Today the Tax Court released its opinion in Whistleblower 22716-13W v. Commissioner, holding that FBAR civil penalties are not “additional amounts” within the meaning of section 7623(b)(5)(B), and they are not “assessed, collected, … [or] paid in the same manner as taxes”; therefore, FBAR payments must be excluded in determining whether the $2,000,000 “amount in dispute requirement” has been satisfied. 

This case appears to be the continuation of the saga of Whistleblower 22231-12W, whose petition to the Tax Court was dismissed for lack of jurisdiction because the IRS had not yet made a determination regarding his case.  However, on September 6, 2013, the IRS Whistleblower Office issued a final determination letter informing the whistleblower that his claim relating to Taxpayer 1 had been denied.  The letter stated that the claim had been denied because (1) the Government had obtained complete information about Taxpayer 1’s offshore accounts directly from the Swiss bank, without any assistance from petitioner; and (2) petitioner in any event could not qualify for a nondiscretionary award because his claim did not meet the $2,000,000 threshold in section 7623(b)(5)(B).  Petitioner petitioned the Tax Court for review of this determination.   Respondent moved for summary judgment on the basis of petitioner’s alleged failure to satisfy section 7623(b)(5)(B).

Judge Lauber’s opinion in this case gives a history of the Bank Secrecy Act, and FBAR penalties, and how enforcement of the Bank Secrecy Act came to be delegated to the IRS.  From there the case moves on to an analysis of the language of section 7623(b)(5)(B), and specifically the meaning of “additional amounts.”  The opinion traces the meaning of “additional amounts” throughout the Internal Revenue Code and how the Tax Court has interpreted this phrase in the past.  The Court also looked to Williams v. Commissioner, where the Court ruled that FBAR penalties were not additional amounts for purposes of determining Tax Court jurisdiction to hear deficiency and CDP cases.  Judge Lauber concludes that “additional amounts” as used in section 7623(b)(5)(B) means civil penalties set forth in chapter 68, subchapter A, and FBAR penalties are not among the tax penalties enumerated in that portion of the code.

It is interesting that the Court has taken the time to differentiate “additional amounts” in collected proceeds from the “additional amounts” in the monetary threshold.  We look forward to additional opinions weighing in on the definition of collected proceeds.  Even if FBAR penalties are ultimately found to be part of collected proceeds, whistleblowers will need to reach the $2,000,000 threshold of section 7623(b)(5)(B) based on tax, penalties, interest, additions to tax, and additional amounts.  Judge Lauber ended the opinion noting that the petitioner may be correct that section 7623 would offer stronger incentives to whistleblowers if FBAR civil penalties were treated like tax liabilities for purposes of deterring eligibility for nondiscretionary awards under section 7623(b)(5)(B), and might more effectively advance the objectives that Congress envisioned for it.  “But if this is a gap in the statute, it is a gap that only Congress, and not this Court, can fill.”

  • Linda Williams

    The judgement above is yet another reason why those individuals thinking of making a 7623(b) submission and who are resident and domiciled outside the US should not get involved in the IRS Whistleblower Program. Particularly those working in offshore banks and investment companies.

    As per the GAO Congressional Report into the IRS Whistleblower Program a backlog of some 2000 rejection letters having been mailed out during the last 5 months. Many of those submissions had been waiting in the program since the beginning. Some 9 years.

    I suspect its why this blog has been so short on posts from many of the regulars of the last 3-4 years.

  • FCA Aficionado

    Hi Linda,

    Glad to see your commentary; it’s been lonely here (also missing Bubba Shawn, MyHeadHurtz, and the rest of the commentariat both domestic and foreign.)

    As a resident in an overseas financial center, I can tell you that I have refrained from dropping my several 211’s due to the gap cited by Judge Lauber and other defects in the statute, regulations, policy, culture and competence surrounding all things 7623(b). The manifold risks are just not worth the minimized payoffs.

    I guess I’ll post a small rehash of my usual pleas for improvement.

    Despite chatter related to the last WBO report to Congress (much improved but still not very meaty or first drawer), I can’t disagree more with the concept that the Service is truly embracing WB’s. Even booting the ineffectual fake-WB-advocate Whitlock and replacing him with the reportedly process and result is oriented Lee Martin (impressive resume) is not enough to comfort and incentivize current and potential future WBs. Replace Dir. Martin’s Legal Counsel with an individual biased toward incentivizing WB’s rather than promoting and defending decisions that minimize WB reward payouts.

    It is painful to see Sen. Grassley’s failure to care for and reform the 7623(b) crop he planted; it is dying in the field due to his neglect. He crows about how much 7623 returns, but if he listened to this County Agent, he could vastly increase his yield rate to Blue Ribbon proportions.

    7623(b)* needs to be fertilized and weeded by:
    1. Requiring the IRS to investigate all claims;
    2. Eliminating the IRS’ discretion in rewards by making 30% the starting point with only reasonable deductions for bad acting in the part of a WB;
    3. Specifying that regardless of title (26, 18, 31, etc.) all government (not only IRS) recoveries accruing to WB input are part of the reward calculation (I.e. in the event IRS provides WB info to DOJ for FCA prosecution);
    3a. In title 31, exempt WB reward portion from being deposited into Victims of Crime Fund;
    4. Eliminating sequester penalty and tax obligation on WB rewards (many modest WB’s are scared off by a unpalatable risk v reward relationship);
    5. Enact anti-retaliation provision as seen in FCA but with unlimited SOL for fraud related retaliation. Consider allowing IRS to collect this directly or on behalf of NLRB.
    6. Incentivize the IRS to devote best resources to prosecuting recoveries based on WB tips by allowing IRS to keep a portion of recoveries as an offset for budget cuts.
    7. In the event that any of the current or past crop of WB submissions suffered due to any of the above defects, review and award those WB’s as if the legislative rectifications were active when 7623 came in to force in 2007. Allow plaintiffs or their heirs to refile in USTC for de novo review;
    8. Prominently display a WBO is Open for Business sign on IRS homepage.
    *7623(a) needs to be subject to all of the above except point 1.

    Only in this way will faraway flowers bloom and grow what should be harvested from those that dare to cheat honest citizens by denying what is owed to the public fisc.

  • Disappointed Whistleblower

    My case is in litigation so I have been limiting my comments. I will say that “6. Incentivize the IRS to devote best resources to prosecuting recoveries based on WB tips by allowing IRS to keep a portion of recoveries as an offset for budget cuts” would change everything and would be a brilliant idea. Right now you have people at the IRS making 30k that are very resentful of Whistleblowers and will do everything in their power to make it look like they already knew about the information or find some other excuse not to pay. This incentive would remove the conflict and would become a win/win.

  • Wbadvocate

    Does anyone know of any efforts currently being made to change this law?