Administration of Whistleblower Claims

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.  

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.

In the tax practitioner version of “Were I King,” nearly every one of us has had that moment where we smack our head at something the IRS does or does not do and think, “the IRS should just ….”  It is a form of armchair quarterbacking that is easy to do because the IRS, frankly, has a lot to improve upon.  We represent IRS Whistleblowers who provide high-quality information to the IRS about the underpayment of tax.  A lot of IRS Whistleblowers – we had nearly a quarter of all 7623(b) awards last year.  There are many things I would like to see the IRS do differently but when it comes to protecting the existence and identity of an IRS Whistleblower, I wouldn’t change a goddamn thing.  My apologies for the profanity but I felt it necessary to convey the shock, and gratitude, I have for the IRS’s protection of tax whistleblowers.

The IRS Office of Chief Counsel just released CC-2017-005, Approval Procedures for Identifying Whistleblowers.  The Notice provides a formal procedure for Chief Counsel Attorneys seeking approval to reveal the existence or identity of a whistleblower.  Not to bore you with the minute details but I will share the people that must sign-off: 1.) Counsel must find out if the whistleblower agrees; 2.) then Division Counsel must approve; 3.) Division Counsel will seek approval from IRS-CI Director of Operations; 4.) then the Director of the Whistleblower Office must approve; and 5.) Deputy Chief Counsel (Operations) must approve.

This Notice formalizes what has always been a very strict non-disclosure policy protecting IRS Whistleblowers.  Rarely is an IRS Whistleblower needed as a witness.  We have had it happen.  In a case where the target taxpayer was challenging the underpayment in Tax Court, IRS Counsel deemed the IRS Whistleblower essential to the case.  In writing, Counsel, informed us that the IRS was willing to drop the case if our client did not want to be identified as an IRS Whistleblower.  That level of dedication to the people helping you is nothing short of heroic in my book.  Our client agreed to testify, approval was received, and the case immediately settled.  Our client received a hefty award and left with the feeling that the IRS truly valued the client as a partner in the process.

CC-2017-005 is another step in the right direction by the IRS when it comes to protecting IRS Whistleblowers.  If you have information about the underpayment of tax and want to learn more about how the IRS formally, and informally, protects your identity contact us at 1-800-275-3332 or visit www.tax-whistleblower.com today.

Trump/Mnuchin

In our experience the IRS is a peculiarly apolitical organization – despite the Lerner email scandal and the targeting of conservative groups for noncompliant tax exempt status claims, almost every position in the IRS is not motivated by or responsive to political considerations – but when we have a change of administration it means we have a new political people in the top tier at the Treasury Department, which runs the IRS.   Yesterday the new administration’s appointee as Treasury Secretary Steven Mnuchin was confirmed by the Senate, so the question you may all be asking is: as current or prospective whistleblowers, what does that mean to us?

Senator Grassley had the opportunity to question the nominee about his thoughts on the Program, and here is what he just said about Mnuchin:

As the author of the provisions improving the incentives for whistleblowers to come forward about large dollar tax fraud, I was glad to receive a commitment from Mr. Mnuchin in support of a strong IRS whistleblower function.   Whistleblowers have helped the IRS recover $3.4 billion that otherwise would have been lost to fraud.  Cracking down on big dollar tax fraud is a matter of fairness to the vast majority of taxpayers who pay what they owe.  The IRS has made progress in working with whistleblowers, but there’s more work to be done.

Previously Grassley said this about the nominee after his Finance Committee nomination hearing: “Mr. Mnuchin gave his assurance that he’ll work with me if confirmed to support tax fraud whistleblowers.” It is a positive sign to whistleblowers that we have such a show of commitment by the incoming administration.  This statute isn’t going to be eliminated, and if anything whistleblowers can expect to see the statute strengthened in the coming years with cooperation by Treasury leadership.

“Support” from the new administration has to be tangible and results oriented to have any meaning.  Words are not enough.  For starters, the leaders at Treasury needs to work with and instruct their attorneys in the office of Chief Counsel to not take legal positions which damage the legitimacy of the Program.  For example, not resisting whistleblowers discovery requests for information from the taxpayer’s administrative file which would show how their information was used beyond what happened to the in the Whistleblower Office’s file; not limiting collected proceeds to be only those monies collected under Title 26 despite rulings by the Tax Court opinions to the contrary; and reconsidering sequestration on awards.  Most importantly the new Treasury leadership should through proper channels instruct IRS operational personnel take a long hard look at allegations of tax underpayments and fraud reported by whistleblowers and treat these losses to the government as the serious threat that they are.  Such claims of large scale malfeasance should not to be taken lightly and dismissed without proper due diligence.  Just because there is a serious limitation on resources at the IRS it does not mean that it is smart or proper to do less with whistleblower claims, to the contrary the data showing the higher return on agent time used in whistleblower cases suggests that the IRS should spend more time prosecuting whistleblower claims because they are one of the most efficient ways to use those precious resources.  Finally, “support” by the new administration is best shown by one thing: putting their money where their mouth is by timely paying awards to whistleblowers.

