Deficiencies Exist in the Control and Timely Resolution of Whistleblower Claims
August 20, 2009
Reference Number: 2009-30-114
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
1 = Tax Return/Return Information
3(d) = Identifying Information - Other Identifying Information of an Individual or Individuals
Phone Number |
202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
August 20, 2009
MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Deficiencies Exist in the Control and Timely Resolution of Whistleblower Claims (Audit # 200830034)
This report presents the results of our review to assess the Internal Revenue Service’s (IRS) progress in establishing a Whistleblower Program. Our review included assessing the implementation of the Whistleblower Office and the controls monitoring the disposition of new claims. This audit was conducted as part of our Fiscal Year 2008 Annual Audit Plan under the major management challenge of Tax Compliance Initiatives.
Impact on the Taxpayer
The Whistleblower Program provides the IRS with an
opportunity to recover potentially billions of dollars in taxes, penalties, and
interest based on information provided by informants. The Tax
Relief and Health Care Act of 2006[1] amended the Internal Revenue Code to provide
increased awards to individuals for information that leads to the detection and
punishment of persons guilty of violating, or conspiring to violate, internal
revenue laws. The IRS has seen
significant growth in claims since the passage of this law with claims in Calendar
Year 2008 alleging more than $65 billion in underreported income.[2] However, without effective control over and
timely processing of these claims, the success of the IRS Whistleblower Program
could be diminished.
Synopsis
The intent of the Tax
Relief and Health Care Act of 2006 was to provide focus on large-dollar
cases with the potential of collecting billions of dollars for the Department
of the Treasury. Under this law, whistleblowers can now receive a minimum award
of 15 percent and a maximum of 30 percent of collected proceeds if their
information leads to additional tax assessments. This Act created Section 7623(b) of the
Internal Revenue Code[3] which generally requires the IRS to pay larger
awards on amounts in dispute of more than $2 million for business taxpayers and
$200,000 for individuals. The IRS refers
to these types of cases as “7623(b) claims.”
For those cases that do not meet the dollar threshold for 7623(b) claims,
these claims are referred to as 7623(a)[4] claims which still qualify for lower award
percentages if the information provided leads to the detection of an
underpayment in taxes.
The Tax Relief and
Health Care Act of 2006 required the
IRS to establish a Whistleblower Office and develop processes to begin to distinguish
whistleblower claims based on the potential amount of taxes to be
recovered. The amendments in this Act to
whistleblowers awards applied to information provided on or after the date of
the enactment of this Act. However, many
of the necessary administrative processes were not established, including the
development of an effective claim control system.
Since standup, the Whistleblower Office has initiated a number of actions in an attempt to improve on the prior Informant Rewards Program which it replaced. However, the IRS did not have an effective inventory control system or adequate procedures and processes at the time of our review. To mitigate the limitations of its prior inventory control system, management relied on multiple systems to track and control claims. This resulted in inaccuracies and inconsistencies in the control and tracking of 7623(b) claims. Management has been in the process of developing and implementing a new inventory system for approximately 2 years and is in the process of transferring its 7623(b) claims inventory to this new system. Nonetheless, without effective procedures and processes to ensure timely, accurate input of case information into this system, the problems we noted with its inventory controls may continue to exist. In addition, timeliness standards and a process to monitor whether claims are worked timely had not been established.
The False Claims Act covers false claims by government contractors but specifically excludes tax fraud. The Whistleblower provisions in the Tax Relief and Health Care Act of 2006 cover actions in the area of tax compliance and provide a structure that is similar in certain respects to the False Claims Act. However, unlike the False Claims Act, Whistleblower law related to tax fraud does not include specific provisions for employee protection against retaliation by an employer. Our discussions with representatives within the operating divisions who work with whistleblowers identified that whistleblowers are concerned regarding possible retaliation from employers and that their confidentiality is their utmost concern.
Recommendations
The Director, Whistleblower Office, should ensure that reporting capabilities are included in the newly implemented single inventory control system and perform a physical reconciliation of 7623(b) claim information to ensure that the information captured from existing systems and input into the new system is accurate. In addition, written procedures with timeliness standards should be established and processes to monitor the timely processing of claims should be developed.
Legislative Recommendation
Legislation is needed to ensure that informants are protected against retaliation by their employers and to provide specific relief to informants who are retaliated against.
