On March 9th, Tax Partner Scott Knott and I attended the Federal Bar Association Tax Law Conference in Washington, D.C.  Known colloquially as the “inside the beltway tax conference,” many high ranking federal government employees from DOJ, Treasury, and the IRS were in attendance and speaking on various new developments in the tax law.

The key note speaker, Don Fort, Chief IRS Criminal Investigation (“IRS-CI”), spoke about the work of his division in the areas of tax evasion, money laundering, the use of cryptocurrencies to conceal income, and terrorist financing. Mr. Fort highlighted that the mission of IRS-CI is to have a maximum deterrent effect and enhance voluntary compliance with the tax laws.  Mr. Fort said maximum deterrent effect comes from working with the DOJ to prosecute tax crimes that generate publicity or are highly visible to the public.  Enhancing voluntary compliance necessarily involves identifying tax crimes in the first place.  In that regard, Mr. Fort stated that whistleblowers are one of the most important sources of information for IRS-CI.

  • Mr. Fort closed by noting that even though his division has the same number of special agents as it had 50 years ago, IRS-CI continually investigates some of the most complicated cases in the agency’s history. According to IRS-CI’s Annual Report for 2017, international investigations have increased substantially from the 186 indictments in 2015, to 221 initiated in 2016, to 283 initiated at the end of 2017.  Indictments have increased correspondingly.

We have spoken to Mr. Fort in the past concerning criminal tax matters, some of which IRS-CI has taken action on, and Mr. Fort has encouraged us to forward relevant evidence of criminal tax evasion to his division. If you have information about criminal tax evasion, please contact The Ferraro Law Firm for a free consultation.


We get absolutely deluged with hundreds of calls a day during tax return filing season about all kinds of fraud, particularly identity related scams and claiming child exemptions improperly.  In 2016, there was a 400% increase in tax related phishing and malware attacks, and 969,000 potentially fraudulent refunds claiming up to $6.5 billion. You may be unaware that you’re a victim until you try to file your taxes and IRS tells you something’s wrong.

Here are four common scams to watch out for this year:

  • Phishing—Fraudsters send fake emails to trick would-be victims into sharing personal data. The real IRS would never initiate contact with you this way.
  • Phone fraud—Identity thieves impersonate IRS agents. But, the real IRS states it will never call to demand immediate payment. You will first receive a mailed bill.
  • Tax preparer fraud—Use tax professionals? Watch out for emails that appear to be from them asking for private information. Delete and call your service directly.
  • Phony IRS agents visit your home—This scam often targets the elderly. Real IRS agents carry photo IDs, and will try to contact you before visiting.

The full list of the recently released “Dirty Dozen” tax scams can be found here.  As for claiming child exemptions improperly, the best defense is a good offence: file early.  Unfortunately, neither of these big problems make for good whistleblower claims under section 7623(b), the IRS whistleblower program we work with.  The Whistleblower Office does not handle the identity theft scams, that is handled by the Treasury Inspector General’s Office.  Claiming of exemptions for children is unfortunately not an issue the Whistleblower Office handles either, that has to be handled directly with the IRS in connection with the filing of your return.

What we do see a lot during tax season that the Whistleblower Office is interested in is non-filing of returns, positions being taken that are clearly non-compliant, abusive transactions, or anything that represents an underpayment of tax of more than $2 million of tax over the last three years.  If you have information about anything you believe may fit in those categories don’t hesitate to give us a call.


Happy New Year! The new year brings a time to reflect back on the past year, on things that went well, things that went not-so-well, and how you would like to do things going forward.  In the spirit of looking back over the last year, the IRS Whistleblower Office released its FY 2017 Annual Report to Congress earlier than usual this year, right after New Year’s. 

In FY 2017, the Whistleblower Office paid $33,979,873 in awards (prior to the sequestration reduction), which was less than the $61,390,910 paid in FY 2016 and the $103,486,236 paid in FY 2015.  The $34 million of awards was spread across a total of 242 awards, 27 of these awards were paid under §7623(b).  The total number of awards paid in FY 2017 falls between the 418 awards paid in FY 2016 and the 99 awards paid in FY 2015. The number of awards paid in FY 2016 was extraordinarily high due to a push by the Whistleblower Office to resolve a backlog of old claims that would be categorized as falling under §7623(a).  Disregarding the number from FY 2016, which is largely attributable to the resolution of the backlog, the IRS Whistleblower Office has continued to grow the number of awards it pays each year.  But more importantly, the number of awards paid under §7623(b) increased by 50% over the number paid in FY 2016.  (The IRS Whistleblower Office paid 18 awards under §7623(b) in FY 2016, which was virtually the same as the 19 awards paid in FY 2015.)

