IRS declines Joseph Insinga's claims, potentially avoiding a negative precedent.

Posted on April 24, 2013 by Erica L. Brady

Joseph Insinga’s case has been watched closely from the time the petition was filed to see if the Tax Court would assert jurisdiction over a case where the IRS had not issued a formal determination but had allowed the claim to linger, causing a de facto denial of Mr. Insinga’s claim.  This proposed an interesting jurisdictional question that captured the attention of tax attorneys, whistleblowers, and the public.  As previously discussed on this blog, The Ferraro Law Firm filed an amicus curiae brief highlighting the fact that the IRS’s refusal to issue a whistleblower award determination, despite having allegedly collected proceeds within the meaning of section 7623(b), is tantamount to a negative award determination, or a de facto denial. 

However, on April 15, 2013, the IRS issued a letter formally denying Mr. Insinga’s claims for all but one taxpayer.  By issuing a formal denial letter, the Tax Court has jurisdiction under section 7623(b)(4) and leaves unresolved whether the Administrative Procedures Act or other non-tax-code procedural provisions might require the IRS to take affirmative action in whistleblower cases.  In a March 13th order, the Tax Court noted that the D.C. Circuit has held the Administrative Procedures Act and the All Writs Act to apply to all congressionally established courts and, under Telecommunications Research and Action Center v. FCC, that the Administrative Procedures Act and the All Writs Act confers jurisdiction over claims of unreasonable agency delay to a court that a statute confers exclusive jurisdiction to review a final agency order. 

The real precedent Insinga was going to set was that if you found out the taxpayer had been paid on an issue you submitted, you could then sue the IRS claiming that they had made a de facto determination not to pay you.  Now it is just a fight over whether the whistleblower provided information used by the IRS to collect tax.  As Greg said, the IRS probably denied the award because it saw the writing on the wall and did not want to set unfavorable precedent.  However, getting rid of the de facto determination issue in Insinga just leaves the question to perhaps be resolved by a court at a later date.  Scott elaborated on this point, saying that he was not surprised by the rejection, since the IRS was facing a potential adverse decision in court that would open up every whistleblower with a case to sue them and have the Tax Court hear the case.

We believe that this issue will be litigated eventually.  However, the next whistleblower in a situation similar to Mr. Insinga's may have a difficult time because it is unclear whether his showing that the taxpayer paid tax will be enough to initiate an award challenge.  Instead, there may need to be evidence to suggest that the IRS intends not to pay the tax whistleblower.  In the Insinga case, there was both the belief of payment of tax by the taxpayer and the suggestion that the IRS had already decided they were not going to pay and just had not issued the formal denial.  It seems the IRS has learned from this experience and is less inclined to discuss the likelihood of an award during an investigation or the status of particular award determinations.

Whistleblowers in Quandary Over Potential Whipsaw

Posted on March 13, 2013 by Erica L. Brady

The IRS has spent much time ensuring that they would not be whipsawed by paying an award on proceeds that is ultimately refunded to the taxpayer, but apparently, little consideration has been given to what happens when the IRS whipsaws a whistleblower using their information after it denied the whistleblower’s claim.  On November 2, 2012, Anonymous 1 and Anonymous 2 had their appeal of the IRS’s denial of their claim dismissed by the Tax Court despite the IRS’s notification that a division of the IRS was conducting an investigation of the taxpayer identified in Anonymous 1 and Anonymous 2’s claim.  The order dismissing Anonymous 1 and Anonymous 2’s claim states:

Petitioners provided respondent with information relating to Company X and approximately 90 of Company X’s clients.  Respondent evaluated petitioners’ information for almost two years, yet assets that he did not institute an administrative or judicial action and collect proceeds relating to Company X or its clients.  Furthermore, after the Whistleblower Office denied petitioners’ claims, a separate division of the IRS opened what respondent asserts is an independent investigation into Company X.  While we question whether the information provided by petitioners was used in the subsequent investigation, section 7623 does not provide a mechanism for petitioners to challenge respondent’s assertion.  See Cohen v. Commissioner, 139 T.C. at __ (slip op. at 9) (holding that “Congress *** has charged the Commissioner with resolving these claims and has not provided remedies until after an administrative or judicial action and the collection of proceeds.”).  Respondent established that petitioners have not met the prerequisites of section 7623(b) and petitioners have not set forth specific facts showing that there is a genuine issue for trial.