Response
IRS management agreed with all of our recommendations. The IRS identified the need for reporting capabilities in the new E-TRAK inventory control system and those capabilities are now in place. In addition, the IRS identified the need to have a single inventory system and will ensure the accuracy of information in that system by completing the process in three phases with the final phase to be concluded in 2010. In addition, the IRS has established a quality control process based on a statistical sample of records to ensure accuracy of data. The IRS has developed written procedures to ensure effective processing, evaluation, tracking, and monitoring of whistleblower claims. However, pursuing new legislation to protect informants against retaliation by their employers is outside the jurisdiction of the IRS. Management’s complete response to the draft report is included as Appendix IV.
Copies of
this report are also being sent to the IRS managers affected by the report
recommendations. Because this report
contains a legislative recommendation, we will provide a copy to the Assistant
Secretary of the Treasury for Tax Policy.
Please contact me at (202) 622-6510 if you have questions or Michael
E. McKenney, Assistant Inspector General
for Audit (Returns Processing and Account Services),
at (202) 622-5916.
Whistleblower Claims
Are Not Timely Processed
Whistleblower Law Does Not
Include Employee Protection Against Retaliation
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Management’s Response to the Draft Report
|
I.R.C. |
Internal Revenue Code |
|
IRS |
Internal Revenue Service |
The
Informant Rewards Program provided rewards to individuals who gave the IRS
information that led to the detection and punishment of individuals who
violated tax laws.
The Internal
Revenue Service (IRS) Informant Rewards Program was created to make award
payments to private citizens who assist in detecting underpayment of tax. Section 7623
of the Internal Revenue Code (I.R.C.)[5] authorizes the IRS to pay awards to
individuals for information that leads to the detection and punishment of
persons guilty of violating, or conspiring to violate, internal revenue laws.
Prior to December 2006, awards paid were between 8 and 14 percent of the taxes, fines, and penalties collected during Fiscal Years 2001 to 2005. The percentage was based on the connection of the informant’s information to the recovery. From Fiscal Years 2001 through 2005, more than $340 million in taxes, fines, penalties, and interest were recovered based on information obtained through the Informant Rewards Program. Awards of more than $27 million were paid to informants.
On December 20, 2006, Congress passed the Tax Relief and Health Care Act of 2006,[6] creating a centralized Whistleblower Office
and amending the law to provide increased awards to informants (whistleblowers)
who provide information resulting in the collection of taxes, penalties,
interest, and other amounts. To comply
with the law, the IRS created the Whistleblower Office which replaced its
former Informant Rewards Program. The
intent of the legislation was to provide focus on large-dollar cases with the
potential of collecting billions of dollars for the Department of the Treasury. Under the new law, whistleblowers can now receive a minimum award of 15 percent and a
maximum of 30 percent of collected proceeds.
The Act created Section 7623(b) of the I.R.C.[7] which generally requires the IRS to pay
larger awards on amounts in dispute of more than $2 million for business taxpayers
and $200,000 for individuals. The IRS
refers to these types of cases as “7623(b) claims.” Those cases that do not meet this dollar
threshold are referred to as 7623(a) claims.[8]
Process to submit a claim for award
o A claim may be accepted for examination. The examination is conducted and when completed the operating division prepares a Confidential Evaluation Report on Claim for Reward (Form 11369). The Form 11369 is forwarded to the Whistleblower Office for review and the Director, Whistleblower Office, will determine the award percentage to be paid.
o If a claim is not accepted for examination, a Form 11369 is prepared that includes an explanation as to why the claim does not warrant examination. The claim is then returned to the Whistleblower Office for review and issuance of a closing letter to the informant.
The completion of the above process can take years. Whistleblowers will receive awards only based on what is collected subsequent to the completion of the examination. Because taxpayers may exercise their judicial appeal rights or enter into alternative payment arrangements, payment of the award could take up to 10 years. For example, the Whistleblower Office recently paid an award on a 7623 claim 15 years after the claim was received. Because of the time periods to process claims and collect taxes assessed, no awards have been paid out yet on 7623(b) claims received.
Figure 1 shows the status of 7623(b) claims processed in the Whistleblower Office as of March 30, 2009.
