An IRS program meant to reward whistleblowers is foundering, critics say, leaving tax cheats feeling emboldened: “There’s a mindset of, all I have to do is outfox the guys at the IRS — and they’re all wearing cardigans and reading glasses." (Photo: Illustration: Benjamin Currie/HuffPost)
About a decade ago, an American lawyer with roughly $50 million stashed in the Cayman Islands went looking for another place to hide it. His problem, allegedly, is that he had never declared the accounts and paid his taxes. His solution was to purchase nearly a dozen villas in Spain through shell corporations, plus millions of dollars’ worth of gold bullion.
The lawyer might never have come to the attention of U.S. tax authorities if not for the fact that the person he had hired to help him load up on Spanish real estate blew the whistle. In 2016, with the aid of a former IRS agent named Robert Mazur, that person handed over detailed documentation of the alleged tax evasion scheme to the IRS whistleblower office.
That was nearly seven years ago. To this day, the IRS has yet to take any enforcement action.
“It defies logic to me that it could take that long,” Mazur said. But that is less than the average amount of time it takes the IRS whistleblower office to investigate a claim, which ranges from eight and a half to more than 11 years.
“The IRS whistleblower program is one of the greatest wastes of government opportunity that’s out there,” said Jeffrey Neiman, who represents whistleblowers as a partner at the Florida law firm Marcus, Neiman, Rashbaum & Pineiro. “You have this stubbornness within the IRS where they believe they should be able to do everything on their own. Despite Congress giving them this amazing tool to crack down on tax evasion.”
According to the IRS’s own data, for every $1 it does eventually award to whistleblowers, it collects at least $6 from noncompliant taxpayers. Since 2007, whistleblowers have helped the service recover $6.39 billion from wealthy and corporate tax cheats.
And yet the program has been shrinking. From 2018 to 2021, the size and number of whistleblower awards plunged from 423 awards totaling $312 million to 179 awards worth $36 million. The amount of money the office recovered from noncompliant taxpayers also fell, from $1.4 billion to $245 million. A recent report from the Senate Finance Committee blasted the IRS for opening just six criminal investigations based on whistleblower complaints in fiscal year 2020.
A major culprit is massive delays in paying out whistleblower awards and a deep-seated resentment inside the IRS toward working with informants. In the years it takes for the IRS to vet a claim, investigate and take action, whistleblowers typically remain in the dark. Waiting for a tax case to take shape, Mazur said, is like watching a glacier form.
“I have a former CFO-type who submitted a claim about a real estate developer around six and a half years ago,” Neiman said. “We’re talking about tens of millions of dollars. And one day, I’m gonna go to the mailbox, find a letter, and it’ll tell me they’ve either decided to give my client a reward or not.”
I’ve had billion-dollar claims rejected even though they were completely meritorious because the IRS just gave up on them.Bryan Skarlatos, a whistleblower attorney
John Hinman, who became the office’s newest director in May, said he is aware of the whistleblower program’s reputation and is keen on improving it.
“We absolutely do value whistleblowers and their contributions,” he said. “I’m really coming into the position with a desire to look for opportunities for improvements and change.”
The challenge facing him is steep. The program is a shadow of what lawmakers imagined when they created the whistleblower office in 2006. Inspired by the awesome scale of malfeasance behind the Enron scandal, Sen. Chuck Grassley (R-Iowa) helped pass a bipartisan law that set up the office and made monetary awards for successful whistleblowers mandatory. They are entitled to between 15% and 30% of what the IRS collects based on their information.
Under the law, the whistleblower has to substantially contribute to the investigation in order to be eligible for an award, usually by providing emails, PowerPoint presentations and memos that help make the case. People who initiated or planned the illegal activity are not eligible.
The law took effect on Dec. 6, 2006.
“We had submissions coming in the door on December 7,” recalled Bob Gardener, a retired IRS agent. By the time the office had a permanent director the following February, the tips numbered more than 400. “And they just kept rolling in,” he said. “Every day we would get five, ten new submissions.”
The quality, he said, was fantastic. Whistleblowers clued the IRS in to everything from garden-variety secret offshore accounts to types of tax evasion the agency didn’t even know existed. Informants hailed from virtually every high-flying industry, like banking, finance, manufacturing, construction, pharmaceuticals, and military contracting.
