Whistleblower Program: IRS Needs to Improve Data Controls for Some Award Determinations

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.

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.

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.

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.

Tax whistleblowers—individuals who report the underpayment of taxes or  the violation of tax laws by others—could help the Internal Revenue  Service (IRS) collect potentially billions of dollars in revenue that may  otherwise go uncollected. According to IRS, whistleblower information  has assisted IRS in collecting almost $3.6 billion since 2007. This  information can help reduce the tax gap—the difference between the  amount of taxes owed by taxpayers and the amount voluntarily paid on  time. The Tax Relief and Health Care Act of 2006 included an expansion  of IRS’s whistleblower program by establishing the IRS Whistleblower  Office and requiring IRS to pay qualifying whistleblowers between 15 and  30 percent of the proceeds IRS collects as a result of the whistleblower’s  information.

The Bank Secrecy Act and its implementing regulations require certain  individuals with offshore bank accounts to file an annual Report of  Foreign Bank and Financial Accounts (FBAR). FBARs help the  government identify and prevent tax evasion, money laundering, terrorist  financing, and other crimes. IRS enforces FBAR filing requirements.  Individuals who fail to disclose these accounts and pay appropriate taxes  on them contribute to the tax gap. If IRS identifies these unreported  accounts and income, it can assess taxes, interest, and penalties. For  each FBAR violation, the penalty for willful violations can be as high as  the larger of $100,000 (adjusted for inflation) or half of the value of the  unreported account at the time of the violation. Some estimates put the  value of offshore accounts in the hundreds of billions to over a trillion  dollars.

In an August 2014 regulation, IRS interpreted the tax whistleblower law  as applying only to collections made under Title 26, the U.S. Tax Code.  Because penalties assessed and collected by IRS for FBAR violations are  collected under Title 31, the Bank Secrecy Act, IRS did not include these  penalties in whistleblower award calculations. Similarly, criminal fines,  which are collected under Title 18, were excluded from whistleblower  award calculations.

Some whistleblowers have challenged these exclusions in the courts.  Also, in 2015, the IRS Taxpayer Advocate Service included a legislative  recommendation in its annual report that Congress amend the tax  whistleblower law to specifically include FBAR penalties in proceeds. On  February 9, 2018, Congress passed legislation that replaced the term  “collected proceeds” with the word “proceeds” and defined proceeds as  “penalties, interest, additions to tax, and additional amounts provided  under the internal revenue laws and any proceeds arising from laws for  which the Internal Revenue Service is authorized to administer, enforce,  or investigate, including criminal fines and civil forfeitures, and violations  of reporting requirements.”

Prior to the statutory change in the definition of proceeds, you asked us to  review how often and to what extent whistleblower claims involve cases  where FBAR penalties were also assessed. This report (1) describes the  extent to which the Whistleblower Office included FBAR penalties in  whistleblower awards prior to the change in the definition of proceeds; (2)  examines how IRS used whistleblower information on FBAR noncompliance and how IRS responded to the statutory change in the  definition of proceeds; (3) describes the purposes for which IRS collects  and uses data from the FBAR Database and assesses the controls for  ensuring data reliability; and (4) summarizes what is known about the  potential effect that exclusions from whistleblower awards, including  FBAR penalties, may have had on whistleblowers bringing claims to IRS.

This report is a public version of a sensitive report that we issued in  August 2018. IRS deemed some of the information in our August report to  be sensitive, which must be protected from public disclosure. Therefore,  this report omits sensitive information about the information security  safeguards of IRS’s FBAR Database as well as an associated  recommendation. Although the information provided in this report is more  limited, the report addresses the same objectives as the sensitive report  and uses the same methodology.

To address our first objective, we reviewed a generalizable stratified  sample of 132 whistleblower claim files closed between January 1, 2012,  and July 24, 2017, (the time of our analysis) to identify how often these  claims included allegations related to offshore accounts and FBAR  violations and how often these claims led to IRS assessing FBAR  penalties. The sample included (1) all 92 claims where the taxpayer  identified by the whistleblower was also included in IRS’s FBAR  Database, IRS’s database of FBAR enforcement actions; (2) all 10 claims  that the Whistleblower Office closed as having no Title 26 collected  proceeds; and (3) a sample of 30 claims randomly selected from 299  claims identified as having one or more key words indicating offshore  account activity in E-TRAK, the Whistleblower Office’s electronic claims  management information system. We compared information gathered  from our file review with data on FBAR enforcement actions from the  FBAR Database. We also interviewed IRS officials.

We assessed the reliability of the FBAR Database and E-TRAK to use  limited data from these databases for our own analysis. We reviewed  agency documents, electronically tested data for missing data and  outliers, and interviewed IRS officials about these databases. These two  databases are the only sources of data within IRS for whistleblower  claims information and FBAR enforcement actions and outcomes. We  used data from E-TRAK to identify whistleblower claims that were likely to  involve allegations of FBAR noncompliance. We compared data from E- TRAK and the FBAR Database to identify individuals that were named by  a whistleblower and also subject to FBAR enforcement actions and any  related enforcement actions taken by IRS. We also reviewed data on the  amount of FBAR penalties assessed, if any, to the individuals included in  our sample. We discuss the limitations of these databases in this report,  but concluded that the elements we used in our analyses were sufficiently  reliable for our purposes.

To address our second objective, we reviewed relevant portions of the  Internal Revenue Manual (IRM) and other IRS internal guidance. We  interviewed IRS Whistleblower Office and IRS operating division officials  about what IRS did with information received from whistleblowers about  FBAR allegations prior to the statutory change in the definition of  proceeds. In addition, we reviewed the February 2018 statutory  provisions concerning the definition of proceeds on which whistleblower  awards are based.

To address our third objective, we evaluated IRS’s FBAR Database to  identify any control deficiencies, using as criteria principles on design  activities for information systems and use of quality information from  Standards for Internal Control in the Federal Government; the Federal  Information Security Modernization Act of 2014, and National Institute of  Standards and Technology Special Publication 800-53. We electronically  tested the FBAR Database for missing data, outliers, and obvious errors,  and reviewed IRS documentation on the database. We also interviewed  IRS officials responsible for maintaining and using the database to  determine how IRS uses the data, existing controls, any known limitations  of the database, and any planned changes or improvements for the  database. While we determined that the data we used from the FBAR  Database were sufficiently reliable for the purposes of identifying  individuals also named in whistleblower claims as well as FBAR  enforcement outcomes, we identified risks to the reliability of the data, as  discussed later in the report.

