Whistleblowers and Tax-Exempt Organizations
On February 3, 2011, the Director of the Internal Revenue Service (“IRS”) Whistleblower Office announced that the number of awards that the IRS has paid based on whistleblower claims has grown significantly over the past five years; a trend that is not expected to change. Prior to 2007, the IRS offered little to no incentive for individuals who reported claims. Under the old whistleblower rewards program, the IRS held the discretion as to whether or not to provide an award to a whistleblower. However, after recognizing the important role that whistleblowers play, Congress implemented a program that offers greater incentives to whistleblowers. As a result, the IRS can now pay awards of 15 to 30 percent of the amount collected as a result of a whistleblower claim. However, whistleblowers must provide specific and credible information and must provide the IRS with information that it is not already aware of.
Interestingly, individuals who participated in a specific violation can submit a whistleblower claim and recover an award provided the individual did not plan or initiate the violation and has not been criminally charged. In addition, in order to qualify for an award, the collection by the IRS must be greater than $2 million and, if the violator is an individual, the individual’s gross income must be greater than $200,000. There are also awards with a maximum of 15% or $10 million if the previously outline dollar thresholds are not met.
FORM 13909, TAX-EXEMPT ORGANIZATION COMPLAINT (REFERRAL) FORM
Since the beginning of 2011, the IRS Whistleblower Office has received over 3,500 whistleblower submissions for which it has awarded roughly 115 awards. Claims that involve the IRS Tax-Exempt and Government Entities Division comprise approximately 6% of the total amount collected from all claims filed since the beginning of 2011. The increase in the number of claims submitted with respect to tax-exempt organizations may likely be attributable to the ease of submission through the IRS Federal Form 13909, Tax-Exempt Organization Complaint (Referral) Form, as well as the increasing incentives for whistleblowers.
Form 13909, which was introduced by the IRS in August of 2007, identifies nine specific types of violations and allows the complainant to check a box indicating the type of violation including:
- Directors/officers/persons are using income/assets for person gain.
- Organization is engaged in commercial, for-profit business activities.
- Income/assets are being used to support illegal or terrorist activities.
- Organization is involved in a political campaign.
- Organization is engaged in excess lobbying activities.
- Organization refused to disclose or provide a copy of Form 990.
- Organization failed to report employment, income, or excise tax liability properly.
- Organization failed to file required federal tax returns and forms.
- Organization engaged in deceptive or improper fundraising practices.
In addition, Form 13909 also provides an “other” line allowing the whistleblower to identify alleged violations that are not listed on the form. The form also requires disclosure of details of the reported violation including name of person involved, their title within the organization, date(s) of the violation(s), dollar amount(s) (if known) and a description of the activities. Upon receipt of a fully completed Form 13909, an IRS Exempt Organization revenue agent must mandatorily review the complaint.
The individual filing the Form 13909 with the IRS is also required to disclose certain of their personal information including name, occupation or business, address and telephone number. The form does include a check box that allows the potential whistleblower to indicate whether or not the individual making the complaint has concerns regarding retaliation and/or retribution if their identity were to be disclosed. Unlike most forms filed with the IRS, Form 13909 does not require the complainant to sign a perjury statement. As such, the submitter is not exposed to any potential perjury penalties. As a follow up to Form 13909, the IRS, in February of 2008, issued a Fact Sheet that describes how the IRS Tax-Exempt and Government Entities Division handles complaints about tax-exempt organizations.
With the increased transparency as a result of the complete overhaul of the Form 990, Return of Organization Exempt from Income Tax, and the now required public disclosure of Form 990-T, Exempt Organization Business Income Tax Return, by tax-exempt organizations, claims against tax-exempt organizations are expected to increase dramatically. The IRS has identified the adoption and implementation of a whistleblower policy by tax-exempt organizations as a “best practice” and includes the question as to whether or not a tax-exempt organization has a formal written whistleblower policy in the governance section of the Form 990. Given the IRS focus on the governance practices of tax-exempt organizations and the entire Form 990 with its increased disclosures, we recommend that each organization review the Form 13909 as part of its annual tax compliance plan.
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Scott Mariani, JD, Partner
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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