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.  

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.

The ability to remain anonymous throughout the administrative and judicial whistleblower award determination an appeal processes has been a common theme in the concerns that we hear from clients and something that I spoke about on a panel at the ABA Section of Taxation Meeting in May of 2016.  This includes how to protect the whistleblower’s identity, the taxpayer’s information, and when a protective order is appropriate.  This is a very complex area, which should be discussed with your attorney as you weigh the decision to pursue litigation in the Tax Court.

The ability of a whistleblower to proceed anonymously in the Tax Court is a balance of the public’s interest in open courts and the interest of protecting the identity of confidential informants.  This balance has generally resulted in whistleblowers being able to proceed anonymously. 

The Tax Court yesterday released Whistleblower 12568-16W v Commissioner.  This opinion addresses a whistleblower’s ability to proceed anonymously (and for the taxpayer’s information to be redacted) where the whistleblower claims that the taxpayer committed tax fraud resulting in a $3 billion tax liability.  This opinion walked through the Tax Court’s jurisprudence on a whistleblower’s ability to proceed anonymously, focusing on the balance between protecting a confidential informant’s identity and the public’s interest in open court proceedings.  Judge Halpern points out in this opinion that this balance can shift as the case progresses, citing the explanatory notes that were included at the time the Tax Court adopted Rule 345.  The Court stated that:

since we do not know what turns this case may take, and given the extraordinary amounts of uncollected tax and penalty liabilities petitioner alleges, with the possibility that petitioner might receive a whistleblower award up to 30%of the proceeds the Commissioner collects (an award that might equal or exceed $1 billion), see sec. 7623(b)(1), we cannot say that, at some future time in this action, we may not revisit the balancing between alleged harm to petitioner and the societal interest in knowing petitioner’s identity and determine that anonymity is no longer justified.

This serves as a reminder that the balancing test is something that we need to continue to look at throughout the litigation process, because balancing a whistleblower’s anonymity and the public’s interest in the proceedings can shift from the Tax Court’s perspective as the case proceeds.  As always, consult your attorney for specifics about your case.

The IRS released the IRS Whistleblower Program Fiscal 2016 Annual Report to Congress recently. There were some interesting statistical revelations, some surprising and some not.  Among the more important, if not surprising, takeaways was the fact that nearly 60% of all cases are rejected for not being specific, credible, or for being too speculative.  Getting over this hurdle should be the number one goal of all IRS whistleblowers.  The best way to get over that hurdle is to have experienced tax lawyers working for you.  We have over a hundred billion dollars in active submissions to the IRS.  I have only seen one case where one of our submissions was initially rejected for being perceived as too speculative and we got the IRS to reconsider that position. 

A surprise from the 2016 report was that we represented nearly a quarter of all 7623(b) awards made by the IRS last year.  We are proud to be seeing success for our clients and happy to see the IRS recognizing the important contribution made by whistleblowers.

The IRS Whistleblower Office announced August 7th that they finally updated two sections of the Internal Revenue Manual (“IRM”), IRM 25.2.2, Information and Whistleblower Awards – Whistleblower Award and IRM 1.1.26, Organization and Staffing – Whistleblower Office.  The updates, which were made by the IRS “to reflect changes related to the issuance of the final regulations” that were implemented August 12, 2014, provide much more comprehensive guidance under the whistleblower program and largely track the language of the Treasury Regulations.  The good news for whistleblowers is now that the IRS has finished updating the IRM, they can now turn their attention back to making award determinations and processing awards.  We understand that several awards were delayed due to the IRS’s need to update their procedures to conform with the final regulations, but now that these have been issued, 7623(b) award determinations are again being processed. 

Some highlights of the changes made to the IRM are presented below and the new IRM can be reviewed here

The IRS’s announcement briefly summarized the changes made to IRM 25.2.2:

  •   Added additional overview of IRC 7623(a) and 7623(b)
  •   Added guidance for examining a whistleblower claim
  