What Does Mnuchin Think of the Whistleblower Program

And, “collected proceeds” Tax Court case is finally final…now will there be an appeal?

In early August 2016, I wrote a second post on Whistleblower 21276-13W v. CIR, where the Petitioner was successful arguing that criminal fines and civil forfeitures were included in “collected proceeds” for whistleblower awards.  The decision can be found here, and my lyrical yet learned post can be found here.  The issue, as I wrote it up back then was:

Under Section 7623(b), certain whistleblowers are entitled to mandatory awards if certain requirements are met.  That amount can be between 15% and 30% of the “collected proceeds” under (b)(1), which has a parenthetical indicating that is “(including penalties, interest, additions to tax, and additional amounts),” and the sentence further states these amounts can be “resulting from the action (including any related actions) or from any settlement in response to such action.”

…[T]he Service took the position collected proceeds did not include criminal penalties and civil forfeitures.  The Service based this on the claim that Section 7623 should only apply to proceeds assessed and collected under the federal tax laws found in Title 26 of the United States Code.  As the fines and forfeitures here were imposed under Chapter 18, they could then not be “collected proceeds” subject to the statute; unlike the restitution, which as per 2010 law can be assessed and collected in the same manner as tax.

The Court concluded the statute was clear on its face, and the penalties and forfeitures were included.  I would highly recommend reading the post if you are interested in this area.  Although I heaped self-praise on myself, the post is really strong because of the input from Jack Townsend on the case and Les Book.  It also links back to our initial post on this case, which Dean Zerbe wrote, and which is also an important but different holding.  Dean, who was lead counsel on the case, also provided some comments on the second holding, which we included in a separate post, found here.

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The Service had sought a motion for reconsideration, but it was denied on January 28th in apparently a one sentence order (I could not track that down).  It will be interesting to see if anything happens in the next 90 days.

This case has, somewhat directly, come up in the recent testimony of Treasury Secretary nominee Steve Mnuchin.  Much of the remainder of this post will be borrowed from a press release by Kohn, Kohn, and Colapinto, co-counsel on the above case, which can be found here, and from Senator Grassley’s webpage.

Dean provided a recent quote on the case, arguing against the failed “kitchen sink” approach taken by Counsel, and highlighting that the Tax Court wasn’t picking up what the Service was putting down, stating:

The IRS Chief Counsel’s office emptied the in basket in making arguments for the Motion for Reconsideration – including the availability of funds for award payments.  To no avail.  While I appreciate that Counsel wanted to defend its corner, at the end of the day the Tax Court wasn’t buying what IRS Counsel was selling.  This decision gives Treasury Secretary nominee Mnuchin and the new administration an opportunity to embrace the Tax Court’s final ruling and show that it supports the IRS whistleblower program and is serious about going after big time tax cheats.

Senator Grassley, who has been instrumental in the implementation of the whistleblower program and often a harsh critic of how it has been rolled out by the Service, questioned Mr. Mnuchin on the program, and specifically how the Service would handle this issue.  The response was somewhat positive as to the Whistleblower program, although not exactly a guarantee on the collected proceeds issue.  The Senator asked:

The IRS has chosen to interpret the whistleblower law narrowly to the detriment of whistleblowers and several instances, the IRS has interpreted the terms ‘collected proceeds’ which is the base for determining the amount of award to exclude criminal penalties and certain other proceeds suggest penalties assessed for undisclosed foreign bank accounts.  Two questions, and I will say that both – should you be confirmed, can I count on you to be support of the whistleblower program and work to ensure its success and would you be willing to review the IRS’s administration program including its very narrow interpretation of the words ‘collected proceeds?

Mr. Mnuchin’s response was favorable to the program overall, but not terribly specific as to the “collected proceeds” issue, stating:

We are aware there is tax fraud.  There is tax fraud as you said, and we need to be diligent and I believe that the whistleblower laws are very important part of that.  I will work very hard with you on that.

He also gave assurances he would look into the collected proceeds matter.  Giving assurances to look into something seems a little like government (and lawyer) speak for one of three things: “nope”; “I have no idea”; or, “we’ll actually consider it…someday”.    It would have been nice to get more specifics out of this aspect of the Q&A, as Mr. Mnuchin knew this was going to be a topic.  Here is a quote about Senator Grassely and Mr. Mnuchin meeting prior to the hearings to discuss Senator Grassely’s concerns.  From the Senator:

It was our first time meeting, so Mr. Mnuchin and I spent a few minutes getting acquainted.  We then discussed a series of issues.  We covered the importance of comprehensive tax reform on both the corporate and individual levels and how tax fairness is critical to economic growth and job creation.  I’ve often said that a major undertaking like tax reform requires the President’s use of his bully pulpit to rally support behind a plan from Congress and the American people.  There’s an opportunity to do that with a new administration.  I emphasized the importance of listening to whistleblowers within the Treasury Department and those who come to the IRS with allegations of major tax fraud.  The provisions improving the IRS whistleblower office that I drafted are working, but it’s required a lot of oversight to maintain the momentum, and I’d like to see a Treasury secretary who will build on the progress.  Enforcing tax fraud is a matter of fairness for the majority of the taxpayers who pay what they owe.  Mr. Mnuchin and I discussed the burden of the estate tax on family farms and businesses.   I emphasized the need to treat alternative energy tax incentives fairly, including keeping the current phase-out for the wind energy production tax incentive as is.  Alternative energy drives job creation in Iowa and nationwide.  We discussed currency manipulation as well as the need to broaden the scope of the Committee on Foreign Investment in the United States to cover food security.  Mr. Mnuchin seemed to appreciate the need for the review process to become broader than it is now to help protect U.S. interests.  I look forward to covering these issues and more in Mr. Mnuchin’s nomination hearing.

You can find the full exchange during the hearings here on YouTube.  The Senator endorsed Mnuchin following the hearing, stating the following on the whistleblower program:

Having a Treasury secretary who understands the whistleblower role in enforcing tax fraud is important.  Whistleblowers have helped the IRS recover $3.4 billion that otherwise would have been lost to fraud.  Cracking down on big dollar tax fraud is a matter of fairness to the vast majority of taxpayers who pay what they owe.  The IRS has made progress in working with whistleblowers, but there’s more work to be done.  Mr. Mnuchin gave his assurance that he’ll work with me if confirmed to support tax fraud whistleblowers.

I also asked Mr. Mnuchin about the importance of supporting the congressionally established phase-out of the wind energy production tax credit.  A smooth transition and the certainty of the phase-out are necessary for a fast-growing industry that supports numerous jobs in Iowa and elsewhere around the country.  The industry needs to be able to maintain its successful growth even as its tax credit phases out.  Mr. Mnuchin said he supported the smooth phase-out.  And I asked Mr. Mnuchin about the role of private contractors in collecting tax debt that the IRS hasn’t tried to collect.  He agreed that it makes sense to use outside help in closing the tax gap.