For our fourth objective, we interviewed a nonprobability sample of 11  attorneys from nine law firms that represent multiple clients who have  submitted claims to the IRS Whistleblower Office under Section 7623(b).  The views expressed in these interviews represented only those of the  attorneys who participated and are not generalizable to all whistleblower  attorneys or law firms. These attorneys also have a financial interest in  IRS’s treatment of whistleblower claims; however, interviewing these  attorneys allowed us to gather broad viewpoints on how whistleblower  award exclusions may affect their professional decisions and the  decisions of their clients and prospective clients. We also analyzed FBAR  penalty data from the FBAR Database, and tax assessment data. In  addition, we interviewed IRS Whistleblower Office and operating division  officials.

The performance audit upon which this report is based was conducted  from March 2017 to August 2018 in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives. We  subsequently worked with IRS from August 2018 to September 2018 to  prepare this public version of the original sensitive report for public  release. This public version was also prepared in accordance with these  standards.

Since 1867, the internal revenue laws have allowed the government to  pay awards to individuals who provided information that aided in detecting  and punishing those guilty of violating tax laws. In 1996, Congress  increased the scope of the program to also provide awards for detecting  underpayments of tax. It also changed the source of awards to money  IRS collects as a result of information whistleblowers provide rather than  appropriated funds. The Tax Relief and Health Care Act of 2006 created  a mandatory whistleblower award program which made fundamental  changes to IRS’s existing informant awards program. The 2006 act also  established the IRS Whistleblower Office. 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.

According to the fiscal year 2017 Whistleblower Office annual report, IRS  collected $191 million in fiscal year 2017 as a result of both 7623(a) and  7623(b) whistleblower claims. IRS also paid out $34 million on 367 claims  to 242 whistleblowers. The average whistleblower award for fiscal year  2017 was over $140,000. Figure 2 below shows the collection and payout  amounts for fiscal years 2012 through 2017.

Prior to February 9, 2018, section 7623(b) of Title 26 required the  Whistleblower Office to calculate whistleblower award amounts as a  percent of “collected proceeds (including penalties, interest, additions to  tax, and additional amounts).” On August 12, 2014, IRS issued a final  rule to implement section 7623 (the whistleblower law) that clarified that  certain penalties—those collected under Title 31 for FBAR violations, and  those collected under Title 18 for criminal and civil penalties for tax law  violations—do not constitute collected proceeds for calculating  whistleblower awards. IRS received comments on the proposed rule  contending that excluding money collected under Title 18 and Title 31 eliminates a whistleblower’s incentive to provide information on violations  under these titles and would reduce the number of whistleblowers willing  to provide information to IRS. IRS stated in its final rule that section 7623  only authorizes awards for amounts collected under Title 26. IRS also  noted that under the Victims of Crime Act, criminal fines paid for tax law  violations must go into the Crime Victims Fund and are unavailable for  payment to whistleblowers.

Whistleblowers challenged IRS’s definition of collected proceeds in court.  In August 2016, the U.S. Tax Court issued a ruling in response to a  petition filed by a married couple who, as whistleblowers, had provided  information leading to a conviction related to a tax fraud scheme and then  disputed the award determination made by the Whistleblower Office. The  U.S. Tax Court ruled that criminal fines and civil forfeitures were collected  proceeds for purposes of an award under Section 7623(b). In its ruling,  the court held that “the term ‘collected proceeds’ means all proceeds  collected by the Government from the taxpayer” and that “…the term is  broad and sweeping; it is not limited to amounts assessed and collected  under title 26.” On April 24, 2017, IRS filed an appeal of the Tax Court’s  decision with the U.S. Court of Appeals for the District of Columbia  Circuit.

Before the U.S. Court of Appeals made a final ruling, Congress replaced  the term “collected proceeds” with the term “proceeds” and provided a  definition of “proceeds” on February 9, 2018, in the Bipartisan Budget Act  of 2018. The act’s definition of proceeds includes: (1) penalties, interest,  additions to tax, and additional amounts provided under the internal  revenue laws; and (2) any proceeds arising from laws for which the IRS is  authorized to administer, enforce, or investigate including criminal fines  and civil forfeitures, and violations of reporting requirements. This  includes FBAR penalties in the definition of proceeds, as well as criminal  fines and civil forfeitures. This definition of proceeds applies to cases for  which a final determination for an award was not made prior to  enactment. On March 26, 2018, IRS withdrew its appeal before the U.S.  Court of Appeals.

Reporting of Foreign Bank and Financial Accounts

Under the Bank Secrecy Act of 1970, and in particular those sections  incorporated into Title 31 of the U.S. Code, U.S. persons with a financial  interest in, or signature or other authority over a bank, securities, or other  financial account in a foreign country are required to keep records and file  reports on transactions with foreign financial institutions. Persons with a  financial interest or signature authority over one or more foreign financial  accounts with a total value of more than $10,000 must file an FBAR with  the Department of the Treasury (Treasury). If an FBAR is required, it must  be filed each year for the previous calendar year on or before April 15 (or  other date as prescribed by the IRS) to coincide with the tax filing  deadline. Administration of this statute has been delegated by Treasury to  the Financial Crimes Enforcement Network (FinCEN). In April 2003,  FinCEN delegated its authority to IRS to enforce the FBAR requirements.  These requirements include conducting examinations of FBAR  compliance and taking such enforcement actions as assessing penalties,  as appropriate.

A person’s civil penalty for each FBAR violation can be up to $500 for a  negligent FBAR violation and up to $10,000 for non-willful violation. In  addition, a person with a willful FBAR violation may be subject to a civil  monetary penalty equal to the greater of $100,000 or 50 percent of the  amount in the account at the time of the violation, and also be subject to  possible criminal sanctions. These penalties are per person, per  account, and per year. According to the Internal Revenue Manual (IRM),  FBAR penalties assessed by IRS are collected and tracked separately  from tax assessments.

Prior to February 2018, IRS Did Not Consider Whistleblower Information That May Have Led to FBAR Enforcement Actions in Award Determinations Whistleblowers Likely Identified Millions in FBAR Noncompliance for Which They Were Not Awarded

IRS assessed approximately $10.7 million in FBAR penalties to taxpayers  who were identified in our sample of whistleblower claims. We reviewed  92 whistleblower claims closed between January 1, 2012, and July 24,  2017, where the identified taxpayer was also subject to an IRS FBAR  examination. IRS assessed FBAR penalties in 28 of these 92 cases.  In none of these instances was the FBAR penalty included in the  collected proceeds used to calculate whistleblower awards. Our analysis  of these 28 claims suggests that if IRS had included FBAR penalties in  the awards, the whistleblowers involved could have received an additional $1.6 million to $3.2 million, assuming an award of between 15 and 30  percent.