Figure 1: Status of 7623(b) Claims
as of March 30, 2009[11]
|
Office |
Open Inventory |
Reclassified 7623(a) |
Rejected |
Total |
|
Whistleblower Office |
5 |
4 |
1 |
10 |
|
Whistleblower Analyst |
30 |
149 |
137 |
316 |
|
Criminal Investigation Division Review |
685 |
|
17 |
702 |
|
Operating Division for Initial Review |
25 |
1 |
2 |
28 |
|
Operating Division Subject Matter Expert |
700 |
5 |
133 |
838 |
|
Operating Division Counsel |
2 |
|
1 |
3 |
|
Operating Division Examination |
69 |
1 |
6 |
76 |
|
Claims |
1,516 |
160 |
297 |
1,973 |
Source: Access database as of March 30, 2009.
A prior Treasury Inspector General for Tax Administration review identified
control weaknesses over the Informant Rewards Program
Our 2006
review identified a lack of detailed policies and procedures which limited
management oversight in the Informant Rewards Program.
In 2006, we completed a review of the Informant Rewards Program, which is the Program that existed prior to the enactment of legislation creating the Whistleblower Office. This review included an assessment of controls over all claims (since the categories of 7623(a) and 7623(b) claims were not yet codified in the law). The review[12] found that the Program significantly contributed to the IRS’ efforts to enforce tax laws, but also that additional management focus could enhance the effectiveness of the Program. A lack of standardized procedures and limited managerial oversight resulted in control weaknesses. It took more than 7˝ years from the receipt of the initial claim to the payment of the award. There were lapses in the monitoring of taxpayers’ accounts for payment activity, which may have delayed the claims. The rejected claims took more than 6˝ months between the date of the decision to reject the claim and issuance of the denial letter to the informant. In addition, for the 22 paid informant claims reviewed:
Finally, for 52 (75 percent) of 69 rejected claims reviewed, we were unable to determine the rationale for the reviewer’s decision to reject the claim. We recommended that the IRS develop and implement a detailed nationwide database to provide increased visibility of the processing and disposition of informant claims. IRS management agreed with our recommendations and stated that corrective actions would be taken which included implementing a nationwide web-based system to track, monitor, and control informant claims.
This review was performed in the Whistleblower Office at the
IRS National Headquarters in
The
Tax Relief and Health Care Act of 2006 requires the IRS to issue an Annual
Report to Congress on the use of Section 7623 including the results obtained.
The Tax Relief and Health Care Act of 2006 required the IRS to establish a
Whistleblower Office and develop processes to begin to distinguish
whistleblower claims based on the potential amount of taxes to be
recovered. The amendments in this Act to
whistleblower awards applied to information provided on or after the date of the
enactment of this Act. However, many of
the necessary administrative processes were not established, including the
development of an effective claim control system. Since standup, the Whistleblower Office has
initiated a number of actions in an attempt to improve the Program. These actions include:
·
Standing
up a centralized Whistleblower Office to administer the IRS Whistleblower Program. Previously, all claims were processed at the
·
Appointing
a Director in February 2007 to oversee the Whistleblower Office.
·
Requesting
the development of a single inventory control system to track both the 7623(a)
and 7623(b) claims. IRS management’s
goal is to have this system in place and fully operational in July 2009.
·
Developing a communication
plan to promote the new Program. Actions
included the development of presentation material for internal and external
audiences, development of training modules for the operating divisions, development
of web sites for internal and external audiences, and the search for funds to
develop a training video series.
·
Establishing a
procedure where the IRS and the whistleblower can enter into a contract to disclose
specific return information pertaining to an allegation.
·
Issuing an Annual
Report to Congress on June 24, 2008, as
required by the Tax Relief and
Health Care Act of 2006. The Act
requires the Secretary of the Treasury to conduct a study and report to
Congress each year on the use of Section 7623, including an analysis of the use
of that section and the results obtained, as well as any legislative or
administrative recommendations regarding Section 7623 and its application. The Annual
Report detailed actions taken in the first 12 months since the standup of the
Whistleblower Office. Actions cited
included:
o
Staffing the Whistleblower
Office.
o
Designing the program
flow for processing new whistleblower claims.
o
Developing a
communication plan to address outreach to the public and IRS personnel.
o
Developing program
guidance and revising claim forms.
