Grassley, Wyden Introduce IRS Whistleblower Improvements Act of 2017

For Immediate Release

Wednesday, March 29, 2017

Grassley, Wyden Introduce IRS Whistleblower Improvements Act of 2017

WASHINGTON – Sen. Chuck Grassley and Sen. Ron Wyden today introduced bipartisan legislation to improve IRS communication with tax fraud whistleblowers and protect those whistleblowers from workplace retaliation.

“Whistleblowers have helped the IRS recover more than $3 billion for the taxpayers that otherwise would have been lost to fraud,” Grassley said.  “Whistleblowers have the potential to help even more.  They need assurances that putting their jobs at risk carries protections.  They also need better communication about where their cases stand so they’re not sitting in limbo.  This bill will offer a welcome mat to those who are too often treated like skunks at a picnic.”

“Whistleblowers are a crucial line of defense against waste, fraud and abuse,” said Wyden. “This legislation will strengthen protections for employees of companies who come forward to report tax evasion.  Empowering these whistleblowers is key to rooting out bad actors who are breaking the law by dodging their taxes.” 

The IRS Whistleblower Improvements Act of 2017 is based on the Grassley-Wyden amendment included in the Taxpayer Protection Act of 2016.  The Taxpayer Protection Act, along with the Grassley-Wyden amendment, passed the Finance Committee in April 2016 but was never considered by the full Senate. 

The measure would: (1) increase communication between the IRS and whistleblowers, while protecting taxpayer privacy, and (2) provide legal protections to whistleblowers from employers retaliating against them for disclosing tax abuses. 

To increase communication, the bill specifically would allow the IRS to exchange information with whistleblowers where doing so would be helpful to an investigation.  It would further require the IRS to provide status updates to whistleblowers at significant points in the review process and allow for further updates at the discretion of the IRS.  It does this while ensuring that the confidentiality of this information is maintained.  Whistleblowers have expressed concern and frustration in their inability to receive information from the IRS on the status of their cases, which may take years to resolve.  Since these individuals often put their livelihoods on the line to come forward, poor communication adds to their anxiety and is a disincentive to others with knowledge of high dollar tax fraud.

To protect whistleblowers from employer retaliation, the bill extends anti-retaliation provisions to IRS whistleblowers that are currently afforded to whistleblowers under other whistleblower laws, such as the False Claims Act and Sarbanes-Oxley.  Tax whistleblowers may be easily identified within their firms as having specific knowledge of tax fraud.  Extending the protections to tax whistleblowers that apply to whistleblowers in other fields is a matter of fairness and in the interest of U.S. taxpayers who benefit from such whistleblowing, Grassley and Wyden said.  

The IRS Whistleblower Improvements Act of 2017 will be assigned to the Finance Committee, where Grassley is a senior member and former chairman, and Wyden is ranking member.

Grassley successfully enacted much-needed updates to the IRS whistleblower program in 2006.  The improvements have led to the recovery of more than $3 billion in taxes that otherwise would have been lost to fraud.  The IRS has made some progress in improving its treatment of whistleblowers, due to congressional oversight, but challenges remain.  The potential is strong to recover much more in fraud proceeds if the IRS continues to improve its procedures, and Congress delivers the improvements in the Grassley-Wyden legislation.

Two well-known pro-whistleblower groups endorsed the legislation.

“Honest taxpayers are the true victim of every tax fraud.  This reform provides critical protection for those courageous enough to risk losing their jobs to report illegal tax schemes.  The legislation closes a loophole in whistleblower law that currently fails to provide any protection for those who report tax fraud. This bill is urgently needed,” said Stephen M. Kohn, Executive Director, National Whistleblower Center.

“These amendments will significantly strengthen the fraud-fighting potential of the IRS Whistleblower statute and promote the public-private partnerships that the law was originally enacted to foster,” said Robert Patten, President and CEO of Taxpayers Against Fraud.  “In particular, the anti-retaliation provisions will encourage more citizens to come forward and will result in the recovery of significant funds that would otherwise be lost to tax fraud.”

Grassley and Wyden are among the founding members of the bipartisan Senate Whistleblower Protection Caucus.  Grassley is chairman and Wyden is vice-chairman.

Tax Court Win for Whistleblowers

Tax Court Win for Whistleblowers

As previously discussed in these summaries, the Tax Court in Whistleblower 21276-13W determined that collected proceeds includes amounts collected outside of Title 26 (the Internal Revenue Code).  Since the August 3, 2016 opinion, the IRS filed a motion on September 2, 2016, requesting the Court to reconsider its opinion.  Petitioners then filed their response on September 13, 2016.  The Court then denied IRS' Motion for Reconsideration on December 20, 2016.

In the IRS' Motion for Reconsideration, the IRS stated that the basis of their motion was to resolve the inconsistency between the Court's opinion in Whistleblower 21276-13W and the Court's prior decision in Whistleblower 22716-13W (where the Court determined that under I.R.C. § 7623(b)(5)'s amounts in dispute determining additional amounts did not include penalties outside of Chapter 68 of Title 26). This inconsistency, as argued by the IRS, is a problem because how can cases that fail to meet the $2,000,000 threshold under I.R.C.§ 7623(b)(5) and which do not include the non-Title 26 penalties be different than cases that meet the "insignificant" $2,000,000 threshold which would include penalties previously excluded by I.R.C. § 7623(b)(5).