Now Anonymous 1 and Anonymous 2 are asking the Tax Court to vacate its prior decision in light of the fact that not only has the IRS begun an audit of the taxpayers identified in their whistleblower claim, but Anonymous 1 and Anonymous 2 have received letters from the IRS that the IRS has re-opened their whistleblower claims and the IRS has asked for assistance from Anonymous 1 and Anonymous 2.  We will be watching to see how the Tax Court rules on this motion to vacate its prior decision because the implications may be felt widely.  By reopening the whistleblower claims, the IRS has functionally rendered the prior denial of the claims an interim determination.  If the denial is treated as an interim decision, then it is likely that the case is not ripe under Cooper I.  However, if the decision is allowed to stand the concern is that the IRS will use Anonymous 1 and Anonymous 2’s information in an investigation and collect proceeds based on that information, and when it comes time to pay an award the whistleblowers will no longer have the right of review because the Tax Court has already ruled on that claim.  If the IRS is able to side step their duty to pay awards to whistleblowers by simply denying the claims and then opening an investigation and using the information, then the requirement to pay awards and the right of review are meaningless.  I cannot believe that this is the case.  The best end result for these whistleblowers is that the IRS successfully uses their information and then the Whistleblower Office determines that they are entitled to an award on all the proceeds collected, but in the meanwhile the Tax Court will hopefully see the position that all whistleblowers can be put in if the IRS denies their claim and then uses their information afterwards.  Therefore, we think the Tax Court should treat the previous determination of the IRS as an interim – not final – award determination and vacate its prior decision due to the subsequent re-opening of the case by the IRS.

Eleventh Circuit sends a reminder that whistleblowers must follow the proscribed procedure in order to have their claim for an award.

Posted on December 10, 2012 by Erica L. Brady

The Eleventh Circuit released Ware v. Commissioner, an unpublished opinion, in which the Eleventh Circuit upheld the Tax Court’s dismissal of the pro se taxpayers’ request for redetermination of their tax liability and their whistleblower claim.  The Eleventh Circuit upheld the decision of the Tax Court to dismiss the taxpayer’s whistleblower claim because the Tax Court found that there was no evidence that the taxpayers filed a Form 211.  As there is no record of a Form 211 being filed, the IRS did not consider their claim for an award.  As the IRS did not consider their claim for an award, the IRS did not issue a final determination on their claim for an award and thus there can be no appeal of a determination to the Tax Court. 

This case serves as a reminder that the procedures for submitting a claim for an award must be followed.  The Eleventh Circuit does not give any details about the information that the taxpayers provided to the IRS.  The Eleventh Circuit simply states that the taxpayers’ last argument is that the Tax Court failed to consider their whistleblower claim.  However, the Eleventh Circuit states that the Commissioner asserts that the taxpayers never filed a Form 211.  The Eleventh circuit goes on to state that, “As a result, the Secretary did not issue a determination on a whistleblower claim, and the Tax Court could not hear the case.”  The Eleventh Circuit simply looked at the Treasury Regulations that describe the procedures that must be followed to file a claim for an award.  “Under § 7623, the Secretary of the Treasury may pay a reward to an individual for bringing information to the IRS about the underpayment of taxes.  A whistleblower must file a Form 211: Application for Reward for Original Information.  26 C.F.R. § 301.7623-1(f).” 

Decisions such as this serve as a reminder that the ensuring that proper procedures are followed is just as important as the information that is provided.  If a whistleblower fails to file a Form 211, then the whistleblower has not made a claim for an award.  An attorney can help ensure that a whistleblower meets all of the procedural hurdles throughout the process.  If you have provided information to the IRS without properly filing a claim for an award, you should contact an attorney who can discuss how you should proceed in order to protect your claim.

The Tax Court continues to define the boundaries of its jurisdiction to review whistleblower cases.