Examples of  Whistleblower Claims  A whistleblower claim may provide IRS  information on the undisclosed offshore  account of a single individual (such as a  business partner, former spouse, or family  member), while other whistleblowers, such as  bank insiders, may provide IRS a list of  individuals with undisclosed offshore  accounts.

The exclusion of FBAR penalties from whistleblower awards is consistent  with IRS’s August 2014 regulation outlining the whistleblower award  process. The final regulation describes the process for determining  whistleblower awards and includes a definition of collected proceeds.  Specifically, the regulation defines collected proceeds as “limited to  amounts collected under the provisions of Title 26, United States Code.”  This definition excluded FBAR penalties assessed under Title 31 and  criminal fines assessed under Title 18. This regulation’s definition of  collected proceeds, however, has been superseded by the replacement  of “collected proceeds” with “proceeds” and a definition of “proceeds” in  the Bipartisan Budget Act of 2018, effective February 9, 2018. The new  law defines proceeds as including “penalties, interest, additions to tax,  and additional amounts provided under the internal revenue laws and any  proceeds arising from laws for which the Internal Revenue Service is  authorized to administer, enforce, or investigate, including criminal fines  and civil forfeitures, and violations of reporting requirements.”

While no whistleblowers were paid for any FBAR penalties collected as a  result of the information they provided to the Whistleblower Office, our  analysis found that IRS took FBAR enforcement actions against at least  10 taxpayers based on whistleblowers’ information. Table 1 shows the  FBAR enforcement outcomes for the 92 claims we reviewed.

Of these 92 whistleblower claims we reviewed where the identified  taxpayer was subject to an FBAR enforcement effort, 39 involved  taxpayers accepted into IRS’s Offshore Voluntary Disclosure Programs  (OVDP). OVDP enables taxpayers with tax noncompliance from  undisclosed offshore accounts to avoid prosecution and resolve their past  noncompliance by paying limited civil penalties. As one of a number of  required actions for OVDP, IRS assesses taxpayers accepted into the  program a miscellaneous Title 26 offshore penalty in lieu of all other  penalties for undisclosed foreign accounts, including FBAR penalties.  According to IRS officials, because the OVDP penalty is a Title 26  penalty, these collections were included in collected proceeds for the  purposes of whistleblower award calculations even before the new  definition of proceeds took effect on February 9, 2018. The case files we  reviewed included some examples of whistleblowers receiving an award  based in part on the miscellaneous Title 26 OVDP penalty in addition to  tax, interest, and other penalties. If the taxpayer had not participated in  OVDP, the whistleblower would not have received an award on the part of  the collected proceeds that came from the FBAR penalty.

FBAR Warning Letters  At the conclusion of a Report of Foreign Bank  and Financial Accounts (FBAR) examination,  an examiner can either assess a penalty or  can use a warning letter (Letter 3800,  Warning Letter Respecting Foreign Bank and  Financial Accounts Report Apparent  Violations) to notify taxpayers that they are  not in compliance with FBAR reporting  requirements. The examiner can use their  discretion to issue a warning letter if they  determine that the taxpayer would improve  their FBAR reporting compliance in the future.  A taxpayer’s failure to file an FBAR after  receiving a warning letter supports a  determination of a willful FBAR violation.

The new definition of proceeds establishes a policy of including FBAR  penalties in whistleblower awards regardless of whether the identified  taxpayer enters OVDP or is assessed an FBAR penalty as a result of an  FBAR exam. It also creates consistency with the treatment of penalties  assessed under the Foreign Account Tax Compliance Act (FATCA).  FATCA, enacted in 2010 under Title 26, assesses penalties for failure to  report foreign financial accounts and assets. Because FATCA is under  Title 26, any penalties assessed stemming from a whistleblower’s  information were already eligible for inclusion in whistleblower awards.

Of the total revenue collected from the 28 whistleblower claims we  reviewed with an FBAR penalty assessed, more than 97 percent came  from 10 cases with willful FBAR penalties. Willful FBAR penalties, which  are up to 50 percent of the value of the account, represent a small portion  (less than 0.1 percent) of all whistleblower claims closed in our time  frame, and less than half of the 28 FBAR penalty cases we reviewed.  However, we calculated that had these willful penalties been included in  awards, the whistleblower awards would have increased by up to  $3,145,754. In contrast, the 18 cases that had a non-willful or negligent  FBAR penalty would have led to an increase in whistleblower awards of  up to $78,912 based on our calculations. Table 2 shows the number of  cases and total amount of FBAR penalties collected by the type of FBAR  penalty.

Whistleblowers may play an important role in bringing willfully  noncompliant taxpayers to the attention of IRS. These taxpayers may be  purposefully hiding their assets from IRS detection. To highlight the  difference in the magnitude of FBAR penalties between willful and non- willful or negligent taxpayers, figure 3 shows the range of potential  whistleblower awards had FBAR penalties been included in award  determinations.

Some Whistleblower Claims Closed between January 2012 and July 2017 Included FBAR Allegations

There is no way to estimate how many whistleblowers would have come  forward had IRS included FBAR penalties in whistleblower awards.  However, we found a small number of whistleblower claims that included  FBAR information anyway. To look for how often whistleblowers  submitted claims with allegations of FBAR noncompliance, we identified  401 of the 10,306 IRS whistleblower claims closed between January 1,  2012, and July 24, 2017, as likely to contain allegations of FBAR  noncompliance by an identified taxpayer. We identified three groups of claims as being most likely to contain allegations of FBAR  noncompliance: 92 claims where the identified taxpayer was subject to an  FBAR enforcement action (population discussed above); 299 claims that  included key terms in E-TRAK indicating offshore assets; and 10 claims  that were closed with “no Title 26 collected proceeds,” which could  indicate FBAR noncompliance since FBAR penalties are Title 31  penalties. Since FBAR penalties were excluded from whistleblower  proceeds, IRS did not track FBAR allegation data in E-TRAK. Therefore,  our numbers might underrepresent the total population of claims likely to  include allegations of FBAR noncompliance.

