Determining the Amount in Dispute for Purposes of a Whistleblower Award

In Smith v. Commissioner, 148 T.C. No. 21 (June 7, 2017), the Tax Court looked for the first time at the issue of the amount in dispute for purposes of determining whether the individual providing information to the IRS should receive an award based on a mandatory or discretionary basis.  The information provided directly led to recovery of an amount that did not reach the minimum amount to trigger a mandatory award percentage; however, the information caused the IRS to audit a taxpayer and recover through that audit an amount significantly in excess of the amount needed to trigger the mandatory award percentage.  The question before the Court was the meaning of amount in dispute as it related to the triggering of the mandatory award percentage.  The Tax Court decided that the amount in dispute was the larger amount which will mean a bigger payday for the informant.  The Court did not determine the final amount of the award but sent it back to the IRS to make an award determination consistent with its decision.


When I worked for Chief Counsel, I had a number of cases generated by whistleblowers.  Their information provided vital pointers to underreporting, non-reporting, or false reporting which, at the time, the IRS rewarded with total discretion.  My observation was that the IRS tended not to be too generous in its determination of the award amount but, nonetheless, individuals still came forward with valuable, and not so valuable, information based on motives not always driven by the potential of a financial reward.

Congress decided that it wanted to incentivize individuals to come forward with information about underreporting of taxes in larger cases because it felt greater incentives and more clarity in the amount of the potential reward would ultimately benefit the government by encouraging more people to come forward.  I am unsure if we have enough data yet to know how successful the law has been but enough high profile cases exist to convince me, as a casual observer and as someone who saw the results during their much less public stage prior to the enactment of the whistleblower provisions, that the incentives do make a difference.

Perhaps Congress felt that for smaller cases, other incentives provided the necessary basis for coming forward and the IRS could continue to have discretion on how much to pay the informant which Congress preserved in IRC 7623(a); however, for “big” cases, Congress stepped up with the concept of mandatory awards in 7623(b).

The Smith case works through the statute to find meaning regarding the definition of a big case.  Congress defined it using the term “amount in dispute” in IRC 7623(b)(5)(B) ; however, the meaning of that term still needed interpretation prior to the Smith case.  The Tax Court noted that it had made some determinations regarding 7623(b)(5)(B) starting with the determination in Lippolis v. Commissioner, 143 T.C. 393, 396 (2014) in which it considered whether the $2 million threshold of 7623(b)(5)(B) was jurisdictional or should be asserted as an affirmative defense.  The Smith opinion works its way through other opinions concerning the provision.

The information provided by Mr. Smith proved very valuable to the IRS for reasons that went beyond the direct information he provided.  The IRS ended up collecting almost $20 million; however, it calculated that the portion of this amount directly related to the information he provided only amounted to $1.7 million.  Since the amount directly related to his information fell below the $2 million threshold for a mandatory award, the IRS determined the amount of his award using its discretion.  The minimum mandatory award would net Mr. Smith 15% of the amount related to his information while the IRS using its discretion awarded him 10% – almost $90,000 less.

“Respondent argues that certain common words or phrases in section 7236(b)(1) require him to follow the same quantitative measure in determining the $2 million threshold of section 7623(b)(5)(B).  In particular, respondent focuses on the words “any” and “action” in the context of section 7623(b)(1)….  Respondent goes on to contend that section 7623(b)(1) therefore defines the scope of the words “any action” for purposes of section 7623(b), and accordingly governs the use of the phrase “any action” in section 7623(b)(5).”

The Tax Court finds the interpretation of the IRS to be misplaced.  It looks at IRC 7623 as a whole as its history and determines that “’action’ for purposes of subsection (b) is the detecting of underpayments of tax or violations of tax law without any qualifier as to quantity or amount.”  Based on this interpretation of the statute, the Court finds that “action” does not establish another technical definition for 7623(b).

Therefore, the Tax Court declines to accept the interpretation by the IRS that action means that only the directly attributable dollars count in determining “amounts in dispute” for purposes of determining if the information meets the $2 million threshold for making a mandatory award.  Petitioner’s information caused the IRS to begin an examination that resulted in the collection of over $20 million.  The phrase in the statute “’amounts in dispute’ is not specifically limited to only those amounts directly or indirectly attributable to the whistleblower information.  Once the monetary thresholds are met and the government recovers ‘collected proceeds’ resulting from the action, the mandatory provisions of subsection (b)(1) or (2) apply.”