Posted on October 10, 2012 by Erica L. Brady

The Tax Court dismissed a whistleblower’s complaint that challenged the IRS’s decision not to act on the whistleblower’s information.  In Raymond Cohen v. Commissioner of Internal Revenue, 139 T.C. No. 12 (October 9, 2012), the Tax Court holds that section 7623(b) does not authorize the Tax Court to order the IRS to reopen Petitioner’s award claim.

The Petitioner, Raymond Cohen, is a CPA who provided information to the IRS Whistleblower Office regarding a corporation that he believes had unreported income from uncashed dividend checks that had not been turned over to the state.  The Whistleblower Office informed Mr. Cohen that he was not entitled to an award because no proceeds were collected based on the information he provided.  Mr. Cohen requested the Whistleblower Office to reconsider the claim.  The Whistleblower Office reiterated the denial, noting that the claim was based on publicly available information.  Mr. Cohen filed a petition with the Tax Court requesting that the Tax Court order the IRS to reopen his claim, arguing that the IRS abused its discretion by not acting on his information.  The IRS moved to dismiss for failure to state a claim upon which relief can be granted.

The opinion’s reasoning starts with a review of the Tax Court’s ability to review whistleblower award determinations.  Tax Court may exercise jurisdiction only to the extent authorized by Congress.  In a whistleblower action, that jurisdiction is limited to the Commissioner’s award determination.  The opinion states that the “jurisdiction under section 7623(b) does not contemplate that we review the Commissioner’s determinations of alleged tax liability to which the claim pertains.  See Cooper v. Commissioner, 136 T.C. 597, 600 (2011) (Cooper II).  Nor does section 7623 confer authority to direct the Commissioner to commence an administrative or judicial action.  Id.”  Mr. Cohen admits that his information did not lead to the Commissioner commencing an action against, or collecting any proceeds from the corporation.  Nevertheless Mr. Cohen argues that he should be granted relief.  Mr. Cohen first argues that he is entitled to relief because the IRS did not comply with the Administrative Procedure Act (“APA”).  The opinion states that “[t]he APA, however, does not create a right of action or expand our jurisdiction.  See Anonymous v. Commissioner, 134 T.C. 13, 19 (2010).”  As the APA does not expand the Tax Court’s jurisdiction the Tax Court can provide relief under section 7623(b) only after the Commissioner has initiated an administrative or judicial action and collected proceeds.  Mr. Cohen’s second argument is that he is entitled to a legal and factual explanation of respondent’s denial of the claim.  While the opinion in Cooper II noted that the Commissioner had produced through the course of litigation a memorandum explaining why the whistleblower claim had been denied, the court “did not hold that the Commissioner was obligated under section 7623 to detail his legal and factual reasons for not pursuing a claim.”  Mr. Cohen’s third argument is that he is entitled to equitable relief; however, the Tax Court is not a court of equity and section 7623 does not provide for equitable relief. 

For these reasons, submissions made to the IRS Whistleblower Office should be carefully prepared and should act as a roadmap that the IRS can simply follow to detect underpayments, making the decision to act on the information an easy one for the IRS.

IRS to Seek Protective Orders to Prevent Nonparty Taxpayer Information from Being Redisclosed.

Posted on September 18, 2012 by Erica L. Brady

As discussed in an earlier blog post, the Tax Court formally adopted amendments to the Tax Court Rules of Practice and Procedure on July 6, 2012.  The amendments rules include Rule 345, which provides that a whistleblower may proceed anonymously by redacting the whistleblower’s identifying information, if appropriate, and provides that the taxpayer’s identifying information be redacted.  On September 13, 2012, the IRS issued CC-2012-016 to alert its attorneys to the amendments to the Tax Court Rules and how the IRS will implement the rules.  The discussion of Rule 345 focuses largely how to prevent the whistleblower from disclosing the taxpayer’s information to third parties outside of the whistleblower’s Tax Court appeal of a whistleblower award determination.

