GAO Report on IRS Whistleblower Processing and Improvement of Data Controls (10/30/18)

The GAO issued a report titled "Whistleblower Program: IRS Needs to Improve Data Controls for Some Award Determinations (GAO-18-698 published 9/28/18 and publicly released 10/29/18).  The fast facts, highlights and recommendations are here.  The full report is here.

I cut and paste the highlights below:

What GAO Found 

Prior to February 9, 2018, when Congress enacted a statutory change requiring the Internal Revenue Service (IRS) to include penalties for Report of Foreign Bank and Financial Accounts (FBAR) violations in calculating whistleblower awards, IRS interpreted the whistleblower law to exclude these penalties from awards. However, GAO found that some whistleblowers provided information about FBAR noncompliance to IRS. In a sample of 132 whistleblower claims closed between January 2012 and July 2017, GAO found that IRS assessed FBAR penalties in 28 cases. It is unknown whether the whistleblower's information led IRS to take action in all of these cases. These penalties totaled approximately $10.7 million. Had they been included in whistleblower awards, total awards could have increased up to $3.2 million. Over 97 percent of the FBAR penalties collected from these 28 claims came from 10 cases with willful FBAR noncompliance, for which higher penalties apply.

Report of Foreign Bank and Financial Accounts (FBAR) Penalties and Potential Whistleblower Awards for Selected IRS Whistleblower Claims Closed between January 1, 2012, and July 24, 2017

FBAR penalty type	Number of claims	FBAR penalty amount (dollars)	Maximum potential whistleblower awarda(dollars)
Willful penalty	10	10,485,847	3,145,754
Non-willful & negligent penalty	18	263,039	78,912
Total	28	10,748,886	3,224,666

Source: GAO analysis of IRS data. | GAO-18-698
a Maximum potential award is defined as 30 percent of the FBAR penalty amount.

IRS forwards whistleblower allegations of FBAR noncompliance to its operating divisions for further examination. However, IRS Form 11369, a key form used for making award determinations, does not require examiners to include information about the usefulness of a whistleblower's information FBAR and other non-tax issues. After Congress enacted the statutory change, IRS suspended award determinations for 1 week, but resumed the program before updating the form or its instructions, or issuing internal guidance on new information required on the Form. As of June 28, 2018, IRS had not begun updating the Form 11369 or its instructions. The lack of clear instructions on the form for examiners to include information on FBAR and other non-tax enforcement collections may result in relevant information being excluded from whistleblower award decisions.

IRS maintains FBAR penalty data in a standalone database. It uses these data for internal and external reporting and to make management decisions. Because of the change in statute, IRS will need these data for determining whistleblower awards. GAO found that IRS does not have sufficient quality controls to ensure the reliability of FBAR penalty data. For example, IRS staff enter data into the database manually but there are no secondary checks to make sure the data entered are accurate. Without additional controls for data reliability, IRS risks making decisions, including award determinations, with incomplete or inaccurate data. 

This is a public version of a sensitive report issued in August 2018. Information on the FBAR Database that IRS deemed to be sensitive has been omitted. 

Why GAO Did This Study 

Tax whistleblowers who report on the underpayment of taxes by others have helped IRS collect $3.6 billion since 2007, according to IRS. IRS pays qualifying whistleblowers between 15 and 30 percent of the proceeds it collects as a result of their information. However, until February 9, 2018, IRS did not pay whistleblowers for information that led to the collection of FBAR penalties. 

GAO was asked to review how often and to what extent whistleblower claims involve cases where FBAR penalties were also assessed. Among other objectives, this report (1) describes the extent to which FBAR penalties were included in whistleblower awards prior to the statutory change in definition of proceeds; (2) examines how IRS used whistleblower information on FBAR noncompliance, and how IRS responded to the statutory change in definition of proceeds; and (3) describes the purposes for which IRS collects and uses FBAR penalty data, and assesses controls for ensuring data reliability. GAO reviewed the files of 132 claims closed between January 1, 2012, and July 24, 2017, that likely included FBAR allegations; analyzed IRS data; reviewed relevant laws and regulations, and IRS policies, procedures and publications; and interviewed IRS officials. 

What GAO Recommends 

GAO recommends IRS update IRS Form 11369 and improve controls for the reliability of FBAR penalty data. IRS agreed with all of GAO's recommendations.

JAT Comments:

Here are some items I found interesting and might be interesting also to readers:

1.  The data set reported on includes only FBAR data for assessments and collections prior to the change to the statute to include FBAR collections in the WB award database.  GAO was concerned that the processes be sufficient to insure proper implementation of the expansion of the award database.

2.  Note that some portions of the report were excluded because of containing sensitive information.

3.  The full report has a discussion (pp. 5-7) of the processing of Whistleblower claims.  The portion of the discussion I found interesting is (footnotes omitted):

