Tax Whistleblower Report

We had a good client ask us the other day about the status of case we had filed together about two years ago. I thought the question was a very good one, so with names omitted I’d like to share both the question and my answer. First some background: the whistleblower client is not an insider of the taxpayer, so we have no visibility into what the IRS is currently doing with the case after two years - other than that the claim is still open with the Whistleblower Office - because the IRS is prohibited from telling us those “confidential taxpayer information” details pursuant to section 6103.

Question:

If you had to make an educated guess, where do you think things are in the process?

My Answer:

By the Submission + 2 year date the IRS has had more than adequate time to evaluate a claim and determine whether or not they want to use the information in an audit of the taxpayer. If they decide not to use it after that evaluation, which averages a just under year in duration from the Submission date, then the claim is typically rejected within a couple months. We obviously did not get a claim rejection in that timeframe, which makes us believe they made a decision to use the information . When they decide to use the information, from that point they have to either add the issue/information to an existing audit, or schedule a new audit of the taxpayer. When that audit actually commences is highly variable depending on the taxpayer, when their last return was filed, what the applicable periods of limitations are, how busy the agents are who would do the case, etc. Figure it will take at least a couple months for them to start a new audit, probably more though.

IRS Audits - once they have commenced - regularly take a year or two, and I’ve seen some take much longer. Note that most business audits cover multiple years, so they have a lot of ground to cover and that’s also how the IRS stays “current” … meaning that they get audits done before the section 6501 statute of limitations expires. If they don’t get the audit done before the statute is set to expire for one or more of the years, then they will ask the taxpayer for an extension of the statute on a Form 870. I put “current” in quotes because in practice these extensions happen all the time. In my prior job representing Fortune 500 taxpayers I’d regularly be working on an audit for a year for which the return was filed more than 3 years prior (that’s the end of the normal section 6501 assessment statute of limitations). If and when I took those taxpayers to IRS Appeals or litigation, we were then usually 3-6 years out from when the return was filed. The moral of the story is that tax cases can be a long road, and even at the Submission +2 year date we’re probably still closer to the beginning then we are to the end.

Joseph A. Insinga, retired Rabobank Finance Specialist, filed a petition with the Tax Court arguing that the IRS’s continued refusal to issue a formal determination constitutes a de facto rejection of his claim and appeals this de facto rejection.  This filing details five years of interaction between Mr. Insinga and the IRS and has brought the operations of the IRS’s Whistleblower Office to the public’s attention.  Mr. Insinga’s petition also raises several questions that should be looked at closer…

What information is award eligible?

Mr. Insinga goes to great lengths to state that he was the only way the IRS could get the information.  However, this goes above and beyond the requirements of section 7623(b).  The statute does not say that the IRS needs to proceed with an administrative or judicial action based "solely" on information provided by the tax whistleblower.  The statute simply requires the IRS utilize the information.  This is shown clearly in the last sentence of section 7623(b)(1), "The determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action."  

There are many ways for a whistleblower to make a substantial contribution even if they are not the sole or initial source of information about an underpayment.  The IRM section on Award Computations, 25.2.2.9.2 (06-18-2010), itself does not require that a whistleblower’s information be the sole or initial source of information in order to be eligible for an award, so long as the case is not based on public information under section 7623(b)(2).  Even if the whistleblower’s information was not the IRS’s original source of information and was public information about the underpayment, section 7623(b)(2)(A) still provides for an award of up to 10% of the collected proceeds “taking into account the significance of the individual’s information and the role of such individual and any legal representative of such individual in contributing to such action.”  

It follows that one does not need to be the sole basis for the action, if you can get an award for "contributing" to an action.  It appears from the Petition that Mr. Insinga's information went to the Field Revenue Agents directly working on the examination of the taxpayers.  If this is the case, to actually use his help and not pay is both contrary to the statute and so patently unjust that we are concerned for the survival of the program if this position of the IRS is sustained.

When is there a de facto denial of a claim?

The Tax Court faces a new issue in Mr. Insinga’s Petition.  Does the court have jurisdiction when the IRS fails to make an award determination?  The answer must be yes otherwise a tax whistleblower could effectively be denied judicial oversight if the IRS just chooses not to act by simply never issuing an award determination.  In Cooper v. Commissioner, the IRS was taking the position that a denial letter was not an award determination, and therefore the Tax Court did not have the jurisdiction to review their award denial. The Tax Court saw through that charade in Cooper and held that they have jurisdiction over negative award determinations, but Mr. Insinga has the harder argument that when the IRS sits on their proverbial hands, that is a de facto negative award determination.  How long does a tax whistleblower need to wait before there is a de facto determination?  Here, Mr. Insinga alleges there has been an administrative action and collection of tax.  This may be a case where the court can determine that the IRS's failure to make an award determination is arbitrary, capricious, and unreasonable.

When should partial payments be made?