Looking at the applicable regulation as well as the statute, the Tax Court determines that the “regulation does not support respondent’s narrow view that the ‘amount in dispute’ is limited to the portion to which award percentages are applied….  The regulation provides instead that the amounts in dispute are the amounts that resulted from the actions with which IRS proceeded based on the whistleblower information.  Accordingly, it does not follow that the limiting standards of section 7623(b)(1) and (2) providing for a percentage to be applied to the portion of ‘collected proceeds’ to which the whistleblower’s information ‘substantially contributed’ would also apply in determining whether the initial $2 million threshold has been met.”

The Tax Court’s interpretation will allow whistleblowers to benefit from collateral items discovered by the IRS in an audit in the application of the percentage applied to their award.  In many, if not most, cases, the IRS would not audit the party targeted by the whistleblower.  Because the IRS would not audit the taxpayer without the intervention of the whistleblower, it makes sense to allow the whistleblower to enjoy the mandatory percentage with respect to that portion of the award clearly attributable to the information provided.  The issue should only arise in cases in which the IRS has benefited in material and fairly substantial ways from the information provided by the whistleblower.  Even though it must pay a higher percentage than it would have paid if it had total discretion, the amount paid remains much less than the amount recovered.

Tax Enforcement Needs Qui Tam Lawsuits

Today’s Op-Ed guest post comes from Eric L. Young and James J. McEldrew, III, who are partners at the Philadelphia law firm McEldrew Young. The firm focuses on various types of complex litigation, including whistleblower suits.  Attorney Young represented the first whistleblower award recipient under Section 7623(b).  Attorney McEldrew has represented many clients in whistleblower claims, and previously served as President of the Philadelphia Trial Lawyers Association.  In this post, Messrs. Young and McEldrew argue that the current tax whistleblower regime is insufficient, and allowing qui tam suits under the FCA or similar statute could decrease fraud and help the nations bottom line.  Stephen

President Trump introduced his tax proposal, which includes a deep reduction in business tax rates with a 15% flat tax for all businesses, in April.  After the announcement, the Wall Street Journal reported that the plan would decrease government revenue by $288 billion in its first year.  The Trump administration can offset this decline and make these tax cuts more palatable with a stronger enforcement scheme built on qui tam lawsuits from tax whistleblowers.

A qui tam lawsuit is an enforcement action initiated by an individual on behalf of the government.  It is a shortened version of a Latin phrase that can be translated as “[he] who sues in this matter for the king as well as for himself.”  Qui tam lawsuits are the primary mechanism for enforcement of the False Claims Act, the nation’s leading tool in the fight against fraud.

However, the Federal False Claims Act specifically excludes tax claims.  It “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.”  31 U.S.C. 3729(d).  Most states have followed the lead of the United States and barred qui tam lawsuits over tax claims.

In 2006, Congress chose to create the IRS whistleblower program to funnel tips about tax noncompliance to the IRS rather than extend the False Claims Act to tax evasion.  Since the establishment of the IRS Office of the Whistleblower, the IRS has received thousands of tips and whistleblowers have helped the IRS collect more than $3 billion in taxes.  The Dodd-Frank whistleblower programs at the SEC and CFTC were modeled after the IRS program.

However, the IRS program has fallen short of expectations to this point.  Senator Chuck Grassley, the nation’s leading advocate in Congress for whistleblowers and the author of the 2006 provisions that created the section 7623(b) program for tax noncompliance over $2 million, criticized the “trickle” of whistleblower payments in 2015.  Grassley blamed slow processing of tips, insufficient communications with whistleblowers and hyper technical arguments made to justify denying awards.


If handled properly, whistleblowers could be a boon for the IRS.  Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said recently in a press release, “Whistleblowers with specialized experience or expertise can help us expend fewer resources in our investigations and bring enforcement actions more efficiently.”  The SEC has already paid out $150 million to 43 whistleblowers.

One problem with the IRS whistleblower program is that it relies exclusively on government enforcement and enforcement actions are expensive. Earlier this year, Aitan Goelman, the former head of enforcement at the CFTC, told Reuters that the derivatives regulator had to triage cases because of a lack of resources.  In the interview, he cited two cases that would have used up half of the 2017 operating budget for CFTC enforcement if they were taken to trial.