We reviewed all 92 of the claims that included taxpayers that were also  present in IRS’s FBAR Database (matched claims) and found that 85 of  them included allegations of FBAR noncompliance on IRS Form 211, the  form used to submit a claim to the Whistleblower Office. We reviewed a  random sample of 30 claims from the 299 claims we identified as being  likely to include FBAR information based on key terms in the E-TRAK  database (key terms claims)—11 of them included allegations of FBAR  noncompliance. We also reviewed all 10 of the claims that were closed  with “no Title 26 collected proceeds” and found one allegation of FBAR  noncompliance. This was not unusual because IRS uses the “no Title 26  collected proceeds” code for closures other than those with FBAR  penalties, such as claims with Title 18 criminal fines. Table 3 shows our  three populations and how often we found claims with allegations of  FBAR noncompliance in each.

Based on our stratified sample of selected whistleblower claims, we  estimate that at least 1.4 percent (or at least 146 claims) of all large-dollar  (7623(b)) whistleblower claims closed between January 1, 2012, and July  24, 2017, involved allegations of FBAR noncompliance. Because the  Whistleblower Office did not require data in E-TRAK to indicate the nature  of the violation the whistleblower is reporting, the actual number of claims  that include allegations of FBAR noncompliance may be higher. While our  estimate represents a small proportion of all whistleblower claims, this  may be because of the prior policy of excluding FBAR penalties from  awards. However, the analysis suggests that despite being ineligible for  award payment, some whistleblowers provided information on FBAR  noncompliance to IRS that may have helped improve FBAR’s  effectiveness as a tool for anti-money laundering and tax enforcement.  With the statutory change in award basis, IRS may see more  whistleblowers come forward with better information about FBAR  noncompliance, according to whistleblower attorneys we interviewed.

IRS Historically Used FBAR Information from Whistleblower Claims for Enforcement Efforts, but the Statutory Change in Award Basis Increases the Importance of Reporting Full Information The Whistleblower Office Forwarded FBAR Information to Other IRS Divisions for Exam Purposes, Even Before FBAR Information Was Required to Be Included in Award Determinations

Even though FBAR penalties were not considered for whistleblower  awards until the February 9, 2018 legislative change, the Whistleblower  Office forwarded allegations it received of FBAR noncompliance to IRS’s  operating divisions for further examination. Whistleblower Office officials  told us that if a whistleblower provides information concerning offshore  accounts held by a taxpayer, including specific allegations of FBAR  noncompliance, IRS evaluates it as it does any other information. The  presence of information on possible FBAR noncompliance does not  change the process for evaluating the claim. Whistleblower Office  instructions for the initial review of a claim specify that, if the claim merits  further consideration, it will be referred to the appropriate operating  division for review.

According to officials from the Small Business/Self-Employed and Large  Business & International operating divisions, during their review process  information dealing with offshore accounts and possible FBAR violations  is treated just as all other information provided by a whistleblower. Once a  claim is referred to an operating division, it is generally reviewed by a  subject matter expert who then determines whether the claim has  sufficient audit potential to warrant adding it to the division’s inventory of  possible returns for audit. If the subject matter expert concludes that the  claim does not have sufficient audit potential, or the division later decides  not to proceed with an examination, the claim is returned to the  Whistleblower Office. If the subject matter expert forwards a  whistleblower claim for possible audit and an examination takes place,  the examiners will establish an audit file for the tax examination. If  evidence of FBAR noncompliance is found, a separate audit file is to be  created. Most often, both files are maintained and updated by the same  examiners. According to IRS officials and procedures laid out in the IRM,  the outcome of the examination is based on the quality of the evidence  and is not influenced by the presence of a whistleblower or the source of  the information.

Information on FBAR noncompliance developed by examiners may or  may not be provided to the Whistleblower Office. At the conclusion of the  examination process, the examiner provides the Whistleblower Office with  a Form 11369, Confidential Evaluation Report on Claim for Award. On  this form, examiners are required to answer a series of detailed questions  about the whistleblower’s contribution to the investigation, such as  whether the whistleblower identified specific issues or provided analysis  that saved IRS time and resources. According to the IRM, the purpose of  the Form 11369 is to inform the Whistleblower Office of the  whistleblower’s contribution, if any, to an examination, investigation, or  other action.

According to the instructions on the Form 11369 as well as the IRM, the  Whistleblower Office bases its award determinations in large part on the  form and information provided to supplement it. There is no specific  space set aside on the Form 11369 for information dealing specifically  with FBAR noncompliance. In addition, there are no instructions on or  accompanying the form to require examiners to provide documentation  relating to FBAR noncompliance.

Prior to the legislative change in February 2018 to include FBAR  penalties in awards, the Whistleblower Office retained in its files any  FBAR-related information provided by the operating division but did not  use it for the award determination process. According to Whistleblower  Office officials, any information about FBAR noncompliance in its claim  files was there incidentally and not collected or retained for any specific  tracking purposes. These officials told us, and we found in our review,  that some claim files had information about FBAR violations or penalties  because the operating division examiner chose to include it in the Form  11369 narrative or in supplemental information, even though the  examiner was not required to do so. Because providing FBAR information  with the Form 11369 was discretionary prior to the legislative change in  February 2018, Whistleblower Office officials told us that if FBAR  information existed in the files at the time of the interview, it may not be  complete.

While having complete information about FBAR exams on the Form  11369 was not needed when IRS did not consider FBAR noncompliance  as part of award determinations, now that it is defined as such by statute,  the Whistleblower Office will need such information on FBAR  noncompliance on Form 11369 to properly determine whistleblower  awards in accordance with the new legal requirements. As of June 28,  2018, the Whistleblower Office had not updated Form 11369 or its  accompanying instructions. Whistleblower Office officials told us they  were reviewing and commenting on draft guidance from the Office of  Chief Counsel on how to implement the new provision but had not yet  updated the Form 11369 or its instructions. IRS officials did not provide a  timeline for when IRS expects to update the form.

Because this form asks questions specific to Title 26 tax noncompliance  examiners may not have clear guidance indicating that non-Title 26  issues should be included in these answers. According to the IRM, the  Form 11369 should assist the Whistleblower Office in making an award  determination by explaining how the whistleblower and their information  assisted IRS in taking action. By not using an updated form that reflects  the technical language distinguishing between tax issues and non-Title 26  issues that IRS also enforces, the Whistleblower Office may not be able  to ensure the information it collects for determining whistleblower awards  that includes non-Title 26 violations is complete and accurate.

