked to the dictionary definition for "report", because the FCA does not define the
term. Dictionaries define "report" as, for example, something that gives information. According to
the Court, using this broad definition is consistent with the drafting history of the public disclosure
bar, which the Court stated was intended to discourage "opportunistic" litigation.
The Court did not decide whether the Relator's allegations were "based upon ... allegations or
transactions" disclosed in the reports at issue. Additionally, it bears noting that the FCA's public
5. disclosure bar was amended in 2010, and that the Supreme Court's decision addressed the pre-
amendment version of the public disclosure bar.
To read a copy of the Supreme Court's Opinion, visit
www.supremecourt.gov/opinions/10pdf/10-188.pdf
SEC Adopts Final Regulations For Whistleblower Program
With great anticipation, the SEC adopted its final regulations governing the new whistleblower
program under the Dodd-Frank financial reform legislation. Most significantly, the SEC did away
with a proposed requirement that whistleblowers first report wrongdoing internally before reporting
to the SEC, despite strong opposition from corporate lobbyists. The SEC did provide enhanced
remedies for whistleblowers that decide to first report internally by reaffirming that such
whistleblowers will still be eligible for an award, and by giving the whistleblower 120 days to report
to the SEC if the company fails to do so. The employee would receive whistleblower status from
the date of internal reporting so as to maintain their place in line in case of successive reporting of
the same conduct. The SEC also provided that cooperation with a company's internal compliance
program would be a factor in determining whether to increase a whistleblower's award.
The SEC broadened the type of information that may qualify for an award by making a
whistleblower eligible for an award if the information provided reopens a closed investigation or
opens a new line of inquiry in an existing investigation. The SEC clarified those individuals who
would not be eligible to participate in an award, including:
Individuals with a pre-existing legal or contractual duty to report their information to the SEC
Attorneys who attempt to use information obtained from client engagements to make
whistleblower claims for themselves
Individuals who obtain information that a court deems in violation of law
Foreign government officials
Officers, directors or partners of an entity who learn about securities violations through
third-persons or who learn the information in connection with the entity's process for
Identifying and reporting potential violations
Compliance and internal audit personnel
Public accountants working on SEC engagements
The SEC also announced that it has completed initial staffing of the Office of the Whistleblower and
that the Investor protection Fund from which awards will be paid, is fully funded.
RECENT WHISTLEBLOWER EVENTS
On June 27, 2011, Marc Raspanti will speak at the American Health Lawyers' Association
Annual Meeting in Boston, Massachusetts, on the topic of "Everything You Need to Know
6. About Handling a Whistleblower"
On June 8, 2011, Michael Morse will speak at the Pennsylvania Institute of Certified Public
Accountants' Health Care Conference on the topic of "Health Care Fraud and the False
Claims Act"
On April 14, 2011, Marc Raspanti spoke at the American Bar Association 2011 Spring
Meeting- Joint Criminal Justice / Litigation Section CLE Program, on the topic of "A New
Day has Dawned: Federal and State False Claims Acts at the Forefront of Litigation"
On April 9, 2011, Michael Morse spoke at the Health Care Compliance Association's
Compliance Institute in Orlando, Florida on the topic of "False Claims Act Developments"
On April 5, 2011, Marc Raspanti spoke at the Offshore Alert Conference in Miami, Florida of
the topic of "Avoiding the Mistakes of the UBS/Birkenfeld Case: Protecting Whistleblowers
from Criminal and Civil Liability"
For more information about whistleblower lawsuits, visit:
www.falseclaimsact.com or www.fraudwhistleblowersblog.com
Federal and State Qui Tam Litigation
Pietragallo Gordon Alfano Bosick & Raspanti, LLP has one of the most successful,
skilled and respected practices in the United States representing qui tam whistleblowers under
federal and state false claims acts and the IRS Whistleblower Program. For nearly 20 years our
attorneys have fought on behalf of qui tam whistleblowers across the United States, in many of the
most complex and sophisticated cases in the history of the federal False Claims Act. Our attorneys
have served as lead counsel for whistleblowers that have resulted in more than $1 Billion in
recoveries for Federal and State taxpayers.
The IRS Whistleblower Team of Pietragallo Gordon Alfano Bosick & Raspanti includes former
federal and state prosecutors, a Certified Public Accountant, a Certified Fraud Examiner, and
attorneys experienced in criminal tax matters.
Michael A. Morse, Esquire Marc S. Raspanti, Esquire
Phone: (215) 988-1427 Phone: (215) 988-1433
Fax: (215) 981-0082 Fax: (215) 981-0082
E-Mail: E-Mail:
MAM@PIETRAGALLO.com MSR@PIETRAGALLO.com
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