I’ve expressed my personal views on the whistleblower program in the past.  I am fully in favor of having a whistleblower program, but my perception of the IRS handling of the program has not been favorable.  I recognize the financial and other constraints, but it does seem like other aspects of the agency may not be favorably inclined towards it, that the roll out had significant issues, and that internally there have been some efforts to thwart what seem like straightforward requirements of payment.  I hope the program continues to grow under Mr. Mnuchin or anyone else who may take over as Secretary of Treasury.

For more on this case, the testimony, and the recent report on whistleblower awards, check out Dean’s post on Forbes here.

When to File a Tax Court Petition after Denial of a Whistleblower Claim

Continuing in what seems to be a series of cases on when the Tax Court gets jurisdiction, the appropriately titled case of Whistleblower 26876-15W v. Commissioner provides guidance on how to gain entry into the Tax Court in this relatively new type of case.  The Court finds that it has jurisdiction even though the petitioner argues that it did not.  The petitioner argued that the decision of the IRS to deny an award was “null and void” and seeks to have the Tax Court make that determination as it determines it has no jurisdiction.  The recent post on what the Tax Court can do after it determines it lacks jurisdiction might have come into play here, except that, despite the protestations of the petitioner, the Court determines it has jurisdiction.  This funny role reversal of the petitioner arguing the Tax Court lacks jurisdiction while the IRS argues for jurisdiction also shows that last known address cases arise in the whistleblower arena as well as other types of Tax Court cases.

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Petitioner here filed the IRS Form 211 seeking an award with respect to information provided to the IRS.  The IRS decided that the information did not merit an award and sent the letter denying the claim for award to somewhere other than petitioner’s last known address.  Petitioner did not receive the letter.  Because petitioner did not receive the letter stating that the IRS would not pay an award, the petitioner waited in limbo for quite some time.

Eventually, petitioner contacted the Whistleblower Office seeking information about the claim.  For those of you accustomed to waiting to hear from the IRS about one thing or another, it is easy to step into petitioner’s shoes here as the wait for information gnaws at you.  As an aside, I note that the IRS has recently introduced a feature that allows you to track your amended return.  Here is a link to the place you go to do the tracking.  What a great idea!  I hope it does not take long before a similar tracking system exists for many other types of matters for which taxpayers, and their representatives, wait for the IRS.  Somehow, waiting seems to go more smoothly, up to a point when you can track the matter and not wonder if it is lost somewhere in the IRS system.

The whistleblower in this case gave information that the examination division of the IRS thought had value and it audited at least one of the taxpayers implicated by the information provided.  The audit resulted in adjustments which the taxpayer took to Appeals.  At Appeals, the taxpayer convinced the Appeals Officer that the adjustments lacked merit.  In November 2013, Appeals conceded the case and determined that the case should be “no-changed.” The report written by the Appeals Officer about the case made its way back to the Whistleblower Office at the IRS where, in January 2014, an employee completed Form 11369, Confidential Evaluation Report on Claim for Award, and recommended the denial of the claim.  On May 30, 2014, the IRS sent petitioner a final determination letter with respect to the award denying the claim for award in full.

Petitioner moved in 2013 and properly notified the Whistleblower office of the new address.  My guess is that of the 1% of people who move and who actually notify the IRS of the move, those making whistleblower requests fall into the 1%.  Despite notifying the IRS, when it sent to petitioner the final determination letter, the IRS sent the notice to the prior address.  The patient petitioner, who would have no basis for knowing when the IRS might make a determination regarding the award, waited for almost a year and a half after the IRS sent the notice of final determination before requesting an update on the status of the award request.  In September of 2015, petitioner reached out to the Whistleblower Office seeking an update and on October 15, 2015, the IRS sent a letter informing petitioner that it had denied his claim.  Petitioner alleged that the October 15 letter was the first he learned of the denial and petitioner used that letter as the basis for filing a petition in Tax Court, which was filed on October 26, 2015.

In whistleblower cases, the Tax Court has jurisdiction under IRC 7623(b)(4) if the IRS makes a “determination regarding an award” and “a petition invoking our jurisdiction over that matter is timely filed.”  Petitioner filed the petition hoping for a result similar to the result petitioners receive in Tax Court cases based on a notice of deficiency cases where the IRS sends the notice to someplace other than the taxpayer’s last known address and the Tax Court finds that it lacks jurisdiction for the reason that the notice of deficiency is invalid.  The Court did not go where the petitioner hoped it would go.

Petitioner’s first argument regarding the lack of validity of the notice denying the award did not attack the mailing address but rather the authority of the person signing the notice.  Delegation Order 25-7 delegated the authority to approve or disapprove awards to the Director of the Whistleblower Office.  The notice here was signed by an analyst in the office rather than by the director of the office.  The Court takes little time dispensing with this argument holding that the delegation order gave to the director the authority to approve or disapprove awards but did not require the director to personally sign the letter notifying the taxpayer of the approval or disapproval.  The Court found that the director had signed the Form 11369 determining that the claim was disallowed, and the director’s signature there met the requirements of the delegation order.

Next, the Court turned to the issue of its jurisdiction based on the timing of the filing of the petition.  It noted that generally the 30-day period within which to timely file a whistleblower petition begins on the date the determination is mailed to a claimant’s last known address or is personally delivered to the claimant.  The Tax Court had not previously addressed this question in the whistleblower context.  It noted that the statute at play here closely resembled section 6330(d) controlling jurisdiction in a Collection Due Process (CDP) case, which says that a taxpayer dissatisfied with the CDP determination made by the IRS “may, within 30 days of a determination under this section, appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter.)”  The Court found that neither the CDP nor the whistleblower statutes require the IRS to send the notice of determination by certified mail to the taxpayer’s last known address or to deliver it in any particular way.  Interestingly, the Court went on to find that neither statute requires that the IRS notify the taxpayer (or the claimant) at all.  The statutes only require that the IRS make a determination.

Judge Lauber cites to the case of Bongam v. Commissioner, 146 T.C. 52 (2016) in which the IRS mailed the notice of determination to an address other than the taxpayer’s last known address.  “Several months later … the IRS remailed the notice to the taxpayer’s last known address by regular mail” and the taxpayer received the remailed notice and filed a petition within 18 days of that receipt.  In Bongam, the Tax Court held that the first notice was invalid because it was not sent to taxpayer’s last known address and was not actually received by the taxpayer; however, the remailed notice gave the Court a basis for jurisdiction because the taxpayer petitioned within 30 days of receipt.