The Whistleblower Program provides the IRS with an opportunity to potentially recover billions of dollars in alleged underpayment of taxes, penalties and interest. However, the IRS did not have an effective inventory control system or adequate procedures and processes at the time of our review. To mitigate the limitations of its prior inventory control system, management relied on multiple systems to track and control claims. This resulted in inaccuracies and inconsistencies in the control and tracking of 7623(b) claims. Management has been in the process of developing and implementing a new inventory system for approximately 2 years and is in the process of transferring its 7623(b) claims inventory to this new system. Nonetheless, without effective procedures and processes to ensure timely, accurate input of case information into this system, the problems we noted with its inventory controls may continue to exist. In addition, timeliness standards and a process to monitor the timely working of claims had not been established.
The IRS has seen significant growth in 7623(b) claims since the passage of the new law. Without effective control over and timely processing of these claims, the effectiveness of the IRS Whistleblower Program could be diminished. Figure 2 provides a comparison by calendar year for claims received with indications of alleged underreported income.
Figure 2: 7623(b) Claim
Receipts
|
Calendar Year |
Claims |
Alleged Income Underreported |
|
2007 |
83 |
$8 billion |
|
2008 |
1,890 |
$65 billion |
Source: Whistleblower Office Access database as of March
30, 2009.
It should be noted
that the underreported income amounts in Figure 2 are solely based on
allegations by the whistleblowers submitting the claims. The completion of the process to validate an
allegation through the performance of an audit can take years to complete. As such, it is too soon to tell what amount of
taxes, interest, and penalties may ultimately be collected.
Multiple Inventory Systems and Inadequate Procedures and
Processes Resulted in Ineffective Control Over Whistleblower Claims
Since the standup of the Whistleblower Office in February 2007, management has had to rely on multiple systems in an attempt to accurately control 7623(b) claims. As a result, the process to control and track 7623(b) claims was inefficient and ineffective. Each system lacks the basic functionality needed to accurately track claims and their processing. As such, management did not have the ability to generate management information reports to track the processing of claims and, ultimately, evaluate the success of the Program. In response to our prior review, IRS management agreed with our recommendation to develop a nationwide web-based inventory control system to track claims. Management anticipates its new nationwide tracking system will be fully operational in July 2009.
The Whistleblower Office maintains three inventory control systems for 7623(b) claims. The three systems are independent of each other and we identified inconsistencies among the claim information contained in these systems. Management noted that the additional systems have been necessary because the previous system did not allow management to distinguish between the types of claims (i.e., 7623(a) and 7623(b)) as required by the passage of legislation in December 2006. The systems in use are the:
· ICEWEB[14] Inventory Control System – This system was in place at the time the legislation was enacted. However, this web-based system did not provide management with the ability to generate reports by claim type and did not provide management with the ability to monitor the processing status of claims. If management needed to identify those claims that were classified as 7623(b), they were required to manually determine this count. However, management has been unable to cease using this system because the ICEWEB system generates a claim number that is used to track whistleblower claims.
· I-TRAK[15] Inventory Control System – In an effort to more effectively administer the program, the Whistleblower Office implemented the I-TRAK system in March 2007. It was implemented as the primary control system to track the 7623(b) cases. However, soon after implementation, the Whistleblower Office recognized deficiencies in this system. Specifically, the I-TRAK system also had no reporting capabilities and did not provide the level of detail needed regarding the status and processing of claims.
· Access Inventory Control System – Recognizing the deficiencies in the ICEWEB and I–TRAK systems, the Whistleblower Office implemented yet a third inventory control system using Microsoft Access. Management noted that this system was used to track the processing of 7623(b) claims as it enables the input of specific information as to the receipt, review, and routing of claims.
The
initial release of the system that management has been developing since the standup
of the Whistleblower Office was brought into use in January 2009. The E-TRAK Inventory Control System will
eventually replace the multiple tracking systems currently being used. The Whistleblower Office is in the process of
transferring applicable information from the existing three inventory systems
to this new system. However, as of March
2009, the E-TRAK system still did not provide management information reports
and, until the information is transferred, the Whistleblower Office will have
to maintain four separate systems to control the claims.
Multiple inventory control systems resulted in inaccuracies
and inconsistencies
The inventory tracking systems did not accurately and/or consistently track 7623(b) claims and provide key information relative to these claims. Specifically, during the course of the audit, management provided us with extracts from the Access Inventory Control System and told us that this system would be the best source for us to identify 7623(b) claims. However, management noted that there was a lag between when the claims were received and when they were added to the Access database.