The notice asks IRS attorneys to balance privacy concerns of taxpayers with the need for disclosure of taxpayer information to whistleblowers.  The notice points out that Rule 345 “does not require that confidential taxpayer information be sealed or otherwise protected in whistleblower cases.  Instead, the court stated it will address the need to protect nonparty taxpayer information on a case-by-case basis.”  The notice states that “section 6103(h)(4) may permit the disclosure of nonparty taxpayer information to a petitioner in a whistleblower award case during discovery, but neither a petitioner nor petitioner’s attorney are under any duty not to further disclose that information once it has been produced to them.”  When the Tax Court announced the finalization of the amendments, the court explained that section 7461(b)(1) provides ample authority for the court to protect the confidential taxpayer information on nonparty taxpayers in whistleblower award cases.  The notice instructs attorneys to be mindful of limitations on discovery in Rule 70(b)(1), which limits discovery to matters that are not privileged and relevant to the pending case.  To limit redisclosure of the taxpayer’s information that is produced in discovery or at trial the IRS may seek a protective order under Rule 103, under the appropriate circumstances.  So far there is no elaboration of when the IRS considers it appropriate to seek a protective order to prevent the redisclosure of nonparty taxpayer information.

U.S. Tax Court Finalizes Rules for Whistleblower Anonymity and Redacting Taxpayer Names.

Posted on July 09, 2012 by Gregory S. Lynam

In line with the Tax Court’s Whistleblower favorable ruling in Whistleblower 14106-10W v. Commissioner, 137 T.C. 183 (2011), the court formally adopted Rule 345 on July 6, 2012.  The new rule has two effective parts, the first deals with Whistleblowers wishing to appeal award determinations anonymously.  While the new rule does not significantly expand the decision in Whistleblower 14106-10W, Rule 345(a) does note that a Whistleblower can file the motion to proceed anonymously with or without supporting affidavits or declarations.  While a minor point, it does show that a Whistleblower has the right to allege fear of reprisal without an affidavit detailing the specific facts making up the fear.  A Whistleblower appealing an award determination should consult with their tax attorney to determine the best approach in their specific case.

The second part of the new rule creates a new administrative burden for Whistleblowers, even those who choose to openly file under their name.  Rule 345(b) requires Whistleblowers to redact out the names and other identifying information of the taxpayers on whom they blew the whistle.  Whistleblowers will be required to create a redaction log which will be filed under seal with the Tax Court.  The court will then decide whether to make the log publicly available.  We do not see the new rule having a large impact, other than on the assistant required to create the redaction log and the clerk required to scan it in at the Tax Court.  In cases where the Whistleblower wishes to proceed anonymously, information about the target taxpayer will already be redacted.  In cases where the Whistleblower does not wish to proceed anonymously, there is nothing stopping the Whistleblower – including the U.S. Tax Court – from shouting the target taxpayer’s name from the rooftops.  We are happy to take whatever steps the court feels are necessary to ensure a fair review of IRS award determinations.  In fact, the Ferraro Law Firm adopted this procedure while the rule was in proposed form.

The Ferraro Law Firm files an amicus curiae brief in a Tax Court case involving a de facto denied claim.

Posted on July 03, 2012 by Scott A. Knott

Some of our clients and readers of this blog have asked that we publish the amicus curiae brief that The Ferraro Law Firm recently filed with the United States Tax Court in the case of Joseph A. Insinga v. Commissioner of Internal Revenue.  Mr. Insinga is the whistleblower who reported his former employer, Rabobank, to the IRS for facilitating tax avoidance transactions for United States taxpayers.  Mr. Insinga saw SEC disclosures by several of the United States taxpayers/Rabobank customers he turned in that lead Mr. Insinga to believe that last year they paid some of the tax he alleged that they owed, and therefore he is due an award.  However, the IRS has refused to make an award determination.  The Ferraro Law Firm’s amicus curiae brief highlighted the fact that the IRS’s refusal to issue a whistleblower award determination, despite having allegedly collected proceeds within the meaning of section 7623(b), is tantamount to a negative award determination, or what we call a de facto denial.  