The reasoning in Bongam applies to this whistleblower case.  The Court found that the remailed notice of determination which the claimant used as a basis for petitioning validly serves as the notice of determination.  So, the petitioner in this case now has the opportunity to show the determination incorrectly denied the claim even though the claimant did not seek that result.

Dean Zerbe Adds Insights to Whistleblower “Collected Proceeds” Tax Court Case

On August 4th, I wrote about the Tax Court’s second holding in Whistleblower 21276-13W v. Commissioner, and how the Court held that “collected proceeds” included criminal fines and civil forfeitures.   That post can be found here.  In the post, we noted that Dean Zerbe was the attorney on the prior case who successfully obtained the whistleblower award, and we assumed he was the lead attorney on this case, but the attorney of record was sealed.

Dean was one of the primary architects of the whistleblower statute, and one of the leading practitioners in this area, so it is not surprising to see him attached to these important cases.  Dean reached out to me last week and confirmed he was the lead attorney on this case also.  He also provided some feedback on the post and some of the issues we highlighted.  I’ve recreated some of Dean’s insightful comments below.  It probably goes without saying, any errors and coarse language are assuredly mine .

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I will not recreate my prior post, but will add a few excerpts to provide context to Dean’s comments.  The key issue was:

Under Section 7623(b), certain whistleblowers are entitled to mandatory awards if certain requirements are met.  That amount can be between 15% and 30% of the “collected proceeds” under (b)(1), which has a parenthetical indicating that is “(including penalties, interest, additions to tax, and additional amounts),” and the sentence further states these amounts can be “resulting from the action (including any related actions) or from any settlement in response to such action.”

As stated above, the Service took the position collected proceeds did not include criminal penalties and civil forfeitures.  The Service based this on the claim that Section 7623 should only apply to proceeds assessed and collected under the federal tax laws found in Title 26 of the United States Code.  As the fines and forfeitures here were imposed under Chapter 18, they could then not be “collected proceeds” subject to the statute; unlike the restitution, which as per 2010 law can be assessed and collected in the same manner as tax.

The Court held “internal revenue laws” were not simply those under Title 26, and included the fines and forfeitures.  This implicates FBAR penalties also, although not explicitly stated in the holding.  Dean’s thoughts on the holding generally were as follows:

I read  the case as the Court seeking to get rid of any shadows or dark corners about what is included in “collected proceeds” and not wanting to see this litigated again and again (there are a lot of these cases in the pipeline).  [My impression] is the Tax Court will not engage in hair splitting.  See page 26, “In sum, we herein hold that the phrase “collected proceeds” is sweeping in scope and is not limited to amounts assessed and collected under Title 26.”    And again on page 29, “We have already explained that ‘collected proceeds’ is a broadly defined term:  It encompasses ‘the total amount brought in’ by the Government.”   And then again, of course, the language in first paragraph of page 32.  There is nowhere to hide with those statements.

I think one of the more interesting points in this opinion (which deserves a lot of rereading) is on page 30, where the Court correctly states that the “forfeitures resulted from an administrative action with respect to the laundering of proceeds, which in turn, arose from a conspiracy to violate Section 7601 and 7206…”   Encompassing, properly, a broad linkage and again speaks to FBAR.

As to FBAR, Dean stated:

[I]t seems clear that FBAR [penalties are] encompassed by the Court’s sweeping ruling (particularly as [the holding]  fits with the discussion in the previous Section 7623(b)(5) case, as well as the reference in footnote 15 in this case to Hom – and citing that FBAR is “tax administration”).

Our readers and tax procedure enthusiasts are likely familiar with Mr. Hom.  His cases have graced our pages somewhat frequently, most recently in late July with the Ninth Circuit holding online gambling site accounts were not subject to FBAR disclosure (well done Joe DiRuzzo).  Les had a brief write up on that found here. The footnote Dean references cites to a different Hom case in the Ninth Circuit from this year, and the note states:

Ours is not the only court to note that tax laws and related laws may be found beyond those codified in title 26. The District Court for the Northern District of California in Hom v. United States, 2013 WL 5442960 … aff’d, … 2016 WL 1161577 (9th Cir. Mar. 24, 2016), stated: “[T]he issue here is whether [31 U.S.C.] Section 5314 is either an internal revenue law or related statute (either designation would make the disclosure [of taxpayer information under sec. 6103] permissible). The United States argues that [31 U.S.C.] Section 5314 is a ‘related statute’ under Section 6103 (Dkt. No. 13 at 6). This is correct. Congress intended for [31 U.S.C.] Section 5314 to fall under ‘tax administration.’”

Hammering home that FBAR penalties are likely included in “collected proceeds”.

Dean also addressed the Chevron comment from my post regarding the regulations that were not before the Tax Court case.  I highlighted (because Les pointed it out to me) that the Tax Court’s language was akin to language used when tossing a regulation under Chevron.  Dean agreed, and provided additional insight:

The language used by the Tax Court – plain language and enforce the terms – is, as you know, right in step with the language we see from Courts when they are rejecting agency regulations under Chevron.    While the Regulations are not at issue here – see footnote 9 – it is difficult to imagine the Regulations withstanding a challenge given this holding.  However, the real hope is that the administration will not appeal the decision and seize the ruling as a chance to make the correct policy decision (as you note) and embrace the commonsense decision by the Court on defining collected proceeds broadly.

Footnote 9, for those of you interested, states both parties agree the regulations are not at issue, as the decision regarding the award was rendered prior to the effective date of the regulations.

Many thanks to Dean for his comments on the case, and congratulations on a great result.

Tax Court Holds Whistleblower “Collected Proceeds” Includes Criminal Fines and Civil Forfeitures

The Tax Court had an important holding regarding whistleblower awards on August 3rd in Whistleblower 21276-13W v. Commissioner  (it is really hard to come up with bad puns about the case titles when they don’t include the names), where the whistleblower was successful in arguing, over the IRS’s objections, that criminal fines and civil forfeitures collected by the IRS were included in “collected proceeds” for whistleblower awards.  This is another IRS loss (seems like they lose all these whistleblower cases), and another case where it looks as though the IRS is actively attempting to thwart the program or minimize payments to whistleblowers.  Although I agree the government should not overpay awards, I still get the impression that the IRS has not found the right balance with what to contest in this realm.

In this case, the whistleblower provided information regarding a financial institution*** that eventually pled guilty to conspiring to defraud the IRS, filing false returns, and evading income tax.  As penance for its terrible behavior it paid the IRS $74MM and change (damn!) in tax restitution, criminal fines, and civil forfeitures under 18 USC § 3571.  The financial institution and the Service agreed that the tax restitution was $22MM, the fine was $22M, and the forfeiture was about $16MM (plus another $16MM previously forfeited).