Initially, we were not aware of the significance of this lag. The initial database received from management on October 30, 2008, did not accurately reflect claims in the possession of the Whistleblower Office. There were 1,086 claims included in the database received on October 30, 2008. However, an updated database received on February 24, 2009, included 1,973 claims. The additional 887 claims were added to the database between November 1, 2008, and February 24, 2009, even though the claims were received between August 7, 2007, and October 30, 2008.
The Access Inventory Control System is what management uses to provide statistical information on whistleblower claims to internal and external stakeholders. Management provides a similar caution regarding the delays in updating information so that stakeholders will be aware of the limitations of the statistical information being provided.
In addition, we identified inconsistencies in the claims
information included in the inventory control systems. Our comparison of 7623(b) claim information on the ICEWEB, I-TRAK,
and Access Inventory Control Systems identified:
Management
informed us that the extracts from the Access Inventory Control System contained
only 7623(b) claims. However, after we questioned
management regarding the timeliness of closing actions, management noted that
62 of the 72 claims listed as closed were actually 7623(a) claims. Also, we identified that specific information
regarding claims included in the whistleblower inventory tracking systems was not
always accurate. Our review of a
judgmental sample of the 32 oldest claims in inventory identified the following
inaccuracies:
·
Incorrect receipt dates.
For 22 (69 percent) of the 32 claims in our sample, inventory records
did not accurately reflect the date the IRS received the claim. The differences in claim receipt dates ranged
from negative 13 calendar days to 165 calendar days. Procedural weaknesses during the Whistleblower
Office standup period contributed to input errors. Figure
3 provides examples of the most significant
discrepancies between the actual receipt date of the claim and the date of the
receipt as shown in the inventory records.
Figure 3: Comparison of Receipt Dates
|
Sample Number |
Received Dates |
||
|
Case File |
Access Database |
Difference (in Days) |
|
|
Sample Case #1 |
07/26/2007 |
08/21/2007 |
26 |
|
Sample
Case #2 |
03/12/2007 |
05/08/2007 |
57 |
|
Sample
Case #3 |
04/11/2007 |
05/11/2007 |
30 |
|
Sample
Case #4 |
05/07/2007 |
06/18/2007 |
42 |
|
Sample
Case #5 |
03/15/2007 |
08/27/2007 |
165 |
Source: Whistleblower
Office case files and Access database as of October 30, 2008.
·
Incorrect transfer dates.
For 13 (41 percent) of the 32 claims in our sample, inventory records
did not accurately reflect the date the claim was transferred to the operating division. The differences in claim transfer dates
ranged from negative 69 calendar days to 196 calendar days. Figure
4 provides examples of the most significant discrepancies
between the date the claim actually transferred and the date that it was
entered in inventory records.
Figure 4: Comparison
of Transfer Dates
|
Sample Number |
Dates Routed to Operating
Division |
||
|
Case File |
Access Database |
Difference |
|
|
Sample Case #1 |
10/10/2007 |
08/02/2007 |
(69) |
|
Sample
Case #2 |
09/18/2007 |
08/22/2007 |
(27) |
|
Sample
Case #3 |
07/11/2007 |
11/30/2007 |
142 |
|
Sample
Case #4 |
03/09/2007 |
04/27/2007 |
49 |
|
Sample
Case #5 |
08/16/2007 |
02/28/2008 |
196 |
Source: Whistleblower Office case
files and Access database as of October 30, 2008.
Standards for Internal Control in the
Federal Government[16]
require that information be recorded and communicated to management and others
within the entity who need it and in a form and within a time period that enables
them to carry out their internal control and other responsibilities. We recognize the efforts management has taken in an attempt to
implement a single inventory system to accurately control 7623(b) whistleblower
claims. Management has begun the initial
implementation of its new system but has yet to develop a process to ensure that
the information input to this system is accurate. In addition, this new system may not solve
the problems we identified. For example,
the initial release of the new system did not include reporting capabilities
even though they are critical in order for the system to be useful.
Recommendations
The Director, Whistleblower Office,
should:
Recommendation 1: Ensure reporting capabilities are included in the newly implemented E-TRAK inventory control system. These reporting capabilities should enable management to generate management information reports to track the processing of claims and evaluate the success of the program.
Management’s Response: IRS management agreed with our recommendation. The IRS identified the need for reporting capabilities in E-TRAK inventory control system and those capabilities are now in place.
