Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Whistleblowers and Qui Tam for Tax
Dennis J. Ventry, Jr.*
*Assistant Professor of Law, American University Washington College of Law
In 1998, as Congress listened to sensational testimony of abuse and coercion by Service agents—nearly all of which turned out to be false or grossly exaggerated—Senator Harry Reid (D-NV) was fuming mad. In addition to encouraging its revenue agents to engage in intimidation tactics, the Service was enlisting taxpayers in overzealous collections efforts by rewarding them for retaliating against alleged tax cheats. Referring to an informant program that he dubbed the “Reward for Rats Program,” Reid told Congress that the Service was paying “snitches to act against associates, employers, relatives, and others—whether motivated by greed or revenge—in order to collect taxes.” Reid found the program “unseemly, distasteful, and just wrong,” as well as “a powerful incentive to anyone interested in becoming rich at the expense of a neighbor, former business associate, former wife, former husband.” Reid urged his colleagues to abolish the program.
Nine years later, in May 2007, Senator Charles Grassley (R-IA) spoke of the same program that had infuriated Reid. Rather than refer to Service informants as “rats,” however, Grassley praised their “courage and patriotism.” These individuals, Grassley said, “often risk their careers to expose fraud, waste, and abuse in an effort to protect not only the health and safety of the American people, but the federal treasury and taxpayer dollars.” Grassley was speaking of all federal whistleblowers in a speech kicking off “National Whistleblower Week.” But he likely was thinking in particular of tax whistleblowers, given that he had championed legislation in 2004 for the creation of a Service Whistleblower Office and that his staff wrote the provision in the Tax Relief and Health Care Act of 2006 that authorized such an office, greatly enhancing the Service’s whistleblower program.
This Article examines the expanded tax informant program and the recently established Whistleblower Office. It largely embraces the revamped tax whistleblower provisions, and recommends that Congress broaden the program still further to allow private citizens to bring qui tam lawsuits against taxpayers for violations of the internal revenue laws. Other federal and state whistleblower statutes, including the wildly successful False Claims Act (FCA), already provide for qui tam actions against persons submitting false claims to the government. The FCA, like the tax whistleblower statute, rewards private individuals for exposing others’ attempts to cheat the government. But unlike the tax statute, the FCA authorizes private individuals to sue on the government’s behalf in the form of qui tam actions. This Article proposes using the FCA as a model for the tax whistleblower statute, and extending qui tam to tax.
The experience of the FCA suggests that private enforcement of public law can be a particularly powerful monitoring and prosecutorial mechanism in areas of law where government officials—due to asymmetric information, active concealment by regulated parties, and weak enforcement—are unable or unwilling to enforce the law or prosecute offenders effectively. Current tax regulation suffers from all three symptoms, and could benefit from private enforcement efforts. The 2006 amendments to the tax whistleblower statute significantly expand the potential size of rewards paid to informants, and thereby heighten the threat that an insider might expose abusive taxpayer behavior. In this way, the enhanced tax whistleblower statute has added risk of detection and prosecution to the compliance calculus. Extending qui tam to tax would add an additional element of risk to tax cheating and noncompliance, and further assist the government in enforcing tax laws.
Part II of this Article provides a brief history of the tax whistleblower law, and describes the 2006 amendments. Part III explains why Congress expanded the tax whistleblower statute, including legislators’ explicit hopes that an enhanced tax informant program would assist in the collection of evaded tax liabilities, close the “tax gap,” and improve tax compliance. Part IV describes the design, implementation, and success of the False Claims Act. Part V articulates the argument for bringing qui tam to tax. It demonstrates the multiple benefits of private enforcement of the nation’s tax laws, including (1) assisting tax officials in overcoming information deficits and aggressive concealment on the part of taxpayers; (2) adding risk to abusive taxpayer behavior by increasing the probability of detection and prosecution of tax violations; (3) closing the “resource gap” currently separating tax regulators and private sector tax lawyers; (4) aligning the interests of taxpayers and tax regulators by providing economic incentives for private persons to expose alleged tax violations; and (5) altering governance and compliance norms within business organizations, thus deterring noncompliant behavior at the source. Part VI addresses potential concerns respecting an expanded tax whistleblower program, including taxpayer privacy, frivolous and harassing claims, and inadequate protections for whistleblowers.Finally, Part VII examines in detail perceived threats to professional confidentiality created by the new whistleblower statute. Recent legislative and administrative changes—particularly requirements under the Sarbanes-Oxley Act of 2002, amendments to regulations governing tax practice in 2005, and legislative and jurisprudential trends extending whistleblower protections—impose heightened obligations on lawyers and other professionals to monitor and enforce public policies underlying public laws. Thus, in an increasing number of situations, these advisors already have a duty under federal law to disclose confidential information. Both the enhanced tax whistleblower statute and the recommendation to extend qui tam to tax buttress those public policy obligations for lawyers, and impose similar duties on non-lawyers to help enforce the nation’s tax laws.