FY2017 Table 1.png

IRS Whistleblower Program has been a success for the IRS and tax administration as shown by the fact that only 6% of claims closed in FY 2017 (down from 7% in FY 2016) were closed because the IRS audited the issue and made no change to the taxpayer’s position.  That means if the IRS acts on a whistleblower’s information there is a very low probability that the IRS will not make an adjustment.  This statistic should be even lower than 6% because the IRS includes adjustments that are made but were non-Title 26 Collected Proceeds – like FBAR penalties within the same statistic.

Nevertheless, the IRS Whistleblower Office should be cautious that the program does not begin to stagnate.  Between the decrease in new submissions, the fact that nearly all new submissions are related to Small Business/Self-Employed Division issues, and the average time to process a claim for an award remained largely unchanged in FY 2017 from FY 2016, which was an increase from FY 2015; the IRS may have trouble making large award payments down the road if the IRS does not address some of the issues within the program and work to build additional support for the program in the operating divisions of the IRS.

The Annual Report made clear that when providing information to the IRS Whistleblower Office, whistleblowers need to ensure that their submissions are specific and credible because more than half (57%) of the claims closed in FY 2017 were closed because the Whistleblower Office found that the allegations in the claim were not specific, credible, or were speculative in nature.  A knowledgeable attorney can help put together a clear and concise submission that will give the whistleblower the best chance of receiving an award.

One final note: The Ferraro Law Firm again accounted for 22% of the §7623(b) awards (by number and by value) of the awards paid by the Whistleblower Office in FY 2017.  We are proud to be seeing success for our clients and happy to see the IRS recognizing the important contribution made by whistleblowers.

Many tax fraud cases also involve securities law violations.  For instance, corporations engaged in tax evasion may also be creating fraudulent financials or offering securities to investors by providing misleading or untruthful information.  The most common compliant categories reported by whistleblowers to the SEC in fiscal 2017 were Corporate Disclosures and Financials, Offering Fraud, Manipulation, and Insider Trading.

The SEC’s whistleblower program is moving full steam ahead according to the 2017 Annual Report of the SEC Office of the Whistleblower.  The Report highlighted the program’s growth, painted a rosy picture for awards into the future, conveyed the value the SEC places on whistleblower information, and underscored the SEC’s commitment to protecting whistleblowers through processes and through enforcement actions.

The SEC received over 4,400 tips in fiscal year 2017, an increase of nearly 50 percent since the program’s first full year in 2012.  In 2017, the SEC ordered awards totaling approximately $50 million to 12 individuals.  Although that award number is about $7 million less than last year, every indication is that the SEC’s whistleblower program is about to hit stride.  Three of the ten largest whistleblower awards were made by the SEC during fiscal year 2017.  Even more interesting than that is the SEC is preparing for a big year of awards in fiscal year 2018, as indicated by the following statement in the SEC’s Financial Report for 2017:

The SEC recognized a contingent liability for the year ended September 30, 2017 of $221 million, which represents a recognized liability for estimated whistleblower awards where the payment is considered probable.

This contingent liability for 2017 will likely include the largest individual SEC whistleblower award ever – an amount that currently sits at $30 million. 

The SEC’s annual report made crystal clear the value whistleblowers have added to SEC enforcement, stating “Whistleblower information has aided the SEC’s efforts to uncover and stop fraudulent investment schemes.” 

The annual report also highlighted the lengths the SEC will go to in order to protect whistleblowers.  The SEC whistleblower program permits whistleblowers to submit information anonymously through an attorney and in any event, by law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  However, the SEC also has weapons to protect whistleblowers and combat whistleblower intimidation and other tactics used by companies and individuals to deter persons from reporting to the SEC.  In 2017, the SEC brought two actions against companies for imposing restrictions in their employee separation and severance agreements that operated to deter whistleblowers from providing information to the SEC or partaking in proceeds of an SEC whistleblower award.  In another enforcement action, a financial services company agreed to a $500,000 civil penalty and to cease and desist from attempting to uncover the identity of a presumed whistleblower and requiring former employees to sign severance agreements that waived potential whistleblower awards. The annual report notes that the SEC will continue to review facts and actions to impede communications with the SEC “to ensure that whistleblowers can freely report information to the Commission and feel comfortable reporting wrongdoing without fear of reprisal.”

An SEC press release at the end of November announced awards of more than $8 million each to two whistleblowers, sending SEC enforcement actions involving whistleblower awards over $1 billion in financial remedies ordered against wrongdoers.

