Every CFE and forensic accountant in practice encounters companies that operate outside accounting rules and tax laws. Blowing the whistle on such companies can be risky for the employee whistleblower; we all know that doing so often results in tipsters losing their jobs and reputations and facing limited future career prospects. Yet, on every side such employees are exhorted to offer the information they do to uncover fraud.
The whistleblower programs set up by U.S. government agencies are of particular interest to our Chapter members, practicing as they do in such close proximity to Washington D.C., and to those practicing in and around Richmond, the seat of government of the Commonwealth of Virginia. State and Federal entities encourage these tips by offering hot-lines and whistleblower awards programs that pay monetary awards to tipsters if their information leads to successful enforcement and to collection of money from a violator.
The two most important of these programs likely to be encountered by our Central Virginia Chapter members are the whistleblower rewards programs of the Internal Revenue Service (IRS) and the Security and Exchange Commission (SEC). The IRS program, which began 140 years ago, authorizes the Department of the Treasury to pay amounts to individuals who provide information that allow the IRS to detect, bring to trial and punish those guilty of violating internal revenue laws. A 2006 amendment created the current IRS whistleblower program, which mandates that the government pay whistleblowers awards based on the size of the taxes collected as a result of their tips.
The seminal U.S. Federal Claims Act, enacted in 1863, allows whistleblowers a portion of reclaimed money when defendants are found guilty of defrauding the federal government. The Commodities Futures Trading Commission has also recently established a whistleblower program. As I’m sure most of you remember, in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act established the SEC’S whistleblower awards program. The program seeks to encourage high-quality tips about securities violations with its monetary awards supplemented by protections from retaliation.
The IRS created the whistleblower awards program, codified in IRC 7623(a), to close the tax gap and fight tax fraud more aggressively. In this original program, the maximum award was 15 percent of collected taxes, penalties and other amounts not to exceed $10 million, but the decision whether to make an award at all was wholly within the IRS’ discretion. When the courts considered attempts to challenge award decisions under this law, they uniformly found that the discretion to make or not make an award is essentially not reviewable. In other words, the courts decided the IRS has the right to make an award or not, and the whistleblower can’t appeal that decision.
The Tax Relief and Health Care Act of 2006, which made major changes to the IRS awards program, mandated that the IRS pay out a substantial award whenever a whistleblower’s information leads to the collection of tax, interest and penalties based on disputes in excess of $2 million. The new section, IRC 7623(b), was intended to create strong incentives to bolster insider reporting of tax violations for claims enacted after Dec. 20, 2006. The awards are now mandatory rather than discretionary; and they range from 15 percent to 30 percent of monies collected with no cap on the dollar amount of the award. With some exceptions, a whistleblower may collect an award even if convicted of a felony.
Whistleblowers are eligible for awards based on additions to tax, penalties, interest, and other amounts collected as a result of any administrative or judicial action resulting from the information provided. The 2006 amendment added whistleblower appeal rights to the U.S. Tax Court. To implement the law, the IRS was also required to create a Whistleblower Office that reports to the IRS commissioner. Submissions that don’t qualify under the new section IRC 7623(b) (usually because the disputes are for less than $2 million) are processed under the original IRC 7623(a). The IRS will continue to consider these cases, but the award is at the discretion of the agency, and there’s no requirement that an award be issued. These whistleblowers have no minimum statutory award percentage and no appeal provision.
The Dodd-Frank bill was partly a response to financial debacles such as the Madoff fraud and widespread mortgage frauds. Many criticized the SEC for its inaction to the causative circumstances that led to the Great Recession, although it definitely wasn’t alone in its failure to uncover and stop massive frauds. The SEC had an awards program before Dodd-Frank, but it wasn’t particularly effective, and it focused solely on insider trading. The new whistleblower awards program, which is much broader, encourages tips related to all kinds of securities violations from financial statement fraud to alleged Ponzi schemes.