The denial of an award through the IRS’s refusal to make a determination could potentially be more harmful for the whistleblower than a flat denial because a flat denial is clearly a determination, which a whistleblower can appeal to the Tax Court under Cooper v. Commissioner.  Mr. Insinga never received a rejection letter, even after being told that it was unlikely that he would receive an award and requesting that if the IRS intended to deny his claim that the IRS issue him a rejection letter.  We believe that the failure to either pay an award or deny a whistleblower’s claim in a timely manner could side step whistleblowers’ rights to judicial review unless the IRS’s failure to act is treated as a de facto denial.  Our brief’s argument centered on the fact that other IRS “determinations” (pursuant to other Internal Revenue Code sections) can be “denied” by the passage of time without requiring a written denial, and that the Tax Court would be treating section 7623(b) award determinations consistent with other determinations by assuming jurisdiction when such a de facto denial occurs.

The need for award determination timelines was echoed just days later in Deputy Commissioner Miller’s field directive to the extent that it called for the Whistleblower Office to make an award determination within 90 days of when proceeds are finally determined in a matter.  It appears based on the allegations in Insinga’s petition that this new timeline was not met.  Not even close.  We hope that the establishment of an internal timeline prevents these de facto denials from happening in the future.

Whistleblower petition raises many questions for the Tax Court

Posted on March 07, 2012 by Gregory S. Lynam

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.  

Tax Court decides landmark Tax Whistleblower case about confidentiality during an award appeal.

Posted on December 12, 2011 by Scott A. Knott

The decision of the Tax Court in Whistleblower 14106-10W  v. Commissioner  should encourage tax whistleblowers that their identity will be protected if they choose to avail themselves of their judicial appeal rights under section 7623(b)(4).  The Tax Court issued its rules governing whistleblower actions on October 3, 2008.  In response to the previously proposed rules for these cases, The Ferraro Law Firm submitted comments to the Court regarding the importance of protecting an informant's identity by allowing anonymous filings and filings under seal.  The Tax Court acknowledged in those concerns in its explanation to Rule 340, and this case is the first test of those rules.

The decision of the Tax Court in this landmark case obviously shows that the Court carefully considered the balance between a whistleblower’s need for protection of his identity with the public’s right of access to court records.  We are happy the court concluded the identity of the whistleblower should not be disclosed.  However, whistleblowers may feel that those award determination appeal rights have been gutted by the Court’s further holding that an affidavit by the IRS which states “we didn’t use your information” is enough to satisfy the Court on a motion for summary judgment that the whistleblower is not eligible for an award.

Because section 6103 generally prohibits the IRS from disclosing information about a taxpayer to a whistleblower, including any information about what the IRS has done with a whistleblower’s information, most whistleblowers who are not insiders of the taxpayer will have no evidence of what the IRS did with their information, if anything.  Non-insider whistleblowers were therefore relying on their judicial appeal rights to act as a check and balance to be able to verify that they were properly awarded under section 7623(b), because section 6103(h)(4) would permit that taxpayer confidential information to come to light in a judicial proceeding.  The holding of the Tax Court in this case may dash a non-insider whistleblower’s hopes of finding out what really happened with their information because the Court didn’t let the whistleblower issue discovery to find that out.  Insiders, on the other hand, will have plenty of evidence to get past a motion for summary judgment on this issue so they are not affected by this part of the Court’s decision.

The whistleblower in this instance may have lost the case, but he won an important victory for all tax whistleblowers.  It was a victory for other whistleblowers because (i) the Tax Court recognized the importance of protecting the identities of whistleblowers by creating a standard which will protect their anonymity, and (ii) the Tax Court followed their holding in Cooper v. Commissioner that a “no award” letter issued by the IRS is a determination under section 7623(b) that the Court has the jurisdiction to review, which should finally put that issue to rest.

Another look at Cooper v. Commissioner.

Posted on September 23, 2011 by Erica L. Brady

I wanted to highlight an article published in the September 19, 2011, issue of Tax Notes, "Scratching Our Heads Over Cooper v. Commissioner" by Michelle M. Kwon.  In this article, Ms. Kwon gives a thoughtful discussion of the Tax Court’s jurisdiction to hear IRS whistleblower cases.  She explores the implications of the court’s decision and some of the questions left unanswered. 