If you have information about large-scale tax underpayments or you would like to know more about reporting securities violations to the SEC anonymously, contact the attorneys at The Ferraro Law Firm today for a free consultation. 

Late on November 16th, the Senate Finance Committee voted to approve its iteration of the Tax Cuts and Jobs Act, passing the measure on a party-line 14-12 vote.  The full version can be found here.  Of particular interest to our readers here is one of the amendments that was added to this in committee.  Senator Grassley submitted a number of amendments to this bill including an amendment that:

modifies section 7623 to define collected proceeds eligible for awards to include: (1) penalties, interest, additions to tax, and additional amounts, and (2) any proceeds under enforcement programs that the Treasury has delegated to the IRS the authority to administer, enforce, or investigate, including criminal fines and civil forfeitures, and violations of reporting requirements.  This definition would also be used to determine eligibility for the enhanced reward program under which proceeds and additional amounts in dispute exceed $2,000,000.  Collected proceeds amounts would be determined without regard to whether such proceeds are available to the Secretary. 

This is the latest step by Senator Grassley to ensure that the IRS Whistleblower Program is administered as he intended when he initially drafted and stewarded the 2006 amendments to section 7623 through Congress.  Senator Grassley has consistently stated that this has been his understanding of the term and the intent of Congress in enacting the amendments to section 7623(b).  In fact, Senator Grassley has gone so far as to file an amicus brief in the appeal of Whistleblower 21276-13W v. Commissioner, in which he makes the case that at the time of the 2006 amendments the term collected proceeds was used broadly and the IRS had been interpreting the base on which it could pay award broadly and the amendments sought to further broaden the amounts on which an award could be paid, not restrict the payments.

The mark up made it out of committee, but there is not guarantee that the Senate will pass the bill, as written or at all.  Then it will have to go to conference due to differences with the version from the House.  So stay tuned because there is a LONG way to go before the law actually changes.  

donald-trump-gop.jpgThe IRS announced that whistleblower awards paid under section 7623 on or after October 1, 2017 and on or before September 30, 2018, will continue to be reduced by the “sequestration reduction rate”, which has now been lowered slightly to 6.6 percent.  The 6.6 percent fiscal 2018 sequestration reduction rate represents a .3 percent decrease from fiscal 2017’s 6.9 percent.  The sequestration reduction will unfortunately continue to be applied to whistleblower payments unless and until a law is enacted that cancels or changes the sequester or a court decides that it is improper. 

The IRS and OMB have taken the position that whistleblower award payments are subject to the sequestration reductions required by the Balanced Budget and Emergency Deficit Control Act (“Budget Control Act”).  We have asserted that reducing awards under section 7623(b) is contrary to the letter of the law and also makes little if any fiscal sense as awards are paid from collected proceeds.  The IRS believes that reducing whistleblower awards is part of spending caps that are imposed on defense and non-defense spending by the Budget Control Act.  If those caps are exceeded, spending is cut across-the-board, a consequence that neither Republicans nor Democrats want. 

This is a year that we could see some meaningful change in or even elimination of the sequester because President Trump has called for substantial increases in military spending in his budget request.  The House and the Senate passed their respective versions of the annual National Defense Authorization Act (“NDAA”) which authorizes budget appropriations for the Department of Defense.  Both houses passed bills that exceed the President’s budget request and smash through the statutory caps on defense spending established by the Budget Control Act.  Breaking these statutory caps triggers the across the board cuts commonly referred to as “sequestration.”  Congress must either raise the spending caps or eliminate sequestration altogether to avoid the cuts that are despised by both parties.

In fact, Senator Tom Cotton (R-AK) attempted to repeal the sequester spending cuts for both defense and non-defense discretionary spending back in September but his amendment to the 2018 NDAA failed to receive votes and eventually died due to a lack of quorum.  Democrats are taking the position that they didn’t support Cotton’s amendment because it only applied to discretionary spending and would not have repealed the automatic sequester of mandatory spending.

In early September the House and Senate voted on a continuing resolution which funds the federal government through December 8, 2017.  As with years passed, we are likely to see increased political maneuvering between the parties as December approaches and the Senate and House budgets are reconciled.  We are watching this year very closely with the hope that reduction of whistleblower awards becomes a thing of the past.  We further understand that there are docketed cases in the U.S. Tax Court that are challenging the legality of the sequestration reductions to whistleblower award, but these cases have not been resolved yet.  Stay tuned.