The Dodd-Frank whistleblower program stipulates that as long as collected monetary sanctions exceed $1 million, awards are 10 percent to 30 percent of that amount. Awards are paid to individuals who voluntarily provide original information that leads to successful SEC enforcement. The award percentage is increased or decreased based on several factors including the extent of the whistleblower’s assistance.
Section 924(d) of the Dodd-Frank Act required the SEC to create a separate office within the agency to enforce the new regulation. In May 2011, the SEC adopted the Final Rules, Regulation 21F, which included prohibitions against retaliation, defined terms and established policies for submitting tips, applying for awards and filing appeals on award decisions.
In the IRS program, a whistleblower must be a “natural person”, in other words, not a corporation or other business organization. Because the claim form must be signed under penalty of perjury, the whistleblower can’t be anonymous, nor can the claim come from a representative of the whistleblower. Multiple whistleblowers can submit a joint claim, but each must sign under penalty of perjury. Similarly, in the SEC program the whistleblower must be a natural person or persons. However, the SEC whistleblower can be anonymous up to the point that the award is paid out, and he or she can be represented by an attorney or other person. IRS whistleblowers can’t be taxpayer’s representatives, employees of the Treasury Department, or employees of federal, state or local governments if they learned of the information as part of their job duties. The SEC whistleblower can’t be an auditor who learned of the issue as part of his or her duties during an audit or other engagement. The SEC whistleblower also must provide the information “voluntarily’ which means that the whistleblower can’t provide it in response to a request from regulators or law enforcement.
IRS claims must include the tax violator’s name and address, date of birth, Social Security number and the specific nature of the violation. If possible, it should also include the tax year(s), the dollar amounts of unreported income or erroneous deductions and supporting documentation. SEC claims must be original information about possible securities laws violations not already known to the SEC and not derived from publicly available sources. Even though the whistleblower employee might have first reported the information to his or her company’s internal hotline process, the SEC will still consider the information to be original. The content of this required information isn’t as clearly specified as in the IRS program, but it must cause the SEC to open (or expand) an investigation and bring a successful enforcement action.
The IRS protects the whistleblower’s identity as far as possible. If the whistleblower is needed as a witness in a court case, the IRS will notify the whistleblower who can then decide whether or not to proceed. The legislation that established the IRS program failed to include any protection for the whistleblower from possible retaliation. However, the alleged tax violator’s information is strictly protected, so that the whistleblower can only be told whether the case is open or closed. If the case is closed, the IRS can reveal to the whistleblower if his or her claim is payable, the amount of a payment or if a payment has been denied.
The SEC can’t disclose information that could reasonably be expected to reveal the identity of a whistleblower except if it needs to comply with law enforcement proceedings or protect investors by notifying another authority. For example, the SEC might need to notify the U.S. Department of Justice or a state attorney general or even foreign law enforcement if a criminal investigation should be opened as a result of the whistleblower’s allegations. The SEC informant must file through an attorney to remain anonymous during the process. After the SEC presents the award to the whistleblower, it will release the whistleblower’s name. Federal laws state that the whistleblower’s company can’t retaliate against the employee.
The IRS pays its awards when the proceeds are collected, and the appeals period for the taxpayer has expired. Many have said that the IRS program process is lengthy and slow. Claimants can generally expect to wait five to seven years to receive an award. While a whistleblower can’t appeal the award amount for IRC 7623(a) through the Tax Court, awards filed under the newer IRC 7623(b) are subject to appeal in the Tax Court.
The SEC will pay after the time has expired for the violator to file an appeal or after any appeals have been concluded. Then it evaluates all claims. The SEC must collect all sanctions from the violator before the SEC pays the award. A whistleblower can’t appeal an award amount but can appeal a denial.
In summary, we CFEs should inform our clients, individual and corporate, that whistleblowers can expect a long and bumpy ride to the chance, but not the promise, of monetary reward.