One of the issues raised in the Petition is that of "partial payments."  There are two parts to this issue and both appear to be at play in Mr. Insinga's case.  The first is what years must close for the IRS to make a determination.  Most of the hundreds of submissions made by The Ferraro Law Firm to the IRS Whistleblower Office involve more than one tax year of a taxpayer, and many involve multiple taxpayers.  If a tax whistleblower outlines five years of tax cheating by a taxpayer and the IRS is auditing on two-year audit cycles, when does the award determination get made?  In all other areas of tax law the rule is clear that each tax year stands on its own.  Following that line of thinking, whenever a year is closed and tax collected, the IRS should make an award determination for that year.  To take a different position could cause decades of delays.  Consider an amortization case, will the IRS wait 20 years until all of the years with improper amortization play out?  The even more egregious position would be that in a case involving multiple taxpayers, all taxpayers identified must have all tax years at issue closed before an award determination can be made.  It simply cannot be that case that this is the proper way to make award determinations.  If 999 out of 1000 identified taxpayers close and pay and one tax cheat has one tax year open for unrelated issues the IRS cannot delay payment on the 999 taxpayers it collected from - to do so would be arbitrary, capricious, and unreasonable.

Is the naming the target taxpayers appropriate?

The Tax Court's proposed rule for redacting taxpayer names would have pulled the target taxpayers names out of this Petition but the rule itself misses the point.  Mr. Insinga is not seeking to file anonymously.  He has a first amendment right to tell the world of the evils he believes Rabobank et al. committed.  Were he to file this Petition after the rule took effect he could provide his redaction index to any and all who would listen.  The Proposed Rule will only be effective in anonymous cases where the Tax Court could already require that redaction as a condition of anonymity.

Is this an example of a larger pattern of Whistleblower Office dysfunction?

We have always said that with tax whistleblower cases you can lead a horse to water but you cannot make him drink.  What would really be dysfunctional would be if the IRS had been offered quality information from Mr. Insinga that it did not otherwise have and failed to use it.  Or if the IRS did in fact use his information and the IRS is failing to make an award determination in order to avoid judicial review of a denial or paying an award even though section 7623(b) requires paying an award.  

Kudos to Erica Brady in our Washington DC office for being named by the American Bar Association as a 2012 Nolan Fellow.  This award by the ABA’s tax section is given to the top 6 young tax attorneys nationwide who demonstrate excellence and leadership.  Please join me in congratulating Erica for this distinguished award.

They say things come in threes, and last week three program manager technical assistance (“PMTA”) memoranda relating to whistleblower cases were released.  Two of the three PMTAs relate to power of attorney forms and the third discusses disclosure of taxpayer information to the whistleblower in certain circumstances. 

In PMTA 2011-31, Whistleblower Office Disclosures of Tax Return Information, the IRS concluded that employees of the Whistleblower Office are authorized to disclose taxpayer return information when (1) making determinations pursuant to section 7623, and/or (2) by providing status updates to whistleblowers regarding pending, unprocessed, or dismissed claims under section 7623.  However, the specific taxpayer return information that may be disclosed to a whistleblower in a particular instance will depend on the facts and circumstances of the matter.  The disclosure will be made pursuant to section 6103(h)(4)(A), (h)(4)(B), and/or (h)(4)(C) depending on the particular facts and circumstances. 

It is good news that the IRS is trying to find a balance between the Whistleblower Office’s non-disclosure obligation and its obligations to convey appealable determinations to whistleblowers.  However, practically this has had no effect on information provided to whistleblowers during the pendency of their claim.  PMTA 2011-31 was written a year ago and Whistleblower Analysts still only are able to say whether the claim is open or has been closed.  Clearly an award determination procedure that commences once the target taxpayer’s case is conclusively resolved is an “administrative proceeding” under section 6103(h)(4) so that a disclosure of otherwise section 6103 protected information can be made to the whistleblower, and this PTMA agrees with that concept.  Not surprising.

Additionally, in PMTA 2011-33, Powers of Attorney in the Context of Whistleblower Cases, and PMTA 2011-32, Powers of Attorney in the Context of Whistleblower Cases, the IRS concludes that any power of attorney used in the context of whistleblower representation must adhere to the standards set forth in either Circular 230, or the Conference and Practice Requirements (section 601.501 et seq. of Subpart E of Part 601 of Title 26), essentially an unaltered Form 2848, Power of Attorney and Declaration of Representation.  Again, not surprising.

In the tax world, unlike Hollywood, we really don’t get that many juicy stories.  However, when the “stars” embarrass themselves with their tax troubles, we are provided relief from yet another story about, for example, the material participation regulations' conjunctive test for determining whether an interest is treated as a limited partner interest for purposes of section 469.   Sorry, back to the scintillating stuff.

The NY Daily News just released a slideshow of the top celebrity tax scandals.  Our favorite story is about Willie Nelson, who famously released an album called the “IRS Tapes” to pay off his $32 million tax bill.  What’s yours?