There seems to be as many ways to cheat on your taxes as there are taxes.  State sales and use taxes are no different.  Some may not realize it but sales and use taxes are two different taxes.  Sales tax is usually collected by the seller at the time you buy an item and most of us have seen this on everything from car purchases to restaurant bills (even residents of the five states without a sales tax have likely left their little tax havens and paid sales tax somewhere else).  Use tax is the backstop when sales tax was not charged.  Bought a new mixer online and had it shipped to your house without a sales tax being collected; congratulations, you probably owe your state use tax.  Has anyone ever actually filed a use tax return declaring their legally owed taxes?  You are probably not surprised to learn the answer is very very few. 

We focus primarily on Federal taxes with submissions to the IRS Whistleblower Office, but there are some possibilities of a whistleblower getting paid for rooting out state tax issues.  Currently, Florida and New York have programs that we work with to report state tax issues.  Florida’s program is similar to the IRS program in that you report the information and they take it from there.  Florida pays a 10% award.  New York amended its False Claims Act in 2010 to add taxes to the list.  There you actually sue the taxpayer on behalf of New York.  It is a lot of work, and a wild ride but the end “Relator Share” that you receive could be up to 30%.

We have dealt with several state tax issues (and even received awards!) but the circumstances must be right to make them worth pursuing.  First and foremost, you need a lot of avoided tax.  While the top Federal income tax rate is 39.6%, Florida has a sales and use tax rate of 6% and New York 4% (8.875% for sales and use in New York City).  It takes some pretty big ticket items to add up to a worthwhile award in a use tax case.  For example, to get a million dollar award from Florida, they would need to find an underreporting of around $170 million dollars’ worth of stuff (170,000,000 x .06 x .1 = 1,020,000 for those playing along at home).  That’s a lot of blenders. 

From where does that level of use tax violation come?  Usually it comes from things that don’t need license plates or captains, like art and jewelry (cars, planes, and boats are almost always registered making avoiding sales and use tax slightly more complicated).  I was reminded of this in today’s Wall Street Journal.  Daniel Grant wrote an interesting piece entitled, “Art Collectors, Pay Your Taxes.”  The article discusses states, particularly California and New York, cracking down on sales or use taxes.  Often, purveyors of art are more than happy to accommodate requests of buyers that help them avoid sales tax, tacitly knowing the use tax will never be paid.  Insiders with quality information about large-scale art or jewelry purchases may do well to consult with a tax whistleblower lawyer to see if their information is actionable.

On July 28, 2017, the Tax Court denied the April 14, 2016 Joint Motion to Remand the case to the IRS Whistleblower Office.  In the joint motion, the parties represented that the IRS Whistleblower Office had reconsidered its determination.  The Tax Court previously issued an order for the parties to file a status report by October 19, 2016, to report the efforts to resolve the case and held the joint motion in abeyance.  A similar order was issued on October 25, 2016, for the parties to file a status report on or before April 25, 2017.  On April 11, 2017, respondent filed a status report indicating that the IRS Whistleblower Office is prepared to make a revised determination regarding petitioner’s claim and asked the Court to grant the Motion to Remand.  On April 20, 2017, petitioner advised the Court that he believes that remand is unnecessary and would needlessly delay the case. 

The Court walks through an interesting discussion about when remand would be appropriate.  Ultimately, the Court follows what it has previously done in cases where the IRS reopens a claim or reexamines its determination, stating:

We see no reason why remand is required to enable to Office to issue a new final determination letter.  Alternatively, if the parties have resolved all issues in this case to their mutual satisfaction, they may employ this Court’s standard procedures for bringing this case to an end.  This order does not foreclose the possibility of remand, should we determine that we may properly order one, in a future whistleblower case where a remand would serve a useful purpose.

This resolution follows Whistleblower 21276-13W v. Commissioner of Internal Revenue, wherein the Court retained jurisdiction of the claim and required the parties to file status reports while the parties to resolve the case and allow the IRS Whistleblower Office to review, investigate, and evaluate the merits of those whistleblowers’ claim. 

We believe that allowing the parties to work to resolve the case this way is similar to allowing taxpayers, who have not already gone to Appeals, to go to Appeals after filing a petition with the Tax Court.  Ultimately, this allows the parties to find a resolution while preventing whistleblower cases from being unnecessarily delayed.  

The United States Tax Court held in Smith v. Commissioner of Internal Revenue that the threshold limitation found in section 7623(b)(5) have “clear meaning” and were intended to limit the nondiscretionary award regime to larger cases.  The Court explained:

Subsection (b)(5) is intended to make the nondiscretionary award program of subsection (b)(1) and (2) applicable to larger cases.  Those where the “amounts in dispute” between the taxpayer and the Commissioner exceed $2 million.  Once that threshold is met, then subsection (b)(1) and (2) would apply and award percentages are to be made on the standards of those subsections.

