The Government Accountability Office is out with a report on the expanded Internal Revenue Service whistleblower program. Preliminary conclusion: The agency moves too slowly, isn't doing a very good job of keeping track of data and has little idea of what is going on.
Remember all this if you're audited by the IRS and an agent says you don't have sufficient paperwork or should have known the law better.
According to the GAO, as of April two-thirds of all claims submitted in 2007 and 2008, the first two years of the stepped-up routine, were still in process with almost none of them near resolution. "The IRS has paid a small number of awards," the agency said in a cover letter to the Senate Finance Committee. The amount of bounty money paid out to informants--a minimum of 15% set by Congress--was so small the IRS refused to provided Congressional investigators with the total amount on the stated ground it could invade taxpayer privacy.
The report lays out the IRS's eight-step process for handling whistleblower claims. Apparently, the last step--"award payment"--is rarely reached.
In true bureaucratic fashion, IRS functionaries provided the GAO with all kinds of reasons why the vetting process has gone so slowly and payments are almost nonexistent. Among them: the IRS pays a bounty only when it actually collects money, and it has a policy of waiting two more years in case the taxpayer nevertheless requests a refund.
The report paints a stark picture of a reluctant agency way in over its head. The whistleblower operation doesn't bother to update IRS computer with the interim status of cases. Result: agency officials "do not have complete data on the length of time claims spend at each step of the review process to inform the decision making for establishing appropriate review time targets."
On top of all the delays, the GAO report says that the IRS has begun withholding 28% of whistleblower awards against the whistleblower's future tax liability, even though that ignores the hefty legal fees that many informants pay lawyers to press their claims.
The GAO recommended that the IRS do a better job of tracking information on many levels. In a response, the IRS said it would try to do so.
One thing the new law has done is generate tips. According to the report, 9,500 reward-seeking tips have been reported to the IRS since Congress strengthened the rights of whistleblowers.
The report mentions the ultimately unsuccessful efforts of Tennessee lawyer William Prentice Cooper III to blow the whistle for his widowed girlfriend on the alleged tax machinations of the family she had married into, descendants of famed Wall Street financier Clarence Dillon. In June, the U.S. Tax Court, more or less reversing an earlier decision, declared it had no authority to override IRS discretion when no money was collected. The GAO report said the latest Cooper decision makes it "uncertain" if future whistleblowers will learn the reason their claims were rejected.
Cooper had claimed the Dillon family avoided $100 million in estate taxes by omitting mention of a 1918 trust established by Dillon himself and by not paying a large generation-skipping tax. In court filings, the IRS said it looked at the claim and decided no tax was due. The secretive Dillon family was not a party to that litigation. A family spokesman noted that the IRS had accepted the estate tax return.
Earlier coverage:
Tax Informants Are On The Loose
Can IRS Be Forced To Check Out Informant's Tip?
Tax Informant Wins Ruling In Dillon Fortune Case
Tax Informant Loses Dillon Fortune Case
Follow William P. Barrett's work on Twitter by clicking here.