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.”

It is a rare that one can say that something exciting for tax whistleblowers has occurred with the proposed budget. However, today is that day. On March 25th, Senator Wicker submitted amendment S.AMDT.620, which is co-sponsored by Senator Grassley. According to Senator Wicker’s press release, “This amendment calls for the IRS to speed up the award process for those who come forward with information on tax evasion.”

The amendment was formally proposed today, March 27th, and agreed to in the Senate by unanimous consent. The Senate agreed to the budget resolution, with amendments, by a vote of 52 to 46 at 3:19 AM. We will be following the legislation as the budget process continues.

The language of the amendment reads:

SA 620. Mr. WICKER (for himself and Mr. Grassley) submitted an amendment intended to be proposed by him to the concurrent resolution S. Con. Res. 11, setting forth the congressional budget for the United States Government for fiscal year 2016 and setting forth the appropriate budgetary levels for fiscal years 2017 through 2025; which was ordered to lie on the table; as follows:

At the appropriate place, insert the following:

SEC. ___. DEFICIT-NEUTRAL RESERVE FUND TO EXPEDITE AWARDS UNDER THE INTERNAL REVENUE SERVICE WHISTLEBLOWER PROGRAM.

The Chairman of the Committee on the Budget of the Senate may revise the allocations of a committee or committees, aggregates, and other appropriate levels in this resolution for one or more bills, joint resolutions, amendments, amendments between the Houses, motions, or conference reports relating to the processing of award submissions, which may include the Internal Revenue Service whistleblower program, by the amounts provided in such legislation for that purpose, provided that such legislation would not increase the deficit over either the period of the total of fiscal years 2016 through 2020 or the period of the total of fiscal years 2016 through 2025. 

The IRS Whistleblower Program took center-stage again, this time at the Federal Bar Association Section on Taxation’s 2015 Law Conference in Washington, DC.  Scott led the lively panel discussion about the IRS Whistleblower Program with Kevin Gillin, Special Counsel in IRS Office of Chief Counsel (Small Business/Self-Employed); Robert Wearing, Branch Chief in IRS Office of Chief Counsel (Procedure & Administration); and George Clarke, Partner at Baker & McKenzie, LLP.  The panel covered recent program and litigation updates, and touched on confidentiality concerns. 

The update on the administrative program covered the Treasury Regulations that were finalized last August and the various audits and inquiries of the program.  Of great interest was the preview of the yet-to-be-released 2014 IRS Whistleblower Office report to Congress by Mr. Gillin:

On a general level, in terms of the number of submissions, the number of claims that result from those submissions, and the amounts that have been paid are going to be similar … to the 2013 report.

This is consistent with Director Whitlock’s statements at the Denver meeting of the ABA Section of Taxation in September, where he said that award payouts in Fiscal Year 2015 will be larger than the payouts in Fiscal Year 2014.  Scott noted that he believes that the number of submissions that are technically sound and do not face limitations on collection or evidentiary issues have remained steady as well, even though these numbers are not reported. 

The litigation updates provided a capsule review of the opinions of the Tax Court to date.  Mr. Wearing noted that the United States Tax Court has been “very methodical” and that “we see the court moving toward standard of review … we’re not really at the point of substantive fights over the meaning of terms in [section] 7623 or whether the award was an appropriate amount.”

A consequence of several years of budget cuts at the IRS is a decline in their enforcement efforts.  The Wall Street Journal has recently run several stories detailing these statistics, noting new data that shows an overall decline in IRS audit rates for individuals as well as a decline in the number of large corporate tax audits.   The context for all the press releases and news stories on this topic is the current debate on Capitol Hill regarding the future budget of the IRS.  Commissioner Koskinen has been asking for a budget that at least brings the IRS back to where it was in 2010.

 

Where does this leave prospective whistleblowers?  There is no doubt that a climate of reduced IRS enforcement leads to a lack of accurate self-reporting and more aggressive tax return positions being taken by individuals and even by large corporations, even in a post SarBox world.  While this means that there will be even more fodder for potential whistleblowers to blow the whistle on, it also means that the IRS has less resources to pursue claims.  In such a case, we believe it is more important than ever before that your submission to the IRS be concise, that your allegations be factually and legally accurate, and most of all your submission must compel the IRS to act.  The IRS considers itself fully busy, especially now, and your submission must convince them that it is worth acting on instead of doing something else.   That’s a tough challenge to face when considering making an IRS whistleblower submission… but we like challenges.