The Whistleblower Office processes claims that allege a tax noncompliance of more than $2 million as potential 7623(b) claims. If these claims meet the requirements for an award, the whistleblower receives a mandatory award of between 15 and 30 percent of collected proceeds, with the exact percentage determined by IRS’s Whistleblower Office based on the extent of the whistleblower’s contributions. Claims not meeting the criteria for a 7623(b) claim are referred to as 7623(a) claims and are subject to procedural steps similar to those of 7623(b) claims. However, 7623(a) claims are neither eligible for appeals to the U.S. Tax Court nor subject to mandatory award payments.
For claims processed as 7623(b) claims, the whistleblower claims process involves multiple steps, starting with a whistleblower’s initial application and ending with a rejection, a denial, or an award payment.7 The process begins when a whistleblower submits a signed Form 211, Application for Award for Original Information, to the Whistleblower Office. The Initial Claim Evaluation unit, which is part of the Small Business/SelfEmployed operating division, performs an administrative review of the incoming applications. The Initial Claim Evaluation unit examines the submission for completeness and logs it into E-TRAK. They may reject claims because the tax noncompliance allegation is unclear, no taxpayer is identified, or the whistleblower is ineligible for an award.8 Claims that are not rejected are sent to classification to determine which operating division should review the claim.9 Claims are then generally sent to subject matter experts in the various operating divisions—usually the Small Business/Self-Employed or Large Business & International division—where they are reviewed to determine whether the claims merit further consideration by the operating division, should be referred to Criminal Investigation for investigation, or should be sent back to the Whistleblower Office as denied. Claims can be denied if there is limited audit potential or if there is limited time left on the statute of limitations, among other reasons. Claims that are not denied are generally added to the operating division’s inventory for potential examination. If a claim is selected for examination, the examiner completes and returns to the Whistleblower Office a Form 11369, Confidential Evaluation Report on Claim for Award, at the conclusion of the examination. The Whistleblower Office uses the information on this form when making an award determination.  Figure 1 summarizes the full claim review process for 7623(b) claims.  [GRAPHIC OMITTED]

4.  The report has a discussion (pp. 5-7) of the processing of Whistleblower claims.  The portion of the discussion I found interesting is (footnotes omitted):

The Whistleblower Office processes claims that allege a tax noncompliance of more than $2 million as potential 7623(b) claims. If these claims meet the requirements for an award, the whistleblower receives a mandatory award of between 15 and 30 percent of collected proceeds, with the exact percentage determined by IRS’s Whistleblower Office based on the extent of the whistleblower’s contributions. Claims not meeting the criteria for a 7623(b) claim are referred to as 7623(a) claims and are subject to procedural steps similar to those of 7623(b) claims. However, 7623(a) claims are neither eligible for appeals to the U.S. Tax Court nor subject to mandatory award payments.

For claims processed as 7623(b) claims, the whistleblower claims process involves multiple steps, starting with a whistleblower’s initial application and ending with a rejection, a denial, or an award payment. The process begins when a whistleblower submits a signed Form 211, Application for Award for Original Information, to the Whistleblower Office. The Initial Claim Evaluation unit, which is part of the Small Business/Self-Employed operating division, performs an administrative review of the incoming applications. The Initial Claim Evaluation unit examines the submission for completeness and logs it into E-TRAK. They may reject claims because the tax noncompliance allegation is unclear, no taxpayer is identified, or the whistleblower is ineligible for an award. Claims that are not rejected are sent to classification to determine which operating division should review the claim. Claims are then generally sent to subject matter experts in the various operating divisions—usually the Small Business/Self-Employed or Large Business & International division—where they are reviewed to determine whether the claims merit further consideration by the operating division, should be referred to Criminal Investigation for investigation, or should be sent back to the Whistleblower Office as denied. Claims can be denied if there is limited audit potential or if there is limited time left on the statute of limitations, among other reasons. Claims that are not denied are generally added to the operating division’s inventory for potential examination. If a claim is selected for examination, the examiner completes and returns to the Whistleblower Office a Form 11369, Confidential Evaluation Report on Claim for Award, at the conclusion of the examination. The Whistleblower Office uses the information on this form when making an award determination.  Figure 1 summarizes the full claim review process for 7623(b) claims.  [GRAPHIC OMITTED]

5.  The report discusses the IRS "stand-alone database" for FBAR penalty enforcement and management and how it will be used with the statutory change that includes FBAR collections in the whistleblower award base (pp. 24-25, footnotes omitted):

IRS collects and maintains FBAR penalty data in a stand-alone database. According to IRS officials, they use these data to carry out IRS’s delegated duties to assess and collect such penalties. For example, the data are used for sending demand notice letters to taxpayers and tracking cases referred to the Department of Justice. According to these officials, IRS also uses information on FBAR penalty assessments and payments for a variety of related purposes including reporting FBAR data to the Financial Crimes Enforcement Network (FinCEN) and for use in annual reports to Congress. IRS also uses the database for internal management. Specifically, IRS officials stated that they use reports on inventory, penalties, and appeals for decision making. Given the February 2018 legislative change to include FBAR penalties in the definition of proceeds, the Whistleblower Office will also use FBAR penalty data for calculating some whistleblower award determinations.

* * * *
Data on FBAR enforcement actions, including penalties, are only housed in the FBAR Database. The FBAR Database is a stand-alone database maintained by the FBAR team within the Small Business/Self-Employed operating division. The FBAR Database does not interface or connect with any other IRS data sources or systems. Therefore, there is currently no mechanism for any data to automatically feed into or from the FBAR Database to cross-check with taxpayer information in other databases. When examiners open an FBAR exam, the IRM directs them to report exam and exam-outcome information to the FBAR team. Examiners fax, mail, or e-mail FBAR examination and penalty assessment information to the FBAR team which then transcribes the data into the FBAR Database manually. Within IRS, only the FBAR team has access to the database. Because the stand-alone FBAR Database is the only data source within IRS that tracks FBAR penalty assessments and payments, the FBAR team is responsible for completing all data entry as well as generating and circulating reports on FBAR enforcement actions to others within IRS.

6.  The report discusses (pp. 28-30) feedback from private attorneys as to concerns in the  program.  See section titled "Selected Whistleblower Attorneys in Our Review Reported They Limited or Refused to Take on Clients Who Alleged FBAR Noncompliance When Penalties Were Excluded from Awards" (pp. 28-30).