Ms. Kwon has previously written on how in creating the whistleblower program Congress created tension between the IRS and the whistleblower due to the confidentiality restrictions in Section 6103 in “Whistling Dixie About the IRS Whistleblower Program Thanks to the IRC Confidentiality Restrictions,” originally published in the Winter, 2010, edition of the Virginia Tax Review, 29 Va. Tax Rev. 447.

IRS Concedes Tax Court Jurisdiction Upon Delivery of "No Award Determination" Letter.

Posted on September 08, 2011 by Gregory S. Lynam

Yesterday the United States Tax Court decided Friedland v. Commissioner, T.C. Memo 2011-217 (Sept. 7, 2011) in favor of the Internal Revenue Service.  Friedland may sound familiar to some, as his previous case against the IRS did not get very far either.  See, Friedland v. Commissioner, T.C. Memo 2011-90 (April 25, 2011).  The case is generally unremarkable.  The Tax Court found that Friedland failed to file his petition to the Tax Court within 30 days of the IRS mailing its “thanks but no thanks” letter.  What caught our eye, however, was this little nugget,

"Respondent [that’s the IRS folks] relies upon the March 3, 2011, date to commence the period for petitioner to file a timely petition.”  

Id. at 3.  This is the first time the IRS has acknowledged that the letter it sends out stating that the IRS cannot make an award determination because it had decided not to utilize the tax whistleblowers information is, in fact, a final administrative decision regarding a tax whistleblower claim.  In Cooper,v. Commissioner, 135 T.C. No. 4 (July 8, 2010), the IRS hotly contested the idea that the denial letter was a ticket to Tax Court.  The IRS lost there, the first Friedland, and Kasper v. Commissioner, 137 T.C. No. 4 (July 12, 2011).  It appears that the IRS has thrown in the towel on this issue and has now taken to using the Tax Court’s holding to its advantage.  While we applaud the IRS for accepting the Tax Court’s jurisdiction, we actively encourage the next step – rolling a “no award determination” into the administrative appeal process.  Telling a tax whistleblower why the IRS is not moving forward on their submission, something allowed under Section 6103 in an administrative proceeding, would greatly reduce the number of Coopers, Kaspers, and Friedlands the IRS must face in Tax Court.  In our view, the best course of action is to avoid a “no award determination” letter in the first place by filing a well-prepared submission vetted by your tax lawyer.  We happen to know a few if you need some help.     

Cooper Round 2: Tax Court Reaches Right Legal Conclusion; IRS Sends Wrong Whistleblower Message

Posted on June 21, 2011 by Gregory S. Lynam

The US Tax Court just released its summary judgment decision in William Prentice Cooper, III v. Commissioner, 136 T.C. No. 30 (June 20, 2011).  In the first true exercise of its new jurisdiction over tax whistleblower cases, the Tax Court showed that it will closely guard that jurisdiction but will not turn itself into the IRS.

Cooper had filed two tax whistleblower claims under the new and improved program of section 7623(b).  The submissions involved estate and gift tax consequences.  The IRS reviewed the information but less than a year after filing sent Cooper a rejection letter stating that they could not make an award determination because they did not use his information to collect taxes.  Cooper, like many tax whistleblowers, provided what he believed to be “slam dunk” information to the IRS.  Cooper filed a petition to the US Tax Court seeking the Tax Court to force the IRS to audit the matters raised in his tax whistleblower submission.

The IRS came back with guns blazing and asked the Tax Court to dismiss for lack of jurisdiction.  Read the fine print they said.  The letter the IRS sent said they could not make an award determination.  No award determination, no jurisdiction, the IRS argued.  Fortunately, the Tax Court saw this as pure silliness.  Saying you won’t make an award determination is the same as making a zero-dollar award determination.  William Prentice Cooper, III v. Commissioner, 135 T.C. No. 4 (July 8, 2010)  

Now that the Tax Court had clear jurisdiction the question to be answered was can the Tax Court force the IRS to audit the issues Cooper raised.  The IRS stated that it had good reason to not go after the issues Cooper raised.  The Tax Court decided that good reason or not, the Tax Court is not in the audit business.  “If the Secretary does not proceed, there can be no whistleblower award.”  We call this the, “you can lead a horse to water but you cannot make him drink” rule.