Before getting to the underlying conflict in this case, it should be noted that Mr. and Mrs. Whistleblower already have had a tough go at getting paid.  These folks had already taken at least one stop to the Tax Court in Whistleblower 21276-13W v. Commissioner, 144 TC 290 (2015). We were lucky enough to have Dean Zerbe, the attorney on at least the 2015 case (current case has counsel listed as sealed) and essentially the guru of all that is IRS whistleblower claims, write up that case, which can be found here.  The 2015 case was a major case also, where the Service tried to argue the whistleblowers had failed to provide the evidence leading to the collection of tax (somewhat because they had not filed Form 211 very early on), and highlighted the immense importance of de novo review in these cases, as opposed to the abuse of discretion standard argued by the Service.  I would encourage everyone to review Dean’s prior post (and we’ll reach out and see if he has any comments on this case also).

Back to the August 3rd holding.  All parties agreed the whistleblowers were going to get paid 24%, but they did not agree on what.  The whistleblowers argued it should be 24% of the full recovery, but the Service argued it should only be based on the tax restitution.  That gave the whistleblowers about thirteen million reasons to ask the Court to clarify.

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The Law – Don’t Blow the Statutory Interpretation!

Under Section 7623(b), certain whistleblowers are entitled to mandatory awards if certain requirements are met.  That amount can be between 15% and 30% of the “collected proceeds” under (b)(1), which has a parenthetical indicating that is “(including penalties, interest, additions to tax, and additional amounts),” and the sentence further states these amounts can be “resulting from the action (including any related actions) or from any settlement in response to such action.”

As stated above, the Service took the position collected proceeds did not include criminal penalties and civil forfeitures.  The Service based this on the claim that Section 7623 should only apply to proceeds assessed and collected under the federal tax laws found in Title 26 of the United States Code.  As the fines and forfeitures here were imposed under Chapter 18, they could then not be “collected proceeds” subject to the statute; unlike the restitution, which as per 2010 law can be assessed and collected in the same manner as tax.

The Whistleblowers responded, “screw you, we help you bust a tax cheat and this is how you treat us?”  That may be inaccurate, as I did not review the brief.  Their position, as summarized by the Court, was that the statute put no such restrictions on payments, and the total amount was a settlement resulting for actions taken by the IRS based on information provided by the whistleblowers.

The Court found the in favor of the whistleblowers, first, finding the statute was clear on its face; there was no restriction on collected proceeds to amounts assessed and collected under Title 26.  The Court further noted the statute was expansively  written with regard to collected amounts, and the IRS’s narrow reading was improper.  With the assistance of statutory construction, the Court found the term “proceeds” to be a “word of great generality.”  The Court declined to read limiting language into Congress’ broad language.  In addition, the Court stated that “internal revenue laws”, as used in various other places regarding the whistleblower statute, were not limited to those found in Title 26.  It gave various examples of this, and then dropped the hammer indicating “perhaps the most telling instance: The very provisions establishing the Whistleblower Office are found outside [Title 26].”

The Court did also highlight an interesting distinction to a similar prior holding, that facially appeared to hurt the whistleblower’s claim.  From the Tax Court:

Our holding in this matter is not in conflict with our holding in Whistleblower 22716-13W v. Commissioner, 146 T.C. __, wherein the Court examined the $2 million threshold requirement of section 7623(b)(5)(B). Section 7623(b)(5)(B) provides that for a whistleblower to qualify for the mandatory whistleblower award, “the tax, penalties, interest, additions to tax, and additional amounts in dispute [must] exceed $2,000,000.” … In arguing his case before us, the whistleblower asserted that FBAR penalties constituted an “additional amount” as used in section 7623(b)(5)(B).

We rejected the whistleblower’s assertion. In interpreting what constitutes “additional amounts” we held that the phrase “additional amounts” as it appears in the series in section 7623(b)(5)(B), i.e., “tax, penalties, interest, additions to tax, and additional amounts”, was a term of art. We noted that the phrase “additional amounts” when used in a series that also includes “tax” and either “additions to tax” or “additions to the tax” appeared nearly 40 times in title 26, and when the words were tied together, as they are in section 7623(b)(5)(B), they had a specific technical meaning. We stated we repeatedly have held that the phrase “additional amounts”, which the whistleblower sought to extend to FBAR penalties, “is a term of art that refers exclusively to the civil penalties enumerated in chapter 68, subchapter A” of title 26 which are assessed, collected, and paid in the same manner as taxes.

In reaching our holding, we determined that the wording in the threshold requirement of section 7623(b)(5)(B) (”if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000”) is different from that of section 7623(b)(1), which provides for an award of a percentage of the collected proceeds (”including penalties, interest, additions to tax, and additional amounts”).

A couple of parting thoughts. This is a major  win for whistleblowers, and it will be interesting to see if there is an appeal.  On a policy basis, I think this is the right decision.  I think a different decision could possibly result in bad outcomes, but I have not researched what I am about to bloviate on.  It does not seem inconceivable that the taxpayer, or other prosecuted party, and the government could negotiate the allocation of these amounts in a way that would detriment the whistleblower, who would not be involved in the negotiations.    And, the tax may not be the first item recouped by the Service, which could harm the whistleblower.  I should note, Jack Townsend beat us to the punch, and already published a write up of this case, which can be found here.  As always, a good summary, and a good conclusion, relating to the distinction raised by the Court above to the prior case relating to FBAR collections.  Jack states, “it would seem that, in light of this holding, the Tax Court is poised to hold that FBAR penalty collections would clearly be collected proceeds.”

Les also noted that Treasury regulations promulgated in 2014 limit the definition of collected proceeds to “amounts collected under the provisions of title 26, United States Code.” The regulations did not apply in this case, though unless the IRS and Treasury throw in the towel on this, the Tax Court will have to consider it in the future under Chevron.  While not written in a Chevron framework, however, this opinion is a strong indication that the Tax Court might strike down the regulatory definition of collected proceeds.

 

***Correction:  I noted in an earlier version that information was provided about a taxpayer and the taxpayer had negotiated the allocation above, but the prosecuted entity here is a bank that assisted other taxpayers in the evasion.  Jack Townsend was kind enough to email me about the error, and explain there is a good chance the restitution is an estimated figure and the Service may not know who the underlying taxpayers actually are.