A tip from Brad Birkenfeld, a former UBS banker who would collect the largest IRS whistleblower award in the program’s history, resulted in a watershed investigation of Americans hiding taxable assets in the Swiss banking system. UBS agreed to pay a $780 million fine and turn over the names of thousands of Americans with undeclared accounts. Birkenfeld was also sentenced to 40 months in prison for withholding the name of a client implicated in the scandal.
But just a few years into the program’s existence, the pace of new whistleblower claims began to slow. Tips were taking ages to investigate — so long that some whistleblowers died before a conclusion was reached on their claims, Gardener said. The IRS, hamstrung by budget cuts and outgunned by accused tax cheats who had the ability to hire formidable legal teams, began avoiding claims involving complex issues like transfer pricing or complicated financial instruments, critics said.
“People cannot believe that the IRS won’t go out of its way to collect $20 million, but the truth is, often they won’t,” said Bryan Skarlatos, a whistleblower attorney at the Washington, D.C., firm Kostelanetz & Fink.“I’ve had billion-dollar claims rejected even though they were completely meritorious because the IRS just gave up on them.”
The agency’s top brass, meanwhile, made no secret of the fact that they resented that Congress had forced them to work with people they saw as unscrupulous.
“We were fighting a constant battle against this institutional feeling of, I don’t need somebody to tell me how to do my job and find the issues,” Gardener said. “And they were looking for ways to make it harder for whistleblowers to get awards.” Many whistleblowers have taken the IRS to court over their shares of an award, a process that can last as long as the initial investigation.
If the IRS doesn’t want to pay whistleblowers, well, who’s going to dime out the Russians for a few million dollars? I wouldn’t.A Democratic aide with oversight of the whistleblower program
The grinding realities of blowing the whistle have led many would-be informants to conclude that the downsides are just too great. Attorneys have, too: The number of law firms willing to represent whistleblowers has collapsed from more than 60 white-shoe law firms doing that work when the whistleblower law was passed to just a handful of boutique operations today.
Whistleblowers who have gotten caught by their employers have been demoted or fired and have suffered spurious lawsuits, Skarlatos said. Birkenfeld — who was represented by Zerbe is now enjoying something of a permanent vacation in Europe — has advised whistleblowers who have been followed and had their phones tapped. One man asked for asylum in the United States.
“In the end, what do you get?” Birkenfeld asked. “Very few people who have the courage to come forward.”
“They’re out there, and they come to us,” said a Democratic aide with oversight of the program. “A lot of people who work in Swiss banking are willing to blow the whistle on big accounts. … But if the IRS doesn’t want to pay whistleblowers, well, who’s going to dime out the Russians for a few million dollars? I wouldn’t.”
On the other side of the ledger, critics of the office say, tax cheats are feeling emboldened.
“Right now there’s still a mindset of, all I have to do is outfox the guys at the IRS, and they’re all wearing cardigans and reading glasses,” said Dean Zerbe, who helped draft the whistleblower statute as a Grassley aide and now represents whistleblowers as an attorney. “What you want is for people to worry about every person they work with — their banker, their banker’s secretary, the guy in Panama, the guy in the Caymans.”
Some critics have pinned their hopes on Hinman to improve things. Hinman told HuffPost that he is trying to accelerate whistleblower payments in ongoing cases where the IRS has already collected some back taxes and said he is pressing the office to track down hard-to-locate whistleblowers and the descendants of whistleblowers who have died.
“We have been thinking hard about what we can do to speed up awards,” he said. “We are not tilted toward saying our job is to make awards as small as possible.”
In September, Hinman approved an $8.8 million award for two informants, represented by Zerbe, who helped the IRS recover $35 million in corporate income taxes; it was a reversal of an earlier decision to give them a much smaller award.
The Inflation Reduction Act, the multibillion legislative package that President Joe Biden signed into law this August, contains $78 million over 10 years for the IRS to backfill and shore up crucial positions. Hinman said any additional field agents will give the IRS more bandwidth to investigate whistleblower claims.
Separately, Sen. Ron Wyden (D-Ore.) and Grassley have introduced a bill that would increase funding for the office itself, penalize the IRS for long delays in issuing awards and, when whistleblowers sue the IRS over award money, make the legal standard courts use in those lawsuits more favorable to the whistleblower.
But none of that immediately addresses the arduous waits whistleblowers face today.
“It’s unfortunate how the program is floundering,” Mazur said. He periodically asks for updates on his client’s case, but the answer is always some version of “hang tight.”
“They’re very polite at the whistleblower’s office, but nothing seems to ever happen.”
This article originally appeared on HuffPost and has been updated.