Like the CFTC, the IRS has had to make due with limited budget resources recently.  Since 2010, Congress has cut the IRS budget by approximately $2.4 billion.  Adjusted for inflation, that is a 17 percent decrease from its 2010 budget.  The decrease in funding has translated into 13,000 fewer employees enforcing the tax laws and providing taxpayer services.

Tax noncompliance is a serious problem and limited resources only make it worse.  Between 2008 and 2010, the estimated average annual tax gap – the difference between total taxes owed and collected – was $406 billion. The number has likely increased since then. In 2016, the total number of tax audits of individuals fell for the fifth year in a row.  The IRS’ Large Business & International (LB&I) Division is also undergoing a significant makeover.  Driven by resource constraints and personnel reductions, it is moving to issue-based examinations.

Ten years after the creation of the IRS whistleblower program, the time is ripe for improvements. In March, Senators Grassley and Ron Wyden proposed the IRS Whistleblower Improvements Act of 2017 to (1) enhance communications between the IRS and whistleblowers; and (2) provide anti-retaliation protections for tax whistleblowers.  These changes could be bolstered by allowing qui tam lawsuits.

For the past few years, New York State has led the charge against tax evasion through whistleblower usage of its qui tam statute.  New York has one of the only False Claims Act laws to allow the recovery of taxes through a qui tam lawsuit after it amended its statute in 2010 to allow them.  New York targeted large scale corporate tax schemes, requiring the defendant to have more than $1 million in income and have deprived the state of more than $350,000 in revenue.

On April 19, 2017, New York announced the largest settlement ever of a tax claim initiated by a whistleblower under its False Claims Act.  The $40 million settlement covered unpaid taxes, penalties, and interest on hundreds of millions in income which hedge fund Harbinger Capital Partners did not report to New York State between 2004 and 2009.  New York paid the tax whistleblower $8.8 million for bringing the matter to the attention of the State.

The IRS could operate more efficiently with its limited resources if it adopted the New York approach and utilized qui tam lawsuits for tax noncompliance.  The IRS is already outsourcing more services than it ever did before.  In a controversial move, the IRS hired law firm Quinn Emanuel in May 2014 to serve as a litigation consultant in an audit of Microsoft.  More recently, it is about to outsource debt collection to four private companies to recover money owed by hundreds of thousands of people.

Qui tams are already used to fight billions of dollars in Medicare and Medicaid fraud annually.  The system perfected in the fight against fraudulent claims for payment could be adapted and used to recover unpaid taxes as well.  When the United States concludes that it does not have the time or resources to expend in pursuit of tax evasion, the whistleblower and their counsel could pursue collection of the tax on behalf of the United States.

If the IRS had unlimited resources, there would be no need for qui tam lawsuits.  However, it does not.  Budgetary shortfalls demand nimble and thoughtful approaches to regulatory enforcement.  In 1986, Congress recognized that government spending was fraught with problems and strengthened the public-private partnership between the government and whistleblowers.  It must do so again now with tax evasion and whistleblowers.

The False Claims Act is America’s most important tool to fight fraud against taxpayers. Congress and more state legislatures should put its terms to use in the fight against fraud by taxpayers.



Whistleblower Who Prompted Voluntary Compliance Not Entitled to Reward

One of the more interesting Tax Court opinions of the last month is Whistleblower 16158-14W v Commissioner. The opinion concludes that a whistleblower who provides information that exposes taxpayer misconduct and brings about a voluntary change in a taxpayer’s behavior in future years is not entitled to receive a reward.

The case involves an employee/whistleblower who told the Service about his employer, a corporation (perhaps a financial institution) that failed to withhold on payments of interest and dividends to foreign persons. (As background, US persons paying US source payments to foreign persons are generally required to withhold at a 30% rate unless the foreign person establishes that it is subject to an exemption or lesser rate).


The noncomplying corporation was already under audit for the 2006-08 years for unrelated issues. After the Whistleblower Office received the information about the corporation’s withholding noncompliance, it provided the information to LB&I and Criminal Investigation, and LB&I expanded the audit to include the withholding issues.

