A former director of the Internal Revenue Service’s tax-exempt bond office is warning the agency that proposed regulations for whistleblowers will substantially diminish the positive impact of the program for the TEB office and the IRS office of federal, state and local governments.
Mark Scott, who was director of the TEB office from 2000 to 2005 and is now an attorney with his own firm wrote a four-page letter to the IRS on Feb.18 about proposed regulations, which were released in December. The comment period for the proposed regulations ended Feb.19. A total of 838 comments were received by the IRS, according to a government website.
These proposed regulations are the first ones published for the whistleblower office and they encompass previous guidance the office has released over the past few years. It is the first opportunity for the public to formally comment on the direction of the whistleblower program.
Scott stressed in his letter that his comments are based on the 18 years with the IRS and his time overseeing the creation of the TEB office. His comments focused on two provisions of the proposed regulations as they related to state and local government issues and the need for revisions.
“These two provisions, as applied to the unique circumstances of these IRS offices, are written in a manner inconsistent with the intent of the statute in that they will greatly diminish the possibility of these offices receiving valuable information from whistleblowers,” Scott wrote.
The first section describes who is not eligible to file a claim for an award. The description is, “an individual who obtained the information through the individual’s official duties as an employee of a federal, state or local government, or who is acting within the scope of those official duties as an employee of a federal, state or local government.”
Scott said that while it is understandable that the IRS would want to exclude state and local employees who have access to federal tax information, the proposed regulations “fail to recognize that state and local governments are also taxpayers.”
“By excluding all state and local government employees as potential claimants against their employers, the proposed regulations eliminate the largest potential treasure trove of information relating to the federal tax liabilities of these government entities,” he wrote.
Scott said he is concerned by the broad exclusion for several reasons: state and local governments are taxpayers and limiting the whistleblower law to single out certain taxpayers for extra protection is “neither warranted by their actual tax compliance histories or by the statutory history of the whistleblower law.”
“Any assumption that all state and local governmental entities are fully compliant with their federal tax obligations would be grossly erroneous and directly contradicted by the need of the IRS to set up separate offices primarily for investigations of state and local governments,” he wrote.
Scott said the language “was a bit sloppy” and more clarification is needed on the issue of who is eligible to file a claim.
“To the extent the IRS is focused on the bad guys, it means they are spending less time looking at transactions that don’t need to be looked at,” Scott said. “If you are a good issuer or good borrower and getting audited, it will take time away from what you are trying to achieve. I think the whistleblower program is good from that standpoint in that it helps both the IRS and the bond community as well.”
Scott’s second concern deals with a provision of the tax code that says the award amount will be capped at 10% if a whistleblower claim is based on information from certain sources, such as from a judicial or administrative hearing, a governmental report, hearing, audit or investigation, or even from the news media.
He takes the IRS to task for prefacing the list with “public source information including,” saying this phrase should be removed because it seems more expansive than the specific list or sources.
He also urges that “public sources of information” exclude governmental records obtained by request because these “are not the type of records the average person would consider to be in the public domain.”
Scott suggested that the final regulations should be written in a manner that are broad enough to encourage everyone with relevant information to report potential tax violations.