IRS Has Taken Some Steps to Communicate Change in Whistleblower Award Basis

When enacted on February 9, 2018, the new law immediately required  information concerning FBAR violations to be included in the awards  determination process. Subsequently, the Whistleblower Office and IRS  started to make changes to policies and procedures to ensure award  determination decisions are made fairly and with full information. The day  the new statutory definition became law, IRS placed a hold on  whistleblower award determinations while the Whistleblower Office  developed new procedures. On February 15, 2018, IRS lifted the hold,  instructing Whistleblower Office analysts to check with their managers  prior to making award determinations on any claims that may include non- Title 26 proceeds. However, the Whistleblower Office did not issue any  additional specific guidance to Whistleblower Office staff on how to review  claims for any non-Title 26 issues until April 19, 2018. According to IRS  officials, the Whistleblower Office closed 2,096 whistleblower claims  between the date the law changed and April 19, 2018 when IRS issued  the internal guidance.

In the April 19, 2018 policy alert, later reissued as a memo on May 8,  2018, Whistleblower Office staff were instructed to look over the Form  211 for indications of FBAR or criminal activity when reviewing a Form  11369 or making award determinations. The policy alert also instructs  staff to contact the FBAR Penalty Coordinator and review Special Agent’s  Reports and Judgement Documents for non-Title 26 proceeds and to  document the results of these reviews in E-TRAK.

Issuing complete and final guidance will take time; however the  Whistleblower Office did not issue any interim guidance to IRS units  outside the Whistleblower Office for more than 2 months after the  enactment of the statute redefining proceeds. On April 12, 2018, the  Director of the Whistleblower Office issued a memo to the commissioners  of the operating divisions and chief of the Criminal Investigation division.  This memo stated that those working on whistleblower claims need to  provide the Whistleblower Office with details of how whistleblower  information was used in any actions taken regardless of whether they  were Title 26 issues or not. The Whistleblower Office emailed a  communication similar to the memo to other IRS employees working on  whistleblower claims on April 18, 2018. The initial memo did not provide  specific instructions as to how to provide such information, such as  specifying to use Form 11369, but the email said additional guidance and  training would be forthcoming. According to Whistleblower Office officials,  the timing of the internal communication about the change in  whistleblower award basis was because the Whistleblower Office was  waiting on draft guidance from the IRS Office of Chief Counsel. The  Whistleblower Office received this draft guidance on April 19, 2018.

In late April and early May, the Whistleblower Office posted information  about these changes in internal IRS media, including IRS-wide web  pages and pages for individual IRS operating divisions. The  Whistleblower Office specified information should be included with the  Form 11369 in these later communications. However, as noted above,  the Form 11369 itself and its accompanying instructions had not been  updated to reflect these new requirements.

The current regulations on whistleblower claims, issued in August 2014,  exclude non-Title 26 proceeds from the basis for determining  whistleblower awards. According to IRS officials, as of June 20, 2018,  IRS had not yet started to take action on making the regulatory change.  IRS, however, is in the process of updating the IRM, which serves as the  primary guidance for IRS employees. Section 25.2.2 of the IRM, which  provides procedures and instructions for the whistleblower award  programs, defines collected proceeds for the purpose of awards as tax,  penalties, interest, and additions to tax limited to amounts collected only  under the provisions of Title 26. According to IRS officials, while IRM  updates take time to complete, generally the IRM can be updated quicker  than a regulation. The officials could not provide a timeline for when these  changes would be complete.

IRS can communicate to the public about statutory changes to the  whistleblower program through its various external communication  channels, such as its website and social media accounts. Such  communications are important because whistleblowers have a limited 30- day period to appeal certain award determinations. On May 9, 2018, IRS  posted an announcement about the statutory change on the  Whistleblower Office page of its web site. The announcement noted the  enactment of the provision redefining proceeds for the purpose of  whistleblower awards and provided a link to the May 8, 2018  Whistleblower Office memorandum. This information was posted 3  months after the statutory change went into effect and a month after we  notified IRS that IRS had not yet announced the change through a press  release, its web site, or its Twitter account.

IRS Uses Its FBAR Database for Internal and External Reporting but Lacks Sufficient Controls

IRS Uses Data from Its FBAR Database to Manage Workflow and for Internal and External Reporting

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.

While FinCEN retains the rule-making authority for FBAR and is the  repository of FBAR filings, IRS assesses and collects FBAR penalties  from taxpayers who violate the FBAR reporting requirements. IRS also  maintains the FBAR Database. While individuals file their FBAR forms  through FinCEN’s online Bank Secrecy Act E-filing portal, IRS enforces  these filing requirements. Following procedures laid out in the IRM, IRS  examiners can access FBAR filing data from FinCEN’s database during  the course of a tax examination. Information on the taxpayers’ FBAR  filings is available to examiners through IRS’s Integrated Data Retrieval  System, including data from filed tax and information returns.

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.

IRS Has Insufficient Controls for the Reliability of FBAR Penalty Data

We assessed the reliability of the FBAR Database for the purposes of  using limited data from this database for our own analysis. We  determined that the data fields we used were sufficiently reliable for our  purposes. Specifically, we matched taxpayer identification numbers in the  FBAR Database to those in E-TRAK and reported on enforcement  outcomes, including a limited number of penalty payments, as discussed  previously. These data were the only available data within IRS on FBAR  penalties and enforcement actions. Even though we found the data that  we used to be sufficiently reliable for our purpose of identifying penalty  information and selecting a sample of claims to review further, we  identified some data control deficiencies related to data input and  validation. We found certain elements of the database to have limited  reliability. Because FBAR penalty information will be used for  whistleblower award determinations, it is important for these data to be  reliable.

A key principle of federal internal control is the use of quality information.  Agencies should have controls in their information systems to ensure the  validity, completeness, and accuracy of data. Further, these controls  should be documented. In addition, the Federal Information Security  Modernization Act of 2014 (FISMA) provides for the development and  maintenance of the minimum controls required to protect federal  information and information systems. Among other things, FISMA  requires the National Institute of Standards and Technology (NIST) to  develop standards and guidelines that include minimum information  security requirements on how agencies should design, protect, and  manage their respective data systems. NIST’s guidance outlines  appropriate data safeguards for agency data systems based on a risk- based approach. NIST guidance also states an agency’s information  system should have controls to check the validity of inputs. This includes  checking the valid syntax of inputs to ensure they match the specified  definitions for format and content. NIST guidance also recommends  controls to help ensure the information system behaves predictably, even  if invalid data are entered.