Recommendation 2: Perform a physical reconciliation of 7623(b) claim information to ensure that the information captured from existing systems and input into the newly implemented single inventory control system is accurate. In addition, a process should be developed to ensure that claims are accurately controlled in the new inventory control system.
Management’s Response: IRS management agreed with our recommendation. The IRS identified the need to have a single inventory system and ensure the accuracy of information in that system. This will be completed in three phases, and the final phase will be concluded in 2010. In addition, the IRS has established a quality control process based on a statistical sample of records to ensure accuracy of data.
Whistleblower Claims Are Not Timely Processed
The Whistleblower Office had not established timeliness standards to evaluate claims; therefore, with the concurrence of IRS management, we used a time standard for claims to be evaluated for acceptance within 60 days. Applying this criteria, we determined that 738 (85 percent) of the claims[17] received as of October 2008 were not processed and sent to an operating division for acceptance for an examination within 60 days of receipt. There are significant delays in the processing of whistleblower claims including:
· 30 days on average to route claims from the Whistleblower Office to an analyst for review (with a range from 1 day to 454 days).
· 107 days on average to route claims from the analyst to the operating division (with a range from 1 day to 507 days).
Management stated
that establishing timeliness standards for processing claims had not been a
priority because the process was constantly changing. Management further explained that efforts
were focused on maintaining three tracking systems, developing procedures, training
the staff, and setting up a program design for processing claims and
coordinating with the operating divisions.
We recognize that there were competing priorities in establishing a new office. However, the office has been in existence well over 2 years and, in our opinion, establishing standards to work the claims should have been one of its immediate priorities. The Director, Whistleblower Office, stated that he has made establishing baselines for processing claims one of his priorities in Fiscal Year 2009. Subsequent to our fieldwork, the Director advised us that the office is using a time standard of 60 days to evaluate the claims for acceptance.
Closing letters notifying whistleblowers
of nonacceptance of claims were not timely issued
For claims
rejected as having no examination potential, no closing letter was sent to the
whistleblower. On average, 290 days had
passed after the operating division recommended not initiating an examination.
We identified significant delays in the issuance of closing letters to whistleblowers. Our review of the 32 oldest 7623(b) claims identified that 13 were returned to the Whistleblower Office from the operating division as rejected (no examination potential). The main reasons these claims were rejected is that the business or individual was already under examination. For 12 claims, no closing letters were sent to the informants despite the completed claim evaluations being returned to the Whistleblower Office on average 290 days prior to our review. The receipt of the completed claim evaluations ranged from 155 to 625 days. For the remaining claim, ****(1)****
We questioned management as to the specific actions needed once the operating division notifies the analyst that an examination was not warranted. We were informed that the analyst reviews the operating division’s evaluation of the claim and generates the closing letter. Management stated that some of the delays resulted from their waiting to receive an opinion from IRS Counsel as to what information could be included in the closing letters sent to individuals explaining the reason the claims were rejected. The Counsel opinion was received August 2008, but closing letters still were not issued. For one claim, ****(1)****
Recommendations
The Director,
Whistleblower Office, should:
Recommendation 3: Establish written procedures that include timeliness standards for processing whistleblower claims. These standards should include time periods to forward a claim to an analyst for review subsequent to receipt, forward a claim to the appropriate operating division for review, and generate closing letters.
Management’s Response: IRS management agreed with our recommendation. The IRS identified the need for standardized, written procedures for the Whistleblower Office. In October 2008, the Director communicated case processing standards to the staff. These standards have now been published in the Internal Revenue Manual, desk guides for use of the E-TRAK Whistleblower information system, and case processing instructions for Whistleblower Office analysts and administrative staff. The standards cover each of the areas our review identified.
Recommendation 4: Develop a process to monitor the timely processing of claims.
Management’s Response: IRS management agreed with our recommendation. The IRS identified the need for monitoring cases, including processing time. Monitoring has been established and is in place.
Whistleblower
Law Does Not Include Employee Protection Against Retaliation
The False Claims Act covers false claims by government contractors but specifically excludes tax fraud. The Whistleblower provisions in the Tax Relief and Health Care Act of 2006 cover actions in the area of tax compliance and provide a structure that is similar in certain respects to the False Claims Act. However, unlike the False Claims Act, Whistleblower legislation related to tax fraud does not include specific provisions for employee protection against retaliation by an employer. This can be a significant issue in some whistleblower claims of tax fraud. Of the 1,973 whistleblower claims received, 93 (5 percent) were submitted by an employee of either the individual or the business.