While the Tax Court clearly came to the correct conclusion in both decisions, the IRS’s arguments in Cooper Round 1 left a slightly bad taste in our mouths.  The IRS should not be hiding from Tax Court review.  Just like in an IRS audit, if you followed the rules you have nothing to fear.  As for Cooper Round 2, we understand that not every tax whistleblower submission will be a clear winner and the IRS needs to allocate their resources effectively.  However, we understand that there are numerous instances of quality information coming into the whistleblower office where the IRS decided not to take action on that information for reasons unknown.  The real danger of a case like Cooper is that it can suggest hostility towards tax whistleblower information.  Despite the perception of hostility towards whistleblowers, in our experience, when you bring the IRS high quality information that is presented in a persuasive, logical, and thorough manner, it greatly increases the chances that the IRS will act on your information.  For that reason, submissions made to the IRS Whistleblower Office should be carefully prepared and should act as a roadmap that the IRS can simply follow to detect underpayments, making the decision to act on the information an easy one for the IRS.

How to Handle an IRS Whistleblower Award Determination

Posted on March 07, 2011 by Scott A. Knott

The first tax whistleblower award payments under the enhanced provisions of section 7623(b) are imminent, likely within the next couple months or sooner.  It’s been a long time coming, but some whistleblowers are finally going to be awarded for turning in large scale tax cheats.  However, the award determination process is complicated [see IRM 25.2.2.8 (06-18-2010) (PDF)] and offers a whistleblower what may be their last chance to get a fair deal from the IRS.

Once the IRS has collected money from the tax cheater and the determination of tax for a specific period becomes final, the Whistleblower Office will prepare and send a preliminary award recommendation package to the whistleblower.  This preliminary recommendation package will include: (a) a notice of opportunity to comment letter; (b) a proposed summary award report; (c) an award consent form; and (d) a confidentiality agreement. 

A whistleblower who receives a preliminary award determination package may be wondering: now what do I do?

Once a whistleblower has received their preliminary recommendation package, they must act quickly to ensure that their rights are fully protected.  Whistleblowers are given 30 days after receiving the preliminary recommendation package to do one of the following: 1) consent to the proposed award recommendation, 2) make comments on the proposed award recommendation, or 3) request an additional administrative review opportunity by signing, dating, and returning the confidentiality agreement.  In almost all cases you would want to pick option three.  If the whistleblower requests an additional administrative review of their award determination and returns the confidentiality agreement within 30 days, the Director will provide the whistleblower with a preliminary report package.  This package contains the Whistleblower Office’s report that states the amount of the recommended award and an explanation of the recommended award.  The report should include the recommended amount of the proceeds to be attributed to the whistleblower’s information, the specific award percentage recommended, the recommended award amount, and a summary of the factors considered in making the specific award percentage recommendation. 

Upon receipt of the preliminary report package, the whistleblower will again have 30 days to respond to the preliminary report package by either: 1) submitting written comments on the award report, or 2) scheduling an appointment to review the IRS’s “Claim File” which contains documents supporting the recommendation.  The supporting documents must be reviewed at the IRS Whistleblower Office in Washington, D.C. and the whistleblower will not be permitted to make copies of these documents.  In almost all cases, we believe a whistleblower should choose option two and request a review of the underlying documents that were used as the basis of their award determination.  Why?  For starters, reviewing key documents from the “Administrative File” that the IRS keeps on each taxpayer is the only way you can determine if the IRS auditor’s adjustments line up with the amounts the Whistleblower Office is saying the IRS collected.  An Administrative File can be massive, often containing thousands of documents, discovery requests and responses, auditor worksheets, revenue agent’s reports, etc.  Unfortunately, the IRS’s Claim File may not contain all the relevant documents from the Administrative File, and if you don’t know what is supposed to be there you won’t know what’s missing.  Secondly, you may not know what some of these often cryptic documents mean to your whistleblower case.  After this review a whistleblower has just 30 days to comment on any discrepancies they have found.

