Tax Analysts Blog

Whistleblower Highlights Undue Influence at the IRS

Posted on Jun 9, 2014

The IRS continues to try to rebuild itself following its mishandling of conservative groups’ exempt organization applications. The scandal dominated last year, leading to the resignation of the acting commissioner and the quick appointment of a restructuring expert, John Koskinen, as the permanent commissioner. But according to a self-styled whistleblower, the Service’s problems go much deeper than possible bias in the EO function.

William Henck is a 26-year veteran of the IRS who works in the chief counsel’s Richmond office. He is no stranger to calling attention to what he considers mismanagement and impropriety in the nation’s tax administration. In April Tax Analysts looked at Henck’s allegations regarding the black liquor controversy. He claimed that granting credits for the use of black liquor was opposed by most of chief counsel, but that a few senior managers changed the policy, allowing paper manufacturers to take advantage of a true tax loophole. “The decision-making process for a particular case or type of case is corrupted or compromised by high-level executives basically on a whim or fiat or in an arbitrary fashion,” Henck said.

Last week Henck again pushed his message of IRS corruption, this time to a CBS affiliate in West Palm Beach, Florida. In the interview, Henck repeated that high-level IRS managers frequently intervene in disputes over credits, often in an arbitrary way that is contrary to the law. He called for Congress to investigate.

Black liquor damaged the credibility of chief counsel. At first the IRS tried to simply let the credits stand, but after a great deal of public and lawmaker outrage, it finally published a memorandum in June 2009 saying why it thought the use of black liquor was eligible for a section 6426(e) credit. That decision cost the United States $25 billion in lost revenue (the Joint Committee on Taxation initially estimated that the credit would cost only $194 million over 10 years). The IRS’s action forced Congress to pass a legislative fix, overruling the Service, but the damage was already done.

Henck’s other allegations aren’t as specific and are more difficult to prove. One thing that he has called attention to, and that should be more closely investigated by the GAO, the Treasury Inspector General for Tax Administration, and Congress, is how the revolving door between Treasury, the IRS, and large accounting and law firms is affecting the creation of guidance and tax policy. Attorneys frequently move between public and private service. After they leave the IRS or Treasury, they often end up representing clients on matters directly related to their time in government. It is hard to know whether their future career prospects are in the back of their mind as they are writing regulations, letter rulings, or other forms of guidance. There is at least a whiff of impropriety that lends some credence to insiders like Henck.

It is hard to know what the solution is to the revolving door problem, or even whether it is a problem at all. The government needs qualified attorneys and professionals to help create and administer the law. It is only natural that those individuals be current tax practitioners. The best experts in any area of the tax law are those who have represented clients and have experience structuring transactions. But Treasury and the IRS need to do more to avoid at least the appearance of undue influence.

Read Comments (10)

Bill HenckJun 9, 2014

I would like to make several comments. First, I spoke out about the decision,
made in secret, to allow paper companies to avoid reporting the refundable AFMC
credits as taxable income, contrary to the law and published guidance. Mr.
Scott seems to be discussing the broader (and public) issue of whether the
companies should have received the credits in the first place. Second, it is
the Government Accountability Institute, a private entity, not the Governmental
Accountability Office. Third, I have made specific assertions, but if no one
investigates them, it does not matter. Finally, we have real problems at the
IRS. I have spoken out because of my legal and moral obligation to do so, but
I think it has been a fool's errand.

Jeremy ScottJun 9, 2014

Mr. Henck,

Thank you for your comments.

We have corrected the GAO. I am sorry for the error.

I also apologize if I misrepresented your criticisms of the IRS's decision
making process regarding black liquor credits.

I hope that it hasn't been a fool's errand. The entire black liquor
controversy highlights serious problems with the IRS's ability to correctly
interpret the law.

vivian darkbloomJun 10, 2014

I'd like to give Mr. Scott credit for at least trying to use the term "tax
loophole" accurately and will give a nod to the adjective "true" as
acknowledgement that the phrase is grossly and frequently misused.

That said, I still wonder. As I understand the controversy, Mr. Henck brought
up the issue of whether "black liquor" should qualify for the credit very early
on. I cannot fathom that those who wrote, sponsored and voted for the original
credit provision were not very quickly aware of the issue.

