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

  • FCA Aficionado

    I’d like to leave a comment here regarding the IRS’ decision to appeal a landmark tax court ruling to the USCA. Unfortunately this development was not covered in the earlier blog posts.

    The issue is briefly summarized in the following text but it suffices to say, the position of the IRS management and counsel leads to an absurd counter-productive policy result (as do. so many of the policy positions and legal interpretations of the IRS’s WBO and counsel In almost all things 7623.

    I am a perfect case in point.

    I have easily actionable information on various tax and financial crimes, between major multinational corporations and financial institutions, that in bringing forward will at worst put me in personal jeopardy and at best end my career.

    Given my young age and good state of health, why would I risk either for the honor of being shafted by the IRS who are hostile and stingy.

    IANAL but I’ve done my research and have seen the serial abuse & shafting of 276/7 (211, the ludicrously low %-multiplier*, the denial of Title 18&31 rewards, the request for reconsideration, now the USCA appellate action) not to mention numerous other WB’s.
    * If 276/7 can’t achieve 30%, who can? The multiplier needs to start at 30%, and only decrease for willful non-cooperative misdeeds on the part of the WB.

    As long as the 7623 allows the IRS WBO & CCO to have discretion regarding 7623(b) discretionary investigation , %-contribution, reward %-multipliers, USC 26 vs 18/31 collected funds, as well as further suckering WB’s by clawing back reward monies through the 7.6% sequester reduction and 30% tax hit, many folks are not going to come forward.

    If the purpose of enforcement is to ensure honest voluntary compliance, so that the tax gap (= taxes expected – actual receipts) is as small as possible, fat reward payouts will both attract the greatest number of WBs and drive down non-compliance in the short term, and continued fat reward payouts will ensure that potential crooks see the risk as too great for the reward.

    Unfortunately, Sen Grassley seems to have run out of gas after picking the lowest of the low hanging fruit. With serious repair of 7623 as outlined herein, Grassley could easily shake the tree to get the majority fruit to fall into his basket.

    P.s. To undo some of their damage by neglect and non-expeditious remediation of the flaws in 7623 that allow IRS intransigence and abuse, Sen’s Grassley & Wyden should revisit their IRS WB retaliation bill and design the SOL to toll until the WB files their 211 (i.e. SOL in the case of fraud is open-ended, and the SOL for the retaliation suit should run from the filing.)

  • Disappointed Whistleblower

    Its much worse than as you describe. If there is a large case they just use the information and find an excuse not to pay. They only will pay a few smaller awards to keep people hopeful and Congress happy.

  • Linda Williams

    We’ve had roughly 27 28 payouts under the new legislation in the last 10 years.

    In contrast, literally 10, 000’s of perfectly good submissions rejected by the IRS.

    All the relevant stakeholders, including Senator Grassley have just given up trying to make the broken IRS Whistleblower Program work. Journalists can’t even be bothered to write articles about it anymore.

    Can anyone tell what future has the IRS Whistleblower Program got if any!?!?

  • FCA Aficionado

    Are those figures correct Linda?

    As much as I think the WBO, IRS, Sen Grassley and Congress are deserving of scorn for their various roles in the institutional shambolic operation that are the IRS’ implementation of 7623, I’m surprised at the low reward figures you cite. If true, things are much worse than I realized.

    As to the magnitude submissions, I seem to recall there was a backlog of 12-15k cases around the time Mr Whitlock was shunted over to OPR. Instead of the WBO being where submissions went into purgatory with him, I fear many of the stalled earlier submissions were “cured” by raising the criteria for investigation and audit so high, and adjusting rejection technical grounds in such a way, that the giant log jam of submissions could be cleared without dedicating additional resources at either the WBO or business unit level. I can’t prove this assertion but there seems no other reasonable way the WBO, under Mr Martin, could have cured Whitlock’s blockage so rapidly.

    As for a future, that is hard to say. At minimum, it would seem that a new patron in Congress is necessary as Sen Grassley seems to be milking the results of his various contributions without really considering how trifling small they really are when adjusted for an avg $/yr basis. While he is entitled to make political hay by cloaking himself in the results of the various programs, if he was truly engaged anymore, he would be trying to bring programs to the next level above the low hanging fruit that they seem to be in.

    I am firmly convinced this is possible, but it would take raising awareness in the media, Congress, amongst potential whistleblowers and from the plaintiffs bar. As for 7623, I’ve written long lists of actions that could support the ultimate tax policy goals of maximized voluntary compliance and minimized tax crime, and this can only be achieved by bringing in more and higher quality WB’s and bigger recoveries. In general and in short, it has to do with increasing rewards in the short term, so that it becomes clear to potential crooks that the risk of non compliance is too high.

    But where to start?

  • FCA Aficionado


    USTC Opinion today reflects contention and potential evidence that IRS is taking tips and using them to let criminal tax cheats get off easy, thus reducing reward amounts to the WB. Multiple travesties!

    Unless and until 7623 is changed, as per my suggestions, to require full and maximum prosecution of those fingered by a WB and then a discretionless maximum reward requirement, we will have the same duplicitous incompetence from the Commissioner’s office, same abuse out of Ogden and the DC WBO as well as DC GLS.

    Good EB’s will not risk their careers and necks by coming forward and the IRS will waste resources and minimize recoveries by going after targets without the assistance of WB aiming.