What Does Mnuchin Think of the Whistleblower Program

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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.

Stephen Olsen About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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