The IRS Whistleblower Office Director makes a final award determination based on a review of the Claim File and any comments submitted by the whistleblower.  The Director will share the recommendation with the Whistleblower Executive Board for concurrence.  Upon concurrence, the Director’s determination will be communicated to the whistleblower in a determination letter, stating the amount of the award and summarizing the basis for the determination.  If a tax whistleblower is still not satisfied with their proposed award determination after their administrative review, only 30 days are given to file a Tax Court Petition for redetermination.

It is obvious from these procedures that a whistleblower must act very quickly at each step to ensure that their rights and interests are protected.  Because of the short time granted at each step for reviewing and appealing the proposed award, a whistleblower (or their representative) will need to be prepared to argue why they deserve a higher award percentage or why the award was calculated by the IRS using the wrong base amount.  Additionally, the whistleblower may not be adequately able to represent their rights if they are unfamiliar with an IRS Administrative File.  The whistleblower’s limited access to the Administrative File coupled with their inability to make copies of any documents in the files could put whistleblowers unfamiliar with the documents in the Administrative File at a distinct disadvantage.  However, it is a careful review of the IRS’s audit documents that will likely be the key to being able to ensure that a whistleblower is receiving the maximum reward.  Therefore, we believe it is in the best interest of the whistleblower to ensure that someone familiar with the awards process and Administrative Files is representing their interests.

Contributed to by Erica Brady

The Importance of Judicial Review for Whistleblower Award Determinations

Posted on January 28, 2011 by Erica L. Brady

One of the biggest improvements the 2006 amendments made to the IRS Whistleblower program was providing the right to appeal an award determination for claims that meet the requirements for the enhanced award provisions, mainly that the amount in controversy is more than $2 million. Prior to the 2006 amendments taking effect, the payment of an award was entirely at the discretion of the IRS with no oversight or review outside of the IRS. The 2006 amendments to section 7623 changed this by creating the right of judicial review by the Tax Court.

The problem with the discretionary award program was that there was no mechanism to force the IRS to pay an award if they used a whistleblower’s information, nor was there a way for the whistleblower to find out if the IRS ever actually used his information. This problem was clearly illustrated in the case of Robert Coleman v. United States, No. 10-219T (Ct. Fed. Cl. Jan 28, 2011) (PDF). In case the Court of Federal Claims was forced to dismiss Mr. Coleman’s suit appealing the IRS’s determination to deny him an award for the information he provided for lack of jurisdiction because there was no provision in the Internal Revenue Code mandating that the IRS pay Mr. Coleman an award at the time he reported this information to the IRS. Mr. Coleman alleged in his suit that he provided the IRS with information regarding his mother’s accountant, who had embezzled money from her and failed to report this income. Mr. Coleman sought to appeal the denial of his claim after Mr. Coleman learned that his mother’s former accountant had pled guilty to filing false tax returns, and was ordered to pay an undisclosed amount in back taxes.

Mr. Coleman will likely never know if the information he provided to the IRS lead to the conviction and collection of an undisclosed amount of tax from the accountant who had embezzled from Mr. Coleman’s mother because Mr. Coleman did not have the opportunity to have his claim reviewed. A point more fully discussed by William P. Barrett in his blog post Another Good Reason To Hate The IRS. He certainly believes it did, and without having a copy of the IRS’s administrative file we will never know either.  Under the old IRS Whistleblower law, whistleblowers had no assurance that they would be treated fairly. 

Under the current statute, whistleblowers that meet the minimum requirements of the enhanced award provisions have an avenue to appeal the IRS’s award determination to the US Tax Court. However, many whistleblowers who don’t meet those minimum requirements still won’t have a mechanism to ensure fair treatment by the IRS. The bounds of the Tax Court’s ability to review award determinations have yet to be tested. However, well-represented tax whistleblowers whose cases meet the requirements for the enhanced award provisions are able to ensure a fair award determination in court.  If the IRS tries to avoid paying an award where the IRS has used the information provided and collected taxes, whistleblowers can enforce their rights to an award.