The IRS also makes the following points in its Motion for Reconsideration:

1. IRS' position regarding collected proceeds is the best because collective proceeds are taxes, penalties, interest, additions to tax and additional amounts.
2. Court improperly separates 7623(a) and 7623(b) programs as two separate programs.  Instead, the IRS reads the 7623(a) restriction on payments being derived solely from amounts collected as equally applicable to 7623(a) and 7623(b) cases.

In response to the IRS' Motion, the Petitioners made the following points in their Reply:

1. IRS fails to raise new arguments in its Motion to Reconsider.
2. Despite IRS claiming an inconsistency exists with the Court's opinion in 21276-13W, the Court has explained exactly why its opinion did not contradict 22716-13W.
3. IRS' inconsistency argument is disguising its real argument that it does not have access to the funds to pay the whistleblowers.
4. Court's position in prior opinion are correct.

As stated above, the Court denied IRS' Motion for Reconsideration, so the Court opinion and the positions in that opinion are still the Court's interpretation of the law.

Expatriation Numbers Soar

Expatriation Numbers Soar in 3Q 2016 and donations to Donor Advised Funds Soar in 4Q 2016

Expatriation Numbers:  Whether it was a result of the pending presidential election or part of something greater, the IRS released figures that in 3Q 2016, greater numbers of U.S. Citizens were renouncing their citizenship and expatriating.  See this Press Release announcing the former U.S. Citizens expatriating.  A total of 1,380 individuals expatriated, the second highest total ever for a quarter, and for the first 3 quarters of 2016, there have been a total of 3,046 individuals that have expatriated.  See this blog for a chart of the number of Expatriations in 2016.

This leads to the question of why so many people are expatriating from the U.S.  One explanation might be increased enforcement by the IRS and U.S. Treasury in offshore bank account reporting as a result of the Swiss banking fiascos (UBS, Credit Suisse) and Foreign Account Tax Compliance Act ("FACTA").  See this CNBC article n 2015, trying to explain the surge in expatriation.

So what are the costs for expatriation?  See this article.  See also this Forbes article.

1. You must file a document with the State Department. Which raised the price from $450 to $2,350 in 2014 (Note: here is the State Department information for Renunciation of Citizenship, and a listing of fees if renouncing through the UK embassy).
2. Show 5 years of tax compliance (filing returns and taxes paid).
3. Exit Tax if your net worth is greater than $2,000,000 or annual average income in the last 5 years is greater than $157,000. (Note: The exit tax is calculated as if you sold all your assets at market value and after an exemption of $693,000, you would pay capital gains taxes on the remaining value).  See IRS form 8854 for more information at calculating the exit tax.
4. Then pay a gift/estate tax for any transfer of your US assets at the existing gift/estate tax.

For a comparison of Donor Advised Funds and Private Foundations, see the National Philanthropic Trust's website outlining the difference between the two.

One Recent Notable Expatriation:  In 2011, Eduardo Saverin, Co-founder of Facebook, expatriated and paid the expatriation tax, estimated to be 15% of (53 million shares of Facebook at $50/share) or an estimated $397,500,000.  However, the Wall Street Journal estimated that Saverin saved about $700 million in taxes otherwise due to the U.S. Government by expatriating.

Donor Advised Funds:  Additionally, as noted by the Wall Street Journal, there is an increase level of activity by Americans prior to the close of the year.  In summarizing the WSJ article, Paul Caron's TaxProfBlog states that donors associated with Schwab Charitable have put more than $693 million into new and existing accounts between Thanksgiving and December 18, which represents a 20% increase over the same period in 2015.

The WSJ article speculates that the cause is President-elect Donald Trump and Republicans' proposal to limit the value of charitable deductions in 2017 and onward by either lowering tax rates or limiting the deductibility of charitable gifts.  The WSJ also notes that a recent boost to markets may also have contributed to this recent surge.

So what is a Donor Advised Fund?  IRS describes the Donor Advised Fund as: 

“a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.”

— Internal Revenue Service

IRS has in the past warned against using Donor Advised Funds because promoters of Donor Advised Funds had allowed taxpayer to misuse the Donor Advised Funds to claim charitable deductions while retaining control over the donated property.  See 2005 IRS Dirty Dozen.  Since this pronouncement and the passage of Pension Protection Act of 2006 (which Congress legally defined donor-advised funds and provided the IRS with tools to enforce the usage of Donor Advised Funds) IRS has since removed the Donor Advised Funds from its Dirty Dozen Lists, but lists fake charities as a Dirty Dozen for 2016.

Conclusion:  So why are people leaving the U.S. in record numbers and donating to their Donor Advised Funds in record numbers?  Simple, to avoid taxes, or to preserve deductions prior to the new administration's removal or reduction of the charitable deduction.

If you know anyone that has expatriated but has failed to pay their exit tax, in excess of $2,000,000, or is misusing their Donor Advised Fund to take charitable deductions that they are not otherwise permitted to in excess of $2,000,000, you should consider filing a tax whistleblower claim.  Or if you know of someone who isn't paying their taxes in excess of $2,000,000 you should also consider filing a claim.  Contact us to discuss filing your claim.  As a reminder, the IRS is willing to pay 15-30% of the tax, penalties, interest, and other amounts collected based on a whistleblower's substantial and credible information.