Whistleblower Who Prompted Voluntary Compliance Not Entitled to Reward

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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.

Avatar photo About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.


  1. After some thought, I see that the judge got it right in this case and I also see why it bothers me (and you). The judge got it right because this is analogous to someone who never filed his tax return getting scared after an audit and deciding to file in future years. It is bothersome not because of the Tax Court opinion, which is correct, but because of the IRS mercy to the taxpayer.

    That mercy was improper for several reasons. First, to qualify for the Whistleblower program, this has to be a big-dollars case, which implies a sophisticated taxpayer. Second, it is negligent not to check that your new software is issuing the right tax information notices. In fact, I’d say it was reckless, though probably not intentional. The IRS shouldn’t charge them criminally, and probably should forgive them some penalties, but not all. It sounds like the IRS didn’t even make them pay the cost of the extra audit expenses the IRS incurred. Third, the IRS should have insisted on some penalties as a way to encourage whistleblowers, since this whistleblower was truly helpful. The IRS in effect had control over the exact level of the reward to the whistleblower.

    So, the way it looks is that the IRS probably chose to be merciful in this case precisely in order to stiff the whistleblower. The whistleblower and his lawyers get zero reward, which will deter law firms from representing such troublemakers in the future. The whistleblower probably got fired, which will deter the troublemakers in the future. As usual, the question is why the IRS wants to protect corporations that underpay their taxes, as it has so often showed is the case.

  2. It seems to me that Judge Buch’s narrow reading of the term “collected proceeds” in this case is likely to have perverse results for the tax system. If a potential employee-whistleblower now consults knowledgeable counsel about submitting a claim similar to the one in this case, the advice would be to wait a couple of years [at least until the current examination was concluded] and then submit the claim. If the Service then conducts the audit and collects back taxes as a result of the whistleblower’s information, the whistleblower’s claim would have to be respected and 15%-30% would be payable. The Government would get the money owed by the taxpayer, but a few years later and with greater administrative costs somewhat offsetting the extra whistleblower award. Or maybe the whistleblower would be discouraged and forget the whole thing. In either case, the most timely compliance would occur if the “collected proceeds” definition were defined more broadly, at least in a case like this. given the extremely stretched compliance resources plaguing the IRS as a result of multiple years of budget shortfalls and hiring freezes, I think the tax system overall would have been better served if the IRS granted the whistleblower award without the contest. Not a “win” for the Government, despite the outcome in this particular case.

  3. Bob Kamman says

    Those sympathetic revenue agents certainly got it right when they did not assess any penalties for failure to collect substantial amounts of tax from nonresident aliens. It’s not like cases where IRS correspondence examiners have to come down hard on low-income taxpayers by assessing penalties to encourage voluntary compliance. In this case, the taxpayer had reasonable cause. It was a big financial institution.

  4. Norman Diamond says

    Nothing against Eric Rasmusen, but I have to correct two mistakes even though I don’t think they were negligent, reckless, or intentional.

    “First, to qualify for the Whistleblower program, this has to be a big-dollars case, which implies a sophisticated taxpayer.”

    It does not. Many sellers of houses (principal residences) that they bought decades ago are less sophisticated than, for example, Boris Johnson.

    “Second, it is negligent not to check that your new software is issuing the right tax information notices. In fact, I’d say it was reckless, though probably not intentional.”

    I partly agree but this is a very tough call. I’ve had one US financial institution make mistakes in choosing which forms to issue and one make mistakes in computing or reporting withholding.[*] Form 1040’s instructions tell US non-resident citizens that they can declare withholding even when the financial institution makes a mistake. Instructions for other forms related to US non-resident citizens are so complicated that US attorneys in the IRS and Department of Justice didn’t understand some of the instructions contained in IRS publications.

    I wonder if the IRS would behave better if they assigned personnel in Large Business and INTERNATIONAL to deal with our cases instead of Small Business and Self Employed when we are neither.

    [* not related to cases where, as TIGTA reported, IRS personnel embezzled withholding]

    The rest of Mr. Rasmusen’s comment is spot-on.

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