There is, of course, something called "Technical Corrections Bills" that
Congress sometimes passes to clear up ambiguities such as the one involved with
"black liquor". They chose not to act, or at least not in a timely manner.
When our Congress passes a bill and sees that the law may be interpreted in a
fashion not intended (particularly by the IRS) one would expect them to quickly
pass legislation that clarifies their intent once and for all.

Their failure to do that leads me to question even here whether this was a
honest-to-God, bona fide ("true", if you will) "loophole". I place more blame
on those who wrote the bill than I do on those at the IRS who are delegated the
task to clean up their messes.

bill henckJun 10, 2014

Mr. Scott's post and the comments discuss the general issue of whether black
liquor qualified for the credits in the first place. I spoke out about the
separate issue of whether the AFMC refundable credit payments should have been
included in taxable income. Most of the companies, in fact, did include those
payments in income, based on SEC filings. Those payments were includible in
taxable income based on both the law and published IRS guidance. However,
after meeting with lobbyists, IRS and chief counsel executives did a 180 and
ordered exam teams not to pursue the issue. The companies then successfully
filed refund claims. According to a high level chief counsel executive, the
chief counsel himself ordered that this decision be kept secret. I spoke out
about this situation because it was wrong. I don't know what else I can say.

Bubba ShawnJun 10, 2014

Mr. Henck,

I know my questions are off topic. But I don't ever get an opportunity to ask
a Chief Counsel Lawyer questions.

As an IRS Counsel that knows the culture of the IRS Chief Counsel Office, how
would you describe the IRS Chief Counsel Office's policies and attitudes
towards IRS whistleblowers?

Do you have insight on how the IRS Chief Counsel Office views the IRS
Whistleblower Program?

bill henckJun 10, 2014

I'm sorry, but I have no insight on that. I've gotten in enough trouble
speaking out about things I do know about.

edmund dantesJun 11, 2014

I don't dispute the legitimacy of Mr. Henck's observations. At the same time,
I think this is another case of Congress not understanding what it is doing.
Congress created the credit to encourage use of biodiesel. No doubt they did
not intend to create a credit for "black liquor," but I think it is
indisputable that "black liquor" did meet the statutory language Congress
adopted. They didn't carve out an exception for "black liquor"--apparently they
should have.

Congress could avoid these problems by ending the practice of trying to
micromanage the economy through the tax code.

Paul BurnsJun 11, 2014

I had my fair share of run-ins with the national office while I worked in what
was then referred to as a District Counsel office. But they were over issues
of strategy in litigation where I was the one signing the pleadings on behalf
of the Chief Counsel (and was therefore the one potentially at risk for
professional discipline).

The question of whether black liquor was intended by Congress to qualify for
the credit in question is a policy call. Policy calls are unequivocally the
province of the National Office. If field lawyers are asked for their views,
they should give them, forthrightly. But once the call is made, the field
lawyer's job is to implement the policy. If a field lawyer is unwilling or
unable to do that, he or she should do the honorable thing, which is resign.

bill henckJun 13, 2014

For the third time, I have not spoken out about whether black liquor qualified
for the credit. I spoke out about allowing the companies to avoid reporting
those refundable credit payments as taxable income. Attorneys in the National
Office and most of the taxpayers themselves agreed that the payments were
taxable income under both the law and published IRS guidance. After a meeting
with lobbyists, high level IRS and chief counsel executives reversed that
decision and cost the Treasury at least $2 billion. The chief counsel
determined that nothing would be put in writing on the subject, not even
internally, which placed exam personnel in jeopardy. I believe that
constitutes public corruption and I have a legal and ethical duty to speak out,
even if no one cares about it. I'm not suing anyone, I'm not asking for
anything, but I would appreciate it if people refrain from misrepresenting my
statements or questioning my honor.

edmund dantesJun 13, 2014

Sorry for my misunderstanding, Mr. Henck, I was misled by the author's
reference to the loss of $25 billion in tax revenue attributable to the
original IRS determination that black liquor qualified for the credit. I see
now that your objection relates only to the proper treatment of the recovery of
such credits as income, which cost us only $2 billion.

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