The IRS released two documents today on their website, Commissioner Koskinen Statement regarding Whistleblower Program and Deputy Commissioner for Service and Enforcement Memorandum.  

The Commissioner’s statement reaffirmed his commitment and support of the IRS Whistleblower Program.  The Commissioner says that he is “committed to expanding the program’s reach and improving communications with existing and potential whistleblowers.”  I sincerely hope that he follows through with this commitment in real and concrete ways.  One way that the Commissioner could improve the program would be to give whistleblower cases priority for audit.  In making cases where a whistleblower has provided information to the IRS a priority for audit will ensure that more of the information provided by whistleblowers is used by the IRS, which will in turn lead to more collected proceeds and more awards.  After all the way to promote the IRS Whistleblower Program is to pay awards. 

The Commissioner went on to mention that to the extent that statutory changes are necessary to improve the program, he intends to work with Congress to ensure that the changes are enacted.  While the Final Regulations highlighted a number of places where statutory changes could improve the way section 7623 is implemented, the most pressing statutory change should be the addition of anti-retaliation provisions in the statute.  The addition of anti-retaliation provisions would bring section 7623 in line with the other Federal whistleblower provisions. 

The Deputy Commissioner for Service and Enforcement Memorandum is largely an update of the Steven Miller Memorandum, published on June 20, 2012.  The update of this memorandum after two years was necessary.  The memorandum outlines highlights some of the administrative changes that have been implemented in the last two years and incorporates some of the preamble of the final regulations.  These changes do not always make their way into other guidance, so it is nice to have this memorandum updated to reflect the current operations of the IRS Whistleblower Program.  The Memorandum also reaffirms the guidelines how long certain parts of the administrative process should take and adds:

The Office of Chief Counsel has established controls and reporting requirements for its risk analysis opinions.  BPR reports should include data on cases for which a risk analysis has been requested but not received for more than 30 days.  Chief Counsel has concurred in making this area a priority. 

The inclusion of the new guideline should ensure that the Office of Chief Counsel is making its determinations is a timely manner to ensure that the information can be passed along to the field before the information becomes stale. 

While these two documents will not have as large of an impact in shaping the IRS Whistleblower Program as the Regulations will, these documents do show that the IRS is committed to improving the IRS Whistleblower Program.

The IRS has finally released the Final Treasury Regulations that we have all been waiting for. While, there were not as many in the Final Regulations as we would have liked to have seen; the changes that were made were important ones. Some of the pros and cons of the Final Regulations are:

Pros:

Change in the definition of “Proceeds based on.” The final definition is more inclusive and removes the word “only” that had been read in. The new definition provides examples of when the IRS proceeds based on, but does not limit when the IRS will have proceeded based on.

Change in the definition of “Collected Proceeds.” Now includes amounts on amended returns that are filed after the IRS proceeds with and administrative or judicial action based on a whistleblower’s information. The IRS will continue to monitor the taxpayer’s tax account for additional collected proceeds in cases where this is a possibility. This will allow for whistleblower to collect on tax assets that are reduced based on their information, but have not yet lead to additional payments at the time the WBO makes a final determination of tax. There is a downside to this change, the WBO will also monitor timing issues in future years to determine if there are offsetting reductions to collected proceeds.

There is now an administrative review process for the rejection or denial of claims for awards under section 7623(b) that are rejected or denied. Administrative Procedures for denied/rejected claims:

1. WBO sends a preliminary rejection letter that states the basis for the rejection or denial of the claim.

2. Whistleblower has 30 days from the date that the letter was sent to respond with comments.

3. WBO will review the comments and either (a) provide written notification to the whistleblower of the rejection of the claim, including the basis fro rejection; or (b) go through the administrative review process provided for in paragraph (c)(1) through (6) of Treasury Regulation section 301.7623-3.

The administrative review is of the items in the administrative claim file that are not privileged, before it was limited to the “pertinent information.”

Cons:

The Final Treasury Regulations kept the fixed percentage award structure and still start the evaluation at the statutory minimum.

The Final Regulations failed to adopt the “principal architect” standard for planned and initiated. This remained section of the Final Regulations remained largely unchanged from the Proposed Regulations. However, using this test is functionally reinventing the wheel.

In the general rule for “Administrative Record,” the administrative record definition is still limited to the information that is relevant to the award determination. By limiting the administrative record to what the IRS deems to be relevant, whistleblower and their representatives will forever be fighting about what is relevant and what they are not being provided when there is concern that monies or circumstances are not being properly considered.

Collected Proceeds still does not include criminal fines or FBAR penalties.