Whistleblower Convinces Tax Court to Order IRS to Produce Information Document Requests over IRS Objection

There have been a number of disputes spinning out of whistleblowers trying to get information from the IRS about both proceeds collected and the link between the information and the proceeds. This week in Whistleblower 11099-13W v Comm’r the Tax Court resolved a discovery dispute involving the IRS’s refusal to serve up Information Document Requests and some related documents it claimed were not relevant in the whistleblower proceeding. The opinion discussed the broad reach of what is relevant and also raises some issues that the Tax Court will likely have to directly address in the future, including how to determine whether subsequent increases in a target’s tax liability which are indirectly related to the whistleblower’s information constitute proceeds for the purposes of Section 7623.

I will briefly describe the legal context, the scheme underlying the 11099-13W proceeding, the dispute and the Tax Court’s resolution.

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For whistleblowers, the entitlement to an award requires that the whistleblower understand what IRS did with the information that the whistleblower provided to the IRS. That in turn requires information that is outside the whistleblower’s control. Getting from the IRS the information about the outcome of an investigation requires the whistleblower to 1) discover what if anything was collected from the target and 2) establish a link between the information provided about the target and the proceeds collected.

As the opinion describes, the case involves a tax evasion scheme (TES) that a target and its affiliates used to manipulate income reporting:

[The scheme] involved target’s engaging in an inventory purchasing scheme that, on account of target’s use of a last-in, first-out (LIFO) method of accounting for inventory, allowed it to artificially inflate its cost of goods sold for tax purposes. Petitioner claims that target used the TES to defer income taxes indefinitely. He claims that he was employed by a corporation (corporation X) affiliated with target that traded commodities that were integral to the purchasing scheme that he had described.

IRS agreed that the issue was one it was unaware of and it did investigate based on the information, though it claimed that the information did not lead anywhere:

Respondent’s position, however, is that he did not use petitioner’s information to make any adjustments to target’s tax returns. He states that his agents added the TES to their examination of target’s tax returns for two of its taxable years (years 1 and 2, respectively) but that because they were unable to discover anything to substantiate petitioner’s claim that the TES violated Federal tax law, he made no adjustments and collected no proceeds on account of petitioner’s information. He does admit to making other adjustments to target’s returns for years 1 and 2, which apparently resulted in the collection of additional taxes from target.

Not surprisingly, the petitioner disagreed with the IRS’s view of the utility of the information:

Petitioner believes that, before the end of year 2, because of the information he provided to the IRS, target stopped using the TES, which increased its year 2 tax bill and would increase its tax bills for subsequent years. Petitioner identifies inventory-related adjustments of $273.7 million and $13.3 million that respondent made to petitioner’s year 1 and year 2 reported income tax, respectively, and that petitioner claims are “in the very area–LIFO valuation–that had been the subject of * * * [petitioner’s] Whistleblower Claim.” Finally, petitioner claims that, in year 5, target announced its abandonment of the use of LIFO altogether. That, according to petitioner, increased its tax bill by at least $3 billion for subsequent years. Petitioner believes that he is entitled to an award because it was his information that caused target to pay, and the IRS to collect, additional tax.

The petitioner sought the documents to show that it was his information that led to the immediate increase in tax and to the future years increase as well. IRS objected to turning over the documents on the grounds of relevancy. The opinion discusses the meaning of relevance under the Federal Rules of Evidence, which ties the term to two related concepts: materiality and probative value. The opinion notes that IRS does not “make clear which of the requested IDRs are irrelevant because they are not material and which are irrelevant because they lack probative value (or which are irrelevant for both reasons…”

Instead, the opinion identifies the implicit interpretative position that the IRS objection raised:

Respondent does not deny that, on the basis of petitioner’s information, he added the TES to his examination of target for years 1 and 2, nor does he deny that he made adjustments to target’s income for those two years. What he does deny is that he proceeded on the basis of petitioner’s information about the TES to make those adjustments (or to make any other adjustments). Implicitly, he is making an argument about the meaning of the term “proceeds * * * based on” in section 7623(b)(1). By emphasizing that he made no adjustments “on petitioner’s issue,” he implies that the Secretary proceeds with an administrative adjustment based on a whistleblower’s information only when the adjustment redresses the specific errors in tax reporting alleged by the whistleblower.

The opinion notes that the IRS position “may have some purchase in the wording of section 7623(b)(1) and of an implementing regulation” but that the discovery dispute is not the forum for resolving that legal issue:

The proper interpretation of section 7623(b)(1) is something that the Court may decide in due course during these proceedings upon argument or briefing by the parties. If respondent is interested in a pretrial ruling from the Court on matters of law, then his proper course of action under our Rules would be to file a motion for summary judgment under Rule 121.

In addition to rejecting a relevance objection based on its implicit legal argument, the opinion also rejects the position that the documents are not probative or would lead to other admissible evidence. The opinion notes the relatively low bar in establishing relevance:

[I]n a discovery dispute, once the discovering party makes some minimal showing of the relevance of the information or response sought to the subject matter involved in the pending case, the party opposing the production of information has the burden of establishing that the documents sought by the other party are not relevant or otherwise not discoverable

Parting Thoughts

This case is worth watching, as the opinion flags some important substantive concepts that the Tax Court has not yet fully addressed but likely will in the near future. From a discovery standpoint, this opinion also should prove helpful for litigants who are trying to get information from the IRS. An earlier order in the case clarified that while the Tax Court is bound to the administrative record in whistleblower disputes, it is not in the IRS’s sole discretion to determine what in fact constitutes the administrative record. Determining what in fact is in the administrative record is one that agencies, litigants and courts confront routinely in non-tax matters, but it is not often an issue in tax cases which generally are reviewed de novo, with the record below not tying the hands of the court.

As courts in the next few years address some of the key concepts in the whistleblower statute, it is likely that some though not all of these disputes concerning what the IRS should provide will go away. Even with the pressure of the Tax Court coming down on the IRS for failing to provide information, I suspect the IRS will likely keep its cards very close to its vest.

 

 

 

 

 

 

 

 

Summary Opinions for 9/21/15 to 10/2/15

Running a little behind on the Summary Opinions.  Should hopefully be caught up through most of October by the end of this week.  Some very good FOIA, whistleblower, and private collections content in this post.  Plus fantasy football tax cheats, business on boats, and lots of banks getting sued.  Here are the items from the end of September that we didn’t otherwise write about:

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  • Let’s start with some FOIA litigation. The District Court for the District of Columbia issued two opinions relating to Cause of Action, which holds itself out as an advocate for government accountability.  On August 28th, the Court ruled regarding a FOIA request by Cause for various documents relating to Section 6103(g) requests, which would include all request by the executive office of the Prez for return information, plus all such requests by that office that were not related to Section 6103(g), and all requests for disclosure by an agency of return information pursuant to Sections 6103(i)(1), (2), & (3)(A).   The IRS failed to release any information pursuant to the last two requests, taking the position that records discussing return information would be “return information” themselves, and therefore should be withheld under FOIA exemption 3.  There are various holdings in this case, but the one I found most interesting was the determination that the request by the Executive Branch and the IRS responses may not be “return information” per se, which would require a review by the IRS of the applicable documents.  Although the petition was drafted in broad terms, this Washington Times article indicates the plaintiff was seeking records regarding the Executive Branch looking into them specifically, presumably as some type of retaliation.

