Tax Court Decision – Good News For Whistleblowers

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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.


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.


  1. Eric Rasmusen says

    If the Chief Counsel’s office is going to be hostile to whistleblowers, I guess it’s good that their legal strategy is so bad. Could they have won this case? Even if they could have, when they put nothing in files that would make it possible for Tax Court to tell if discretion was abused, and then exemplify the bad consequences of that with a high-profile case like this, they’re not going to get sympathy from the Tax Court on the issue of whether it should go beyond the administrative record. Their argument will now fail the laugh test.

    Note too the lengthy discussion of the facts in the case. The plaintiffs’ unusual helpfulness, effort, and risk weren’t important to the holding, which was on the simple and boring point of whether you have to file the form before you provide your information. What they *are* relevant to is telling other Tax Court judges how amazingly reluctant the Chief Counsel is to reward whistleblowers, ready even to support a policy that would seriously delay criminal investigations once potential whistleblowers got to know about it. (And there’s the lengthy recitation of the Inspector-General’s findings of how sloppy the IRS is about keeping track of whistleblowers– though that, I guess, is relevant to the issue of whether the Whistleblower Office could be a monopoly gatekeeper.)

  2. Dean Dershowitz says

    Great result. Thank Heavens the Tax Court is not buying the nonsense that the IRS is selling!

    On the day this decision was released, Sen. Grassley, side by side with this decision, released a fawning response from Commissioner Koskinen stating the IRS is doing its utmost to help WBs, etc., statements belied by the detailed facts stated in this Tax Court decision.

    Of course the contradiction makes Commissioner Koskinen look like a buffoon and seemingly misleading the Senate. If someone mislead him, he should take a long and serious look at his staff and do some culling so he can rescue his own career, which is on a downward spiral it seems.

    This is a head-scratcher though: why is the IRS so stubbornly pursuing such a disastrous policy. One has to ask if there is some quid pro quo going on at high levels? Things just don’t add up.

  3. Dean Dershowitz says

    Having thought about this case a little more, I thought I would publish the comment I put up on Forbes concerning this case. Frankly, despite all the noise, this case may have a very limited application from a practical perspective.

    First, the key ingredient of “outing” IRS duplicity in this case was that the whistleblower (WB) had access to an extensive public record concerning the target, Wegelin bank of Switzerland, and through that information he actually knew that the IRS had collected taxes. When the IRS denied his reward claim, stating that there was no collected proceeds from his claim, he knew that the IRS was misrepresenting the situation.

    You also state at length, summarized in point 4 of page 5 of your account, that navigating the Tax Court rules and procedures is a highly complex endeavor, but that the Tax Court does right by WBs once you get all the facts before them—so you NEED competent counsel to get to the point where you can “out” the IRS for failing to pay a reward.

    The substantial majority of WBs are not in the fortunate position that they know whether or not the IRS collected on their claim. And this leads me to my point: it will be difficult if not impossible for that type of “private” WB to retain competent counsel to find out whether the IRS has cheated the WB or not by denying his claim.

    With respect, this case has a perhaps unique set of publicly disclosed facts concerning a major bank fraud investigation (and a WB that was himself in the public domain due to his own criminal activity), that substantially bolstered the facts supporting the WB’s claim and enabled him to hire you—if this was a normal case with no public facts other than the WB’s own words or any “inside information” concerning the case’s progress, would you have represented him? You will grant me this: at least that decision would not have been clearcut–your resources are limited too.

    In contrast to the facts in your case, most WBs will just accept the IRS holding and move on because they will not have access to the necessary representation and won’t risk disclosure of identity and likely professional and financial ruin.

    If one never gets to Tax Court, one never gets the Tax Court review. Surely there should be an automatic complete review by the Tax Court without the necessity of going through the legal rigmarole to obtain it—that would be a simple solution to this obvious problem.

    Yes, this was a great win (and I applaud you: clap clap), its application may be limited, perhaps to the Wegelin situation and other, highly-public, investigated situations, your rhetoric to the contrary notwithstanding. Again clap, clap, but….

    Second, doesn’t this case indicate a leadership vacuum at the IRS WB office? Fine, blame the Office of Chief Counsel for arguing IRS positions. BUT, the OCC takes it direction from IRS management, NOT the other way around.

    It seems to an objective viewer (and I have no dog in this hunt) that the problem lies with weak (perhaps non-existent) leadership at the IRS WB Office, and until that is dealt with this program may be undermined due to mistrust of and incompetence by the IRS, or perhaps worse. IRS conduct concerning WBs is certainly bewildering though: actively undermining a program that promises some leveling of an obviously un-level playing field for ordinary taxpayers. In turn, this argues for an False Claims Act-type process for IRS cases–if the IRS cannot do its job (which is obvious to all), let it be done for it.

    • Thank you Dean Dershowitz for your insight! You have made some valid points! I have sent whistleblower docs to the irs in the past and have always wondered how would I know if they told me they denied my case for “no merit” but instead pursued it behind my back to actually collect! Afterall, the irs is not all ‘above board’ and has a ‘shady’ past as an organization! Nevertheless, if someone had firsthand knowledge of information being whistleblowed, would you suggest an affidavit or declaration of facts pertaining to such information? Do you think that format would make it less likely that the irs would deny a claim…or because of this case you wrote about, that is unneccessary?

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