The False Claims Act contains provisions stating that any employee who is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in terms and conditions of employment shall be entitled to all relief necessary to make the employee whole. Such relief shall include reinstatement with the same seniority status, twice the amount of back pay, interest on the back pay, and compensation for any special damages sustained.
In our discussions with representatives from the IRS operating divisions who work with whistleblowers, they told us that whistleblowers are concerned about possible retaliation from employers and that their confidentiality is their utmost concern. For example:
· A Whistleblower Office analyst told us that all whistleblowers who are employees and work with the IRS fear reprisals and there are instances when they ask how the IRS could protect them.
Whistleblowers
are concerned about retaliation from employers.
Confidentiality is of the utmost importance.
In addition, we spoke with a lawyer in private practice who is experienced in this area of tax administration, as well as litigation brought under the Federal False Claims Act. This lawyer’s clients, both current and former employees, have concerns about their confidentiality because of possible retaliation from their employers.
The underlying premise of the Whistleblower provision in the Tax Relief and Health Care Act of 2006 is that individuals with knowledge of significant tax noncompliance issues would come forward if there was a significant financial incentive for them to provide information to the IRS. Protection against retaliation would increase the likelihood that employees would come forward with information when their employers are significantly misreporting their tax liabilities. Without such protection for employees, the risk of retaliation might outweigh the incentive of the reward.
Legislative Recommendation
Recommendation 5: Legislation is needed to ensure that informants are protected against retaliation by their employers and to provide specific relief to informants who are retaliated against.
Management’s Response: This recommendation is outside the jurisdiction of the IRS.
Detailed Objective, Scope, and Methodology
The overall objective of this review was to evaluate the implementation of the Whistleblower Office. Our review included assessing the implementation of the Whistleblower Office and the controls monitoring the disposition of new claims.
To identify time lapses between activities, we analyzed the initial Access database received from management on October 30, 2008, that showed 866 records without identifying the number of related claims. During a briefing on February 4, 2009, the Director and Senior Advisor of the Whistleblower Office informed us that the initial Access database was incomplete and provided a subsequent Access database on February 24, 2009, that showed 1,154 records with 1,973 claims received as of October 30, 2008. The Whistleblower Office staff subsequently advised us that the original 866 records had 1,086 claims associated with the records provided. Based on these observations and attempts to verify data accuracy, we concluded that the Access data were not reliable because the data may not be complete and were not always accurate. This limitation adversely impacted our ability to identify workload and to evaluate processing actions without reviewing the hard-copy documents on file. We did conduct analyses on the records associated with 1,973 claims received by October 30, 2008, but we still had concerns with the completeness and accuracy of the data. Therefore, we qualified our observations because of those concerns. To accomplish our objective, we:
I. Evaluated whether agreed-upon recommendations from our 2006 audit report[18] were implemented.
A. Determined whether the IRS centralized the campuses’[19] Informant Claims – Examination Units and evaluated whether it resulted in increased oversight of the Program and standardization of the processing of informant’s claims.
B. Ascertained whether a nationwide database of informant claims had been developed and implemented, and provided increased visibility of the processing and disposition of informant claims.
II. Interviewed the Director, Whistleblower Office, and other personnel involved in the program to obtain an overview of the Whistleblower Program processes and procedures for the coordination among the Whistleblower Office, the Criminal Investigation Division Confidential Informant Program, and the Large and Mid-Size Business Division.
A. Evaluated whether the Whistleblower Office developed guidelines for screening informant claims and routing them to the appropriate function, and whether they revised forms, letters, and procedures for the processing of Section 7623(b) cases.
B. Evaluated whether the Whistleblower Office had established strategic direction for the program and developed goals and measures to track the Program’s progress toward its mission.
C. Ascertained whether the Whistleblower Office had a communication plan and informed the general public about the new Whistleblower Program.
D. Evaluated whether the Whistleblower Office defined and communicated the performance goals of the Whistleblower Program.
E. Determined whether the Whistleblower Office prepared the Annual Report on the Informant Rewards Program to Congress.
III. Interviewed the Whistleblower Office program analysts and discussed the processing of Section 7623(b) informants’ claims.
A. Interviewed the Whistleblower Office analysts and determined the procedures for processing claims.
B. Determined the methodology used by the Whistleblower Office to account for and track actions on Section 7623(b) informants’ claims, the criteria used for an acceptance or rejection decision of Section 7623(b) cases, and whether timeliness standards have been established for rendering an accept or reject decision.