In a second opinion issued on September 16th, in Cause of Action v. TIGTA, Judge Jackson granted TIGTA’s motion for summary judgement because after litigation and in camera review, the Court determined none of the found documents were responsive.  This holding was related to the same case as above, but the IRS had shifted a portion of the FOIA request to TIGTA.  Initially, TIGTA issued a Glomar response, indicating it could not confirm or deny the existence (I assume for privacy reasons, not national defense).  The Court found that was inapplicable, and TIGTA was forced to do a review and found 2,500 records, which it still withheld.  Cause of Action tried to force disclosure, but the Court did an in camera review and found the responsive records were not actually applicable.

  • That was complicated.  Now for something completely different.  This HR Block infographic is trying to get you all investigated for tax fraud.  In summary, 75 million of the 319 million people in America play fantasy football, and roughly none are paying taxes on their winnings.  If you click on the infographic, we know you are guilty.  Thankfully, my teams this year are abysmal, so I won’t be committing tax fraud…my wife on the other hand has a juggernaut in our shared league…To all of our IRS readers, please ignore this post.
  • Now a couple whistleblower cases.  In Whistleblower One 10683W v. Comm’r, the Tax Court held that the whistleblower was entitled to review relevant information relating to the denial of the award based on information provided by the whistleblower.  The whistleblower had requested information relating to the investigation of the target, the disclosed sham transaction, and the amounts collected, but the IRS took the position that certain items requested were not in the Whistleblower Office’s file, and were, therefore, beyond the scope of discovery (denied, but we don’t have to explain ourselves).  The Court disagreed and found the information was relevant and subject to review by the whistleblower.  Further, the IRS was not unilaterally allowed to decide what was part of the administrative record.  Another case that perhaps casts a negative light on how the IRS is handling the whistleblower program.
  • On September 21st, the District Court for the Middle District of Florida declined a pro se’s request for reconsideration of a petition for injunctive relief against the IRS to force it to investigate his whistleblower claim in Meidinger v. Comm’r (sorry couldn’t find a free link to this order).  Mr. Meidinger likely knew the court lacked jurisdiction, and this was the purview of the tax court —  Here is a write up by fellow blogger, Lew Taishoff, on Mr. Meidinger’s failed tax court case.  Lew’s point back in 2013 on the case still rings true:  “But the administrative agency here has its own check and balances, provided by the Legislative branch.  There’s TIGTA, whose mission is ‘(T)o provide integrated audit, investigative, and inspection and evaluation services that promote economy, efficiency, and integrity in the administration of the internal revenue laws.’ Might could be y’all should take a look at how the Whistleblower Office is doing.”  The tax court really can’t force an investigation, but TIGTA could put some pressure on the WO to do so.  After taking a shot at the IRS, I should note I know nothing of the facts in this case, and Mr. Meidinger may have no right to an award, and TIGTA has flagged various issues in the program.  It just doesn’t feel like significant progress is being made.
  • I found Strugala v. Flagstar Bank  pretty interesting, which dealt with a taxpayer trying to bring a private action under Section 6050H.  Plaintiff Lisa Strugala filed a class action suit against Flagstar Bank for its practice of reporting, and then in future years ceasing to report, capitalized interest on the borrower’s Form 1098s.  Flagstar Bank apparently had a loan that allowed borrowers to pay less than all the interest due each month, resulting in interest being added to the principal amount due.  At year end, the bank would issue a 1098 showing the interest paid and the interest deferred.  In 2011, the bank ceased putting the deferred interest on the form.  Plaintiff claims that the bank’s practice violated Section 6050H, which only requires interest paid to be included.  The over-reporting of interest, she claims, causes tens of thousands of tax returns to be filed incorrectly.  Further, upon the sale of her home, Strugala believed that the bank received accrued interest income that it didn’t report to her.  A portion of the case was dismissed, but the remainder was transferred to the IRS under the primary jurisdiction doctrine.  The Court found the IRS had not stated how the borrower should report interest in this particular situation, and that it should determine whether or not this was a violation.  In addition, Section 6050H didn’t have a private right under the statute.  I was surprised that this was not a case of first impression.  The Court references another action from a few years ago with identical facts.  However, perhaps I shouldn’t not have been, as this is somewhat similar to the BoA case Les wrote about last year, where taxpayers sued Bank of America alleging fraudulent 1098s had been issued relating to restructuring of mortgage loans.
  • The Tax Court has held in Estate of John DiMarco v. Comm’r, that an estate was not entitled to a charitable deduction where individual beneficiaries were challenging the disposition of assets.  Under the statute, the funds have to be set aside solely for charity, and the chance of it benefiting an individual have to be  “so remote as to be negligible.”  Here, the litigation made it impossible to make that claim.
  • My firm has a fairly large maritime practice, which makes sense given our sizable port in West Chester, PA (there is not actually a port, but we do a ton of maritime work).  That made me excited about this crossover tax procedure and maritime  Chief Counsel Advice dealing with Section 1359(a).  Most of our readers probably do not run across Section 1359 too frequently.  Section 1359 provides non-recognition treatment for the sale of a qualifying vessel, similar to what Section 1031 does for like kind real estate transactions.  This applies for entities that have elected the tonnage tax regime under Section 1352, as opposed to the normal income tax regime.  In general, the replacement vessel can be purchased one year before the disposition or three years afterwards.  But, (b)(2) states, “or subject to such terms and conditions as may be specified by the Secretary, on such later date as the Secretary may designate on application by the taxpayer.  Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe.”  Those regulations do not exist.  The CCA determined that even though the regulations do not exist, the IRS must consider a request for an extension of time to purchase a replacement vessel, as the Regs are clearly supposed to deal with extensions by request.
  • From The Hill, another article against the IRS use of private collection agencies.

 

 

 

Summary Opinions for June

Before covering the June tax procedure items we didn’t otherwise write on, I wanted to highlight that Keith was quoted in a Seattle Times’ article about the IRS/Microsoft litigation, where MS is questioning the length of its audit and the Service’s hiring of Quinn Emanuel to investigate its tax obligations.  Other tax procedure luminaries Stuart Bassin (who is working with Les on rewriting part of SaltzBook addressing disclosure litigation) and Professor Andy Grewal (a PT guest poster) were also quoted.   Keith’s last post on the topic can be found here, where he discusses Senator Hatch’s letter to the Commissioner questioning the use of an outside law firm on audits.