While FBAR team employees transcribe data manually into the database  from emails or faxed or mailed paper forms, there are no procedures for  data testing or validation. For example, there is no secondary check by  another individual to ensure data were entered correctly and completely.  The FBAR Database procedures also lack sufficient validity checks to  ensure that the data entered are accurate. There are some basic data  entry checks in the database, such as limiting input to alphanumeric  entries and a warning if a date is more than a year from the current date.  However, these checks serve only as a reminder for the employees  entering the data to verify its accuracy; these checks do not prevent  erroneous data from being entered and retained. Without additional  controls for accuracy and validity, IRS risks relying upon inaccurate  information for some of its reporting and decision making.

According to IRS officials, not all fields in the FBAR Database are  mandatory. In addition, some fields are new as of January 2017 and,  therefore, only contain data after this time. IRS officials also told us that  they are aware there are some data missing in the database, such as  incomplete records for some taxpayers, but they could not quantify how  often this occurs. They also told us that such missing data can contribute  to inaccurate reports of FBAR total assessments. For example, if a date  field is left blank, certain reports that pull data based on these date fields  will not pull the records with this missing field, thereby underreporting  FBAR outcomes. We found 44 records with input errors in this date field.  The officials stated that they make every effort to input complete data into  the database, but sometimes complete information is unavailable from the  exam team. Because the FBAR data lack some reliability controls, IRS  may rely on insufficient or incomplete data for reporting and decision  making, including amounts of whistleblower awards.

IRS officials did not have any documentation showing why or how the  database was developed in November 2003. Further, IRS officials told us  the only documentation on how the database is used is the FBAR  Database desk guide. The desk guide provides instructions for data input;  however, this guide does not include any information to describe or define  the elements in the database. Standard data element definitions are  intended to ensure that all users of the system define the same data in  the same way and have a common understanding of their meaning. Such  documentation is important for providing clear instructions to users to  know what information should be input in each variable field to ensure  that the type of data in each variable field is consistent. Without it, IRS  and other users of the data may not have reasonable assurance that data  in the database are input as intended.

IRS recognized the need to address the FBAR Database and established  an FBAR Improvement Project Team to review the FBAR Database and  records system and make recommendations for improvements. The team  was established in 2016 after reviews of database-generated reports  indicated missing data. The FBAR Improvement Project Team has made  recommendations to improve the overall function and reliability of the  dataset, including updating FBAR policies and procedures and validating  data for the report to Congress. They are also exploring automating case  building by pulling taxpayer data from other IRS data sources and  creating a report automation tool. As of April 2018, these  recommendations had not been implemented. IRS officials were  reviewing the recommendations and specific plans had not been vetted  by the leadership in the relevant operating divisions. IRS officials noted  that because of the small size and limited use of the database, it may be  a low priority for scarce information technology resources. Until IRS  develops and documents improved controls for the validity,  completeness, and accuracy of data in the FBAR Database, it risks using  incomplete and insufficient data for decision making.

Award Exclusions May Have Negatively Affected Whistleblowers’ Willingness to Bring Information to IRS 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

Whistleblower attorneys we spoke with referred to the former exclusion  for FBAR and other non-Title 26 collections from whistleblower awards as  a significant concern for them and their clients. Their concerns are  important to the success of the whistleblower program because if  whistleblowers are discouraged from coming forward, IRS risks losing  opportunities to identify tax fraud and abuse and ultimately reduce the tax  gap. This loss of help in identifying noncompliance could be significant for  IRS. According to IRS, between 2007 and 2017, whistleblower  information helped IRS collect $3.6 billion in tax revenue that may have  otherwise gone uncollected. According to the whistleblower attorneys we  spoke with, as well as information we gathered in a search of relevant  literature, the estimated value of undisclosed offshore accounts may be in  the tens of billions of dollars, but could be as great as hundreds of billions  of dollars.

Prior to the legislative change in the definition of collected proceeds, we  interviewed 11 whistleblower attorneys from nine law firms about their  experiences representing tax whistleblowers who submitted allegations of  FBAR noncompliance to IRS. Several of these firms also had  experience helping whistleblowers appeal IRS award determinations. Of  these nine firms, eight firms’ attorneys told us they had refused or limited  the number of whistleblowers alleging FBAR noncompliance they were  willing to take on as clients when such collections were excluded from  award determinations. For example, one attorney told us that his firm  would take on whistleblower clients alleging FBAR violations only if there  was strong evidence of tax noncompliance. An attorney with another firm  reported that the firm was willing to take on such clients but advised these  clients that the inclusion of FBAR penalties in any award may have to be  litigated in court at the award determination phase. Further, attorneys with  three of the nine firms reported fewer whistleblowers either approaching  them for representation or following through on filing a claim once  informed of the exclusion of non-Title 26 collections from awards.  Attorneys with eight of the nine firms also reported that the exclusion of  criminal fines from collected proceeds was a potential reason for  whistleblowers not coming forward.

We spoke with attorneys at eight of the nine firms again after the passage  of the statutory change in the definition of proceeds. Most said that this  was a positive step for the IRS whistleblower program and expected that  more whistleblowers will come forward with information on criminal and  FBAR violations. Attorneys with seven of the eight firms stated they would  be willing or already had started taking on clients reporting FBAR and  criminal violations. However, they cited other concerns with the program  that could continue to limit their willingness to represent tax  whistleblowers and discourage whistleblowers. These concerns included  limits on anonymity for whistleblowers appealing Whistleblower Office  decisions to the Tax Court;  restrictions on filing claims anonymously; delays in award payments during the lengthy appeals process; and  limited communication with the Whistleblower Office during the claim  review process.

According to these attorneys, for those whistleblowers who are offered an  award that excludes FBAR penalty and criminal fine collections, many  choose to forgo appealing the decision because it would delay their  collection of any part of the award until the appeals process was  complete, which can take years. Further, the whistleblower may risk  losing their anonymity in an appeal. They added that some whistleblowers  risk their lives and livelihoods to come forward and that anonymity is  critical to their willingness to provide information to IRS. The attorneys  generally stated that these issues can discourage whistleblowers, which  then can limit the whistleblower program’s effectiveness.