In Smith, the petitioner’s whistleblower claim regarding barter and gift transactions caused the IRS to examine those and related issues for the taxpayer, resulting in almost $20 million in collected tax revenue.  However, the IRS only found that $1.8 million were directly attributable to the whistleblower’s information and an additional $2 million had no direct relationship to the whistleblower’s information.  The IRS made a determination under 7623(a) and applied an award percentage of 10 percent to the $1.8 million that was directly connected to the whistleblower’s information and 1 percent to the $2 million that was not directly connected to the whistleblower’s information.  The whistleblower sought review in by the Tax Court and the parties filed cross-motions for summary judgement.  The Court granted in part the petitioner’s motion for summary judgement.  The Court noted the other issues raised by petitioner in their motion for summary judgement; however, the Court stated that these issues are moot until there is an award determination under section 7623(b).

Also of note were two other cases Lippolis v. Commissioner of Internal Revenue (Lippolis 2) and Gonzalez v. Commissioner of Internal Revenue.  Both of these cases involved the IRS’s motion for summary judgement based on an affirmative defense that the amount in dispute was less than $2 million in each of these cases.  In both of these cases, the Tax Court denied the IRS’s motion because they had failed to establish the facts necessary to prove the affirmative defense.  In Lippolis 2, the Tax Court stated:

Facts alleged in respondent’s motion do not preclude the existence of other records showing that the amount in dispute exceeded $2 million.  Thus, respondent has not established that facts are not in dispute which are necessary to show that respondent is entitled to judgement as a matter of law on the point that the disputed amount does not exceed $2 million.

In Gonzalez, the Tax Court stated that:

Absent an affidavit or a declaration from an appropriate IRS representative stating that a diligent and comprehensive search of IRS records had been conducted, all appropriate personnel have been contacted, and there is no record that the IRS has asserted an underpayment of tax or made any effort to assess or collect tax in excess of $2 million from the taxpayers identified in petitioner’s claims or any taxpayers related to those taxpayers, respondent has failed to show that there is no dispute as to a material fact and that a decision may be rendered in his favor as a matter of law.

These cases illustrate the Tax Court’s continued push against the IRS’ attempts to limit the Tax Court’s review of its decisions and that the Tax Court will require litigants to prove every element of their case

Today the Tax Court issued an opinion, Whistleblower 4496-15W v. Commissioner of Internal Revenue, granting the IRS’s motion for summary judgement.  In this case, the informant had received a preliminary award determination for an award of $2,954,933.  Congratulation to the informant in this case on the receipt of an award.  The award was computed as follows in the Summary Report, which is attached to the Preliminary Award Determination letter:

  1. Tax, Penalties, interest, and other amounts collected based on information provided by Whistleblower: $14,489,227
  2. Recommended Award Percentage: 22%
  3. Collected proceeds (Line 1) x recommended award percent (Line 2): $3,187,630
  4. Budget Control Act reduction (Line 3 amount x 7.3 percent): $232,697
  5. Award after Budget Control Act Reduction (Line 3 less Line 4): $2,954,933

The informant in this case ultimately chose to accept the award amount in the preliminary award recommendation by checking the box captioned:

I agree with the preliminary award recommendation and accept it as the award determination.  I waive all of my administrative and judicial appeal rights with respect to the award determination, including my right to petition the United States Tax Court.

The petitioner made this choice after his counsel consulted with the IRS for options of receiving the award but keeping the option to appeal just the Budget Control Act Reduction (more commonly referred to as the “sequester cut”).  The IRS Whistleblower Office processed the paperwork and sent the informant a check for $2,135,826 ($2,954,933 – $819,107 of withheld taxes).  Within 30 days of receiving the check the informant filed a petition with the Tax Court.

The IRS filed a motion to dismiss for lack of jurisdiction, which the Court found that it had because the petition was timely filed within 30 days of the IRS making an award determination in this case.  The motion also urged the Court to dismiss because the petitioner had agreed to waive their right to appeal the award when they accepted the preliminary award recommendation.  The Court treated the acceptance of the preliminary award recommendation as a settlement where the right to further administrative or judicial appeal has been waived.  The Court pointed to the fact that the informant could have elected not to accept the award and when a final award determination was made by the IRS Whistleblower Office, they could have appealed to the Tax Court then.  However, this would have delayed the receipt of the award.