IV. Determined whether I.R.C. Section 6103 (disclosure provisions) affected the Tax Relief and Health Care Act of 2006[20] and evaluated the actions taken by the Whistleblower Office to share information with informants.
A. Determined whether IRS Counsel had given an opinion on entering into contracts with informants to allow sharing examination activities under I.R.C. Section 6103.
B. Requested Treasury Inspector General for Tax Administration Counsel’s opinion on the legality of the IRS using an I.R.C. Section 6103 exception to permit interaction between informants and the IRS.
V. Reviewed a judgmental sample of the 32 oldest 7623(b) claims from a population of 1,973 claims and determined whether they were properly processed and routed to the appropriate operating division. The judgmental sample was used to identify possible delays in the processing and routing of claims.
VI. Assessed how closely the process followed in redesigning and implementing the IRS informant reward program changes compares with best practices advocated by the Government Accountability Office.
VII. Developed a matrix and compared and contrasted the IRS Whistleblower legislation to the False Claims Act and identified areas where the legislation may need strengthening.
A. Interviewed appropriate operating division personnel who examined 7623(b) claims and discussed the Whistleblower legislation.
B. Interviewed an attorney who represented several informants that submitted IRS Whistleblower claims and discussed the Whistleblower legislation.
Appendix II
Major Contributors to This Report
Michael E. McKenney,
Assistant Inspector General for Audit (Returns
Processing and Account Services)
Russell P.
Martin, Director
Edward
Gorman, Audit Manager
Kathleen A.
Hughes, Senior Auditor
Stephen Elix,
Auditor
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of Staff C
Director, Whistleblower Office SE:WO
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
RAS:O
Office of Internal
Control OS:CFO:CPIC:IC
Audit Liaison: Senior Advisor, Whistleblower Office SE:WO
Appendix IV
Management’s Response to the Draft Report
The response was removed due to its size. To see the response, please go to the Adobe
PDF version of the report on the TIGTA Public Web Page.
[1] Pub. L No. 109-432, 120 Stat. 2958 (2006).
[2] The underreported income amount is solely based on allegations by the whistleblowers submitting the claims. The completion of the process to validate an allegation through the performance of an audit can take years to complete. As such, it is too soon to tell what amount of taxes, interest, and penalties may ultimately be collected.
[3] Section 406 of the Act amended 7623 of the Internal Revenue Code concerning payment of awards to certain persons who detect underpayment of tax (2006).
[4] This review focused on the control and processing of 7623(b) claims.
[5] 26
U.S.C. Section 7623
(2004).
[6] Pub. L No. 109-432, 120 Stat. 2958 (2006).
[7] I.R.C. Section 7623(b) (2006).
[8] This review focused on the control and processing of 7623(b) claims.
[9] The
Whistleblower Office currently has six analysts located in
[10] The operating divisions involved in the Whistleblower Program are the Large and Mid-Size Business, Small Business/Self-Employed, or Tax Exempt and Government Entities.
[11]
Our report raises concerns regarding the
accuracy of claim management information (see page 7). However, this is currently the best
information the Whistleblower Office has regarding 7623(b) claims in inventory.
[12] The Informants’
Rewards Program Needs More Centralized Management Oversight (Reference Number 2006-30-092, dated June 6, 2006).
[13] Application controls include controls over input, processing, output, master data, application interfaces, and management system interfaces.
[14] Informant Claims Examination web-based system (ICEWEB) stores 7623 cases indefinitely and tracks case dispositions including claim approval/denial and amounts.
[15] I-TRAK is a IRS-wide, web-based internal document tracking system that IRS leadership and business units can use to timely and effectively manage their responses to issues raised by taxpayers, IRS employees, Congress, the Department of the Treasury, the White House, the Government Accountability Office, and the Treasury Inspector General for Tax Administration.
[16] GAO/AIMD-00-21.3.1, dated November 1999.
[17] This analysis was based our initial database of 866 records that contained 1,086 claims.
[18] The Informants’ Rewards Program Needs More Centralized Management Oversight (Reference Number 2006-30-092, dated June 6, 2006).
[19] The data processing arm of the IRS. The campuses process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.
[20] Pub. L No. 109-432, 120 Stat. 2958 (2006).