Our Analysis Found No Evidence That Presence of Whistleblower Alters the Mix of FBAR Penalty and Tax IRS Assesses

Some of the attorneys we interviewed indicated that whistleblowers may  have been further discouraged from bringing information on offshore  noncompliance to IRS if they believed that IRS was purposefully trying to  limit whistleblower awards by assessing higher FBAR penalties and lower  taxes when a whistleblower was involved. The IRM provides IRS  examiners with some level of discretion about when to assess tax and  FBAR penalties, subject to the facts and circumstances of each individual  case. Attorneys at seven of the nine firms we interviewed expressed  concern that IRS examiners may have used this discretion to assess  higher FBAR penalties and lower taxes as a way to reduce a  whistleblower’s potential award. However, these attorneys did not provide  specific evidence of this occurring. Because of taxpayer information  privacy laws, IRS limits the amount and type of information it can share  with whistleblowers and their attorneys about their claims once submitted  to the Whistleblower Office.

To investigate this claim, we analyzed IRS data on taxpayers that were  assessed FBAR penalties from tax years 2010 to 2015. We compared the  proportion of FBAR penalties assessed to the overall tax and FBAR  penalties assessed to a taxpayer for exams where a whistleblower was  and was not involved. Our analysis did not find any evidence of a  statistically significant difference between the taxpayers identified by a  whistleblower and taxpayers with no whistleblower involved.

The IRM lays out the steps examiners should take when determining  whether FBAR penalties are warranted and how they should be  assessed. These steps are independent of IRM guidance on tax  examinations and assessments. IRS officials that we interviewed,  including those with oversight of examiners in Small Business/Self- Employed and Large Business & International, indicated that the Title 26  tax exams and Title 31 FBAR exams are conducted independently of  each other and neither influences the outcome of the other. Further, they  stated that the presence of a whistleblower has no bearing on the  decision of whether to assess a tax or penalty or the amount of such  assessments, as previously discussed.

For the IRS whistleblower program to be successful, whistleblowers need  to have confidence in the program’s processes and outcomes, including  paying awards when a whistleblower’s information is used. Despite IRS’s  prior policy of not including non-Title 26 collections, we found some  whistleblowers brought such information to IRS, and IRS assessed  penalties on noncompliant taxpayers. However, according to  whistleblower attorneys we spoke with, this policy of award exclusions  may have discouraged other whistleblowers with significant information  on FBAR reporting and tax noncompliance from coming forward. With the  new statutory definition of proceeds enacted on February 9, 2018, that  includes FBAR and other non-Title 26 collections, whistleblowers may  now be more willing to submit claims.

However, IRS has not yet fully changed some of the whistleblower  program’s policies and procedures to reflect that FBAR penalties, as well  as criminal fines and civil forfeitures, are now included in whistleblower  awards. Because the change was effective for claims that had not had a  final determination made as of February 9, 2018, the Whistleblower Office  taking immediate steps to ensure it had full information from other offices  and divisions within IRS about claims reaching the award determination  phase would have helped IRS act on these determinations. While IRS  has now taken steps to communicate the need for information about non- Title 26 actions to be included with the Form 11369, updating the form  itself and its instructions will help to better ensure that complete and  accurate information about such actions is reflected on the form to be  provided to the Whistleblower Office for inclusion in award  determinations.

The FBAR Database is the only comprehensive source of information  within IRS about the FBAR penalties assessed and paid. If this database  does not have the controls necessary to provide reasonable assurance  that the data are reliable, accurate, and complete, there is a risk that the  Whistleblower Office may make award determinations based on incorrect  data.

We are making the following two recommendations to IRS:  The Commissioner of Internal Revenue should ensure that the Director of  the Whistleblower Office modifies the Form 11369 and its accompanying  instructions to clarify how to document how whistleblower information was  used in any IRS actions taken, regardless of whether the laws  administered, examined, or enforced are outside of Title 26, such as  FBAR penalties. (Recommendation 1)

The Commissioner of Internal Revenue should ensure that the Deputy  Commissioner for Services and Enforcement develops and documents  improved controls for the validity, completeness, and accuracy of data on  FBAR exams and enforcement actions. (Recommendation 2)

We provided a draft of the sensitive version of this report to IRS for review  and comment. IRS agreed with our recommendations and provided  technical comments which we incorporated as appropriate. However, IRS  deemed some of the information in their original agency comment letter  pertaining to the FBAR Database to be sensitive, which must be  protected from public disclosure. Therefore, we have omitted the sensitive  information in the comment letter, which is reproduced in part in appendix  II. These omissions did not have a material effect on the substance of  IRS’s comments.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees and the Commissioner of Internal Revenue. In  addition, the report will be available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-9110 or at mctiguej@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix III.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to: (1) describe the extent to which the Internal  Revenue Service’s (IRS) Whistleblower Office included Report of Foreign  Bank and Financial Accounts (FBAR) penalties in whistleblower awards  prior to the statutory change; (2) examine how IRS used whistleblower  information on FBAR noncompliance and how IRS responded to the  statutory change in definition of proceeds; (3) describe the purposes for  which IRS collects and uses data from the FBAR Database and assess  the controls for ensuring data reliability; and (4) summarize what is known  about the potential effect exclusions from collected proceeds, including  FBAR penalties, may have had on whistleblowers bringing claims to IRS.

This report is a public version of a sensitive report that we issued in  August 2018. IRS deemed some of the information in our August report to  be sensitive, which must be protected from public disclosure. Therefore,  this report omits sensitive information about the information security  safeguards of IRS’s FBAR Database as well as an associated  recommendation. Although the information provided in this report is more  limited, the report addresses the same objectives as the sensitive report  and uses the same methodology.

To address the first objective, we conducted a case file review of a  generalizable stratified sample of closed 7623(b) whistleblower claims to  identify how often and to what extent whistleblower claims included  information about offshore accounts and FBAR violations. For this case  file review, we started with the population of 10,306 7623(b) claims that  had been closed by IRS between January 1, 2012 and July 24, 2017 (the  time of our analysis). We identified three subpopulations of whistleblower  claims from which we selected the claims we reviewed:  1.  All 92 claims involving taxpayers who were identified in a  whistleblower claim and who also appeared in IRS’s FBAR Database  as having been subject to an FBAR examination. We designated this  subpopulation as “Matched Claims.”  2.  A random sample of 30 claims from a population of 299 claims that a  text search within E-TRAK had identified as likely involving  noncompliance with offshore account requirements, including FBAR,  and that were not included in other samples. We designated this  subpopulation as “Key Terms.”  3.  All 10 denied claims closed in E-TRAK, the IRS Whistleblower Office’s  claim tracking system, with the closing code “Denied - No Title 26  Collected Proceeds.” We designated this subpopulation as “No Title  26 Collected Proceeds.”