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  • The 2015 IRS annual Whistleblower Report to Congress was released in June and can be found here.  In 2014, the Service paid out around $52MM in awards, representing about 17% of the tax it claims was collected due to WB’s information.  Submissions to the WB group were up in 2014, with over 14,000 claims being filed.  Of those, about 8,600 were opened.  The report paints a slightly rosier picture of the program than what may be practitioners’ perceptions of the program.  It does note issues with taxpayer confidentiality, and whistleblower protection. The report also provides a spreadsheet of the reasons for closing cases and the time most cases have been in the program (which tends to be fairly long).
  •  This Tax Court case has a fair amount of tax procedure packed into it.  In Webber v. Comm’r, the Court found a taxpayer had retained control and incidents of ownership over life insurance held in a trust, which caused some negative tax  consequences.  In coming to this determination, the Court found that the IRS Revenue Rulings dealing with the “investor control” doctrine were entitled to Skidmore deference under the “power to persuade” standard.  The Court also found reasonable cause due to the taxpayer’s reliance on his advisor.  In the case, the advisor was an expert and was paid hourly to review the transaction, and had the pertinent information.  We just wrote this case up for SaltzBook, so I won’t go into too much detail (don’t want to give all the milk away, as we definitely want to keep selling cows).
  • Agostino & Associates has published its July Monthly Journal of Tax Controversy.  Frank and his associate Brian Burton have a nice piece on the public policy of OICs.  As always, it is interesting and essentially a mini law review article.
  • BMC Software v. Comm’r is a Fifth Circuit case we (I) missed in March that was potentially significant in how closing agreements are interpreted.  Miller & Chevalier’s Tax Appellate Blog has coverage here.  The facts are fairly specific, and the applicable Code sections do not pertain to many taxpayers.  What is important is that the Fifth Circuit reversed the district court, and held that the boilerplate in the opening paragraph stating, “for income tax purposes” did not cause the agreed treatment of a tax item for one purpose as applying for all purposes under the Code.  The Court would not read that into the agreement of the two parties, who had meticulously spelled out the specific tax treatments for one purpose.
  • Another case with multiple interesting tax procedure items.  In Riggs v. Comm’r, the Tax Court ruled on 1) whether a bankruptcy stay for the taxpayer’s successor-in-interest applied to the taxpayer, and  2) whether the IRS had to follow the taxpayer’s instructions about which debts its payment should be applied to when the Bankruptcy Court directed the payment generally.  As to the first point, the court found there was not sufficient “identity between the debtor and the [taxpayer] that the debtor may be said to be the real party defendant”, so the stay did not apply.  As to the second point, the Court found the payments were not voluntary, and therefore it did not have to follow the taxpayer’s instructions under Rev. Proc. 2002-26.  I would assume the Court would have specifically directed the payment application in the order had it been requested.
  • Hard to talk to an accountant these days and not discuss the tangible personal property change of accounting method.  The Service has provided additional time to file Form 3115 and modified some procedures.  See Rev. Proc. 2015-33.
  • For those of you who do work with Section 6672 penalties, you know the definition of willfulness and actually running a business can be in conflict.  Often, a business that is light on cash has to make a decision about which bills to pay, and sometimes the business thinks that suppliers need payment to keep product flowing.  If a responsible person makes such a decision and knows the withholding taxes are delinquent, Section 6672 penalties will almost certainly apply.  See Phillips v. US, 73 F3d 939 (9th Cir. 1996).  The Court of Federal Claims had occasion to review one such case in Gann v. US, and dismissed the government’s motion for summary judgement.  It held that determining when and whether the responsible person had knowledge of the company’s failure to pay taxes was a disputed issue of fact.  The Court found that simply showing that cash inflows and outflows indicating someone wasn’t going to get paid weren’t enough for summary judgement, and some level of actual knowledge was needed by the responsible person.  There was also some question as to whether the person was a “responsible person”, which was covered by Professor Timothy Todd on Forbes and can be found here.
  • Another attorneys’ fees case that probably would have ended differently had the client made a qualified offer.  In Mylander v. Comm’r, the Tax Court found that the taxpayer prevailed in the amount in controversy and the most significant issue, but the Service’s position was substantially justified.  The reasoning for this was because the case was complex and the taxpayer didn’t share all relevant facts or the case law for their claims.  I’m not sure how I feel about the complexity aspect or the onus being on the taxpayer to provide the applicable law  to the Service.  If the taxpayer’s position was clear, and reasonable research could have turned up the correct law, it seems unfair to make the taxpayer outline all relevant cases.  I hope those were only considered in conjunction with the missing facts, and wouldn’t have been sufficient on their own.  The Court did also mention that the current case was arguably distinguishable from the applicable prior holdings, so the Service’s position could have been somewhat reasonable no matter what.  All of this probably wouldn’t have mattered if the taxpayer had taken advantage of the qualified offer provisions (although if you make an offer, and fail to provide the IRS with the facts and the law, can you still prevail?).
  • SCOTUS has denied cert for Ford in its interest payment case involving the treatment of an advanced remittance.  Les has blogged this case twice before, most recently here.  In addition to the interest question, there was also a jurisdictional issue about whether the district courts could hear an interest disagreement or if it had to be determined by the Court of Federal Claims.  Les’ post outlines the issue and eventual court holding.
  • In Slone v. Comm’r, The 9th Circuit has decided another case on the two prong test necessary to establish a transferee is liable for the predecessor’s tax liability.  The court remanded for the tax court to review the transaction as to the first prong on federal law, but also held that the Service had to show it was a fraudulent transaction under the federal law and also had to independently show that the transferee was liable under the applicable state law.  This holding is in line with the various other recent cases, including Stern, Salus Mundi, and Diablod, which we most recently covered here.
  • Would you like to know how to file delinquent FBARs and not pay a penalty (i.e. are you mega rich and hiding money in some country with shady banking laws)?  Well, this probably doesn’t apply to you because you likely did not pay the tax due on those assets.  For those folks who paid the tax, but inadvertently failed to file the FBAR the IRS has issued updated guidance on filing late without penalties.
  • A res judicata case, which should have a familiar name for tax procedure junkies.  In Batchelor-Robjohns v. US, the 11th Circuit held the feds were barred by res judicata from raising the dead taxpayer’s income tax issues in an income tax audit when the same issue was previously litigated in an estate tax refund relating to same issue.
  • Just about a year ago, we covered Heckman v. Comm’r, where the Tax Court found the six year statute of limitations under Section 6501(e)(1)(A) applied to ESOP distributions that were not properly disclosed.  The Eighth Circuit has affirmed that ruling.  This is the link to the prior SumOp where we discussed the case.  In Heckman, the courts (Tax Court & 8Th Cir.) declined to incorporate other related entity returns to show disclosure for the individual’s return of the ESOP distribution.  It is interesting to compare that language to CNT Investors, another recent Tax Court statute of limitations case, which seemed to indicate the tax court would consider all the filings of the taxpayer and his related entities.  Although the tones are different, I do not think the holdings are necessarily in conflict.  In Heckman, there was not much disclosed that would adequately apprise the Service of the connection.  In CNT, a few key items were left off, but overall the filings painted a fairly full picture.

Tax Court Decision – Good News For Whistleblowers

Today we are pleased to welcome first time guest poster Dean Zerbe, who is a nationally known expert regarding tax whistleblower actions.  Dean is the national managing director of the Washington DC office of the Alliant Group, the senior policy analyst for the National Whistleblowers Center, and a partner in ZFF&J, his law firm specializing in tax controversy and whistleblower actions.  Dean was also the primary architect of the whistleblower statute while Senior Counsel and Tax Counsel to the Chairman of the Senate Finance Committee, Senator Grassley, and represented Bradley Birkenfeld in his whistleblower claim involving UBS – the largest tax whistleblower case  in US history.  Mr. Zerbe discussed this case and other aspects of the whistleblower statute at the 2013 Villanova Law School Shachoy  Symposium on tax administration, where he was enlightening and entertaining.  In this post, Dean discusses his recent whistleblower case decided by the Tax Court, where the Court found the IRS incorrectly claimed the whistleblower’s information had not led to the collection of tax.  Mr. Zerbe highlights the importance of the Tax Court and its de novo review of whistleblower cases in this discussion of a very important holding. Steve

In a major opinion — 144 TC 15 (Whistleblower 21276-13W v. IRS), the Tax Court brushed aside IRS arguments that tax whistleblowers must first file a Form 211 with the IRS whistleblower office to be eligible for a tax whistleblower award under Section 7623(b).

As lead counsel for the whistleblowers in this case, there are a number of critical points for whistleblowers and practitioners to understand from this case — the first tax whistleblower case that was subject to an evidentiary trial with attorneys that has been held by the Tax Court.  I apologize that in fast reading and even faster writing – I may not get or capture or express all nuances or subtleties – but here is a first take on this important opinion.

First, the IRS initially stated to the two tax whistleblowers (husband and wife) that they were not receiving an award because the information they provided did not lead to the collection of any proceeds (see page 17 of the opinion).  Thanks to discovery – this was proven to be completely and wholly inaccurate.  In fact, the government agents stated that “but for” the whistleblowers the case against the taxpayer would not have happened – that the whistleblowers work was “essential.” See page 14 of the opinion.

For whistleblowers getting communication from the IRS whistleblower office about their case – there will now be an understandable skepticism about the accuracy of those statements.   This decision and the actions of the IRS in this case are not going to make administration of the IRS whistleblower program easier – and could have easily been prevented by the IRS.

Second, the case underscores the importance of providing for de novo review of whistleblower cases by the Tax Court (an issue that the Tax Court here sidestepped but is an issue currently being considered by the Tax Court).  To allow for only a review for abuse of discretion based on the administrative file – as has been argued by the IRS Chief Counsel’s office – would completely undermine the intent of Congress of protecting whistleblower’s rights.   In this case – the whistleblowers would have been shown the door and been denied an award had it been subject to only abuse of discretion and the administrative file.

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The administrative file in this case – as the Tax Court was at pains to point out (see page 4 of the opinion) – consisted basically of the Form 211’s filed by the whistleblower and the IRS correspondence with the whistleblower.  In short – plenty of nothing.  That administrative file is created and controlled by the IRS.  The tax whistleblower is in a different position than a taxpayer in tax court – the whistleblower has no independent or outside information (in the vast majority of cases) of what has happened in an examination or audit of the taxpayer.  To allow for only a review of abuse of discretion based on the administrative file created by the IRS in the case of a tax whistleblower – is to effectively gut the whistleblower program.

This decision by Judge Jacobs gives a detailed factual road map of why whistleblowers must be allowed de novo review and discovery.  Otherwise, the ultimate Congressional goals of the tax whistleblower law are frustrated.  (A brief sidenote:  previous to Section 7623(b) being created in 2006 – whistleblowers could go to Federal Claims Court to have their Section 7623(a) award claim reviewed – and the review was essentially meaningless with the decisions being a parade of tears for whistleblowers.  The Federal Claims Court cases were subject to a standard of abuse of discretion and it was the extremely rare day that a whistleblower got good news from the Federal Claims Court – key reasons why the authority to review whistleblower cases under 7623(b) was essentially transferred to the Tax Court with its tradition of de novo review and its expertise in the tax laws as well as the IRS).

The Jacobs decision also reminds us all of the enormous benefit of tax whistleblowers in tax administration.  The decision showcases something that many of us know already – that in the area of criminal investigations the IRS will often work hand-in-glove with the whistleblower.  The IRS civil division still seems to treat working with whistleblowers as a foreign land (and no, just debriefing the whistleblower for an hour in a pro forma setting is not “working with the whistleblower”).   With the IRS having to face the challenges of a reduced work force – it’s past time for the civil divisions to learn from CI and start fully utilizing whistleblowers and their lawyers (as was intended on the law – modeled after the False Claims Act success) to assist in examinations and audit.  Leadership has to come from the top of the IRS on this – not just words on a memo – there needs to be a hard push to break the culture.

Underscoring the Court’s decision is a commonsense effort to recognize Congressional intent and allow the whistleblower program to work (stating that the statute shouldn’t be interpreted to lead to an absurd result – p. 24 of opinion).  The Court saw that requiring a Form 211 prior to filing would harm the effort of getting information to agents (noting that the IRS agent testified that he would not suspend his investigation to permit whistleblowers to file forms with the whistleblowers office).   One of the more telling statements from Judge Jacobs is his comments that the 2006 changes to the law were based (in part) on improving the process by which awards were issued –the process was problematic (page 23 of the opinion – emphasis added).  It is certainly the case – as the author of the 2006 laws – that providing greater protections for the rights of tax whistleblowers to awards and ensuring proper and fair processing of awards was critical to the reforms.     There is much in Judge Jacob’s writing that will, I predict, give much comfort to tax whistleblowers for years to come.

Overall – a good day for tax whistleblowers.  My hope is that this will start to put to bed this and other nonsense arguments being made in tax court against whistleblowers.  Finally, the Court gives us with the facts a good reminder of the importance and benefit of the whistleblower program – and the risks that whistleblowers often face.   Once again, the Tax Court shows that it understands its role provided by Congress to serve as a protector of the whistleblower’s rights.