At the conclusion of the 2006-08 examination, the Service issued a no-change letter to the corporate taxpayer. After the exam, an employee of the Whistleblower Office and an employee of LB&I completed an evaluation of the whistleblower claim on Form 11369. The opinion discusses that evaluation:

The explanation attached to the Form 11369 stated that the whistleblower was correct that the taxpayer had made errors but the cause of the errors was an “honest mistake” made while updating its reporting systems. The explanation went on to say that “[i]t appears the * * * [taxpayer] has been convinced by its close call to become fully compliant with its withholding tax responsibilities and further examination is not warranted.”

Eventually, the Service issued a denial of the request for an award because the information that the whistleblower provided did not turn into “collected proceeds” under the whistleblower statute.

Section 7623(b)(1) provides that a whistleblower will “receive as an award at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts)”.

Section 7623(b)(1) also predicates the award on the Secretary’s proceeding with “any administrative or judicial action described in subsection (a)” There was no dispute that there was an administrative action in 2006-08, the original years under audit. Yet the taxpayer received a no change letter for those years.

What about future years, when the whistleblower alleged (and the Service did not dispute) that the taxpayer became voluntarily compliant, resulting in the Service collecting substantially more revenue than it otherwise would have absent the whistleblower coming forward?

This tees up the legal issue that the opinion addressed: can a whistleblower’s information that prompts a taxpayer’s voluntary compliance in future years serve as the basis of an award? In particular, does the additional revenue that the Service collects due to a taxpayer’s voluntary compliance amount to “collected proceeds” under Section 7623(b)(1)?

As this case was resolved on summary judgment, the opinion assumed that the whistleblower’s factual allegations were correct, i.e, that in fact his spilling the beans on the withholding noncompliance did in fact contribute to the corporation becoming compliant in future years.

The opinion concludes essentially that without the Service taking administration action in future years the information that the whistleblower provides cannot justify the payment of an award. The opinion gets there first by noting how prior opinions have addressed the scope of the term “collected proceeds”:

Section 7623(b)(1) provides that a whistleblower will “receive as an award at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts)”. Therefore, an award is predicated on the collection of proceeds. “Collected proceeds” is not defined in the statute. In Whistleblower 21276-13W v. Commissioner, we relied on the canons of statutory construction to define collected proceeds. We defined it as “all proceeds collected by the Government from the taxpayer”. We explained that “collected proceeds” is an “expansive and general term” a “sweeping term”, and “not limited to amounts assessed and collected under title 26”… (citations omitted).

Despite the expansive language in Whistleblower 21276-13W  v. Commissioner, it held against the taxpayer, primarily based on a policy concern about the difficulty of establishing a connection between the information that the whistleblower has provided to the Service and a taxpayer’s future conduct:

Collected proceeds do not include self-reported amounts collected when a taxpayer changes its reporting for years that are not part of the action. The Commissioner argues, and we agree, that because of the significant costs and heavy administrative burden, collected proceeds cannot include amounts collected for years after examination years on account of a taxpayer’s changing its reporting. (emphasis added)

In language that I found a bit harsh, the opinion states that the whistleblower’s argument takes the Whistleblower 21276-13W discussion of collected proceeds to an “irrational extreme to argue that self-assessed amounts collected for future years are proceeds collected by the Government. Indeed, many, if not all, of the Commissioner’s examinations will have some influence on a taxpayer’s reporting. However, any determination of an award based on additional amounts collected for years following examination years would be based on speculation.”

There is more to the opinion, including a discussion of how the regulations under Section 7623 in limited and different circumstances tether collected proceeds to future years’ positions if “adjustments to tax attributes made in the year of the action have direct carryover consequences for other years”; its discussion of how if the Tax Court accepted the taxpayer’s position it would effectively require the Court to impermissibly order the Service to conduct an examination of the taxpayer’s future years; and how the Service discussion in Form 11369 of the taxpayer’s future compliance at the end of the 2006-08 audit did not amount to an “implied settlement” for those future years.

This is a very tough outcome for the whistleblower. There are strong policy reasons to want to reward a person whose conduct causes future tax compliance. Given the limited statutory definition of the term “collected proceeds”, and the competing policy concerns that the opinion did not fully address (such as the benefit of information prompting voluntary compliance). I suspect that this is not the last word on some of these issues.

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.


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.


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 .


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.


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.


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.