Table 4 shows descriptive information about each of these  subpopulations.

The purpose of our file review was to determine how often whistleblower  claims in each of our different subpopulations involved offshore accounts  and allegations of FBAR violations. We reviewed all claims in our first and  third subpopulations; because of the larger number of claims in the  second subpopulation, we selected a random sample for review.

For the 132 whistleblower claims in our review, two reviewers coded the  content of each file into different categories, including: whether the Form  211, Application for Award for Original Information, included allegations of  FBAR noncompliance; whether the whistleblower received a  whistleblower award; and what collections were included in collected  proceeds for those paid whistleblowers. To the extent there were  disagreements among the reviewers’ coding for a file, a third reviewer  resolved the differences. We agreed on a final coding for all of the data  elements collected, recorded them in a summary document, and used  these for our analysis. Because whistleblower files were not required to  contain information on FBAR penalty assessments or other enforcement  actions, although some of the files we reviewed did have this information,  we supplemented our file review with data on FBAR enforcement actions,  such as penalties and warning letters, from the FBAR Database.

We assessed the reliability of the FBAR Database and E-TRAK database  for the purposes of using limited data from these databases for our own  analysis. We reviewed agency documents, electronically tested data for  missing data and outliers, and interviewed IRS officials about these  databases. These two databases are the only sources of data within IRS  for whistleblower claims information and FBAR enforcement actions and  outcomes. We compared data in both databases to identify individuals  that were both named by a whistleblower and subject to an FBAR  enforcement action. We used data from the FBAR Database for the  purpose of identifying and summarizing FBAR enforcement actions taken  by IRS, and we used data from the E-TRAK database to identify  whistleblower claims that were likely to include allegations of FBAR  noncompliance. IRS officials told us that the FBAR Database is the most  reliable data source at IRS for individuals who were subject to such FBAR  enforcement actions as penalty assessments. We discuss the limitations  of these databases in this report, but we concluded that the elements we  used in our analyses were sufficiently reliable for the purposes of  identifying a sample of whistleblower claims likely to include allegations of  FBAR noncompliance and FBAR enforcement outcomes. We also  interviewed IRS officials concerning the processing of claims and the  operation and maintenance of the E-TRAK and FBAR databases.

For the second objective, we reviewed relevant portions of the Internal  Revenue Manual and other IRS internal guidance and documentation and  interviewed officials from IRS’s Whistleblower Office and operating  divisions that handle whistleblower claims about what IRS does when it  receives information from whistleblowers that include allegations of FBAR  noncompliance. We also reviewed the recently enacted statutory  provisions concerning the definition of collected proceeds on which  whistleblower awards are based. In addition we spoke to IRS  Whistleblower Office officials concerning any changes IRS plans to make  in its policies and procedures as a result of the statutory change.

For our third objective, we evaluated IRS’s FBAR Database to identify  any control deficiencies, using as criteria Standards for Internal Control in  the Federal Government, the Federal Information Security Modernization  Act of 2014, and National Institute of Standards and Technology Special  Publication 800-53. We electronically tested the FBAR Database for  missing data, outliers, and obvious errors. We also reviewed IRS  documentation on the database. In addition, we interviewed IRS officials  responsible for maintaining and using the database to determine how IRS  uses the data, what controls are in place, and any known limitations of the  database. We also met with IRS officials and discussed the ongoing  development of plans for improvement of the database.

For our fourth objective, we interviewed a nonprobability sample of  attorneys who have represented multiple whistleblowers who have  submitted claims to the IRS Whistleblower Office under section 7623(b).  The views expressed in these interviews represented only those of the  attorneys who participated and are not generalizable to all whistleblower  attorneys or law firms. These attorneys have a financial interest in IRS’s  treatment of whistleblower claims; however, interviewing these attorneys  allowed us to gather broad viewpoints on how whistleblower award  exclusions may affect their professional decisions and the decision of  their clients and prospective clients. We began with whistleblower  attorneys whom we previously spoke with for our 2011 and 2015 reports  on the IRS Whistleblower Office and requested from those attorneys  names of other attorneys currently active in the IRS whistleblower  community who have represented clients who submitted allegations that  included FBAR noncompliance. We individually interviewed 11 attorneys  from nine firms, asking the same questions of each to obtain their  perspectives on the effect the exclusion of FBAR penalties and criminal  fines has on the nature and volume of whistleblower complaints and on  the cases they bring forward. We also attended a regularly scheduled  meeting of attorneys representing whistleblowers, including some we had  spoken with and several others. Following the enactment of statutory  provisions defining collected proceeds for the purpose of whistleblower  awards to include FBAR penalties and other non-Title 26 collections, we  contacted the 11 attorneys we had previously interviewed for their views  on the effect of the new legislation, and we received written responses  from 8 of them.

For balance, we also analyzed data on FBAR penalty and tax  assessments for a sample of taxpayers who were assessed an FBAR  penalty in calendar years 2010 through 2015. For all taxpayers in our  sample, we identified those where a whistleblower was involved in  providing IRS information about the taxpayer and those where there was  no whistleblower presence. We analyzed whether there was a statistically  significant difference in proportion of FBAR penalty assessments  compared to tax and FBAR penalty assessments based on whether a  whistleblower was involved or not using a nonparametric Wilcoxon-Mann- Whitney test. This analysis did not control for other factors that could  affect the results, such as the taxpayer being willfully noncompliant with  FBAR reporting requirements, the total tax assessment of the taxpayer, or  the total income of the taxpayer. In addition, we interviewed IRS  Whistleblower Office officials and operating division officials to discuss  the relative complexity of claims involving and not involving FBAR and  how the exam teams use whistleblower information related to FBAR  noncompliance.

Appendix II: Comments from the Internal Revenue Service

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Tara Carter (Assistant Director),  Danielle N. Novak (Analyst-in-Charge), James Ashley, Steven J. Berke,  David Blanding, Amy Bowser, Andrew Emmons, Steven Flint, and Kayla  Robinson made key contributions to this report.

Tax whistleblowers who report on the underpayment of taxes by others have helped IRS collect $3.6 billion since 2007. Whistleblowers can claim awards of between 15 and 30 percent of the proceeds that IRS collects as a result of their information.

However, before 2018, IRS wasn't required to pay whistleblowers for information that led to the collection of Foreign Bank and Financial Accounts penalties. Congress began to require IRS to pay whistleblowers for this information in February 2018. However, we found that IRS’s data on these penalties may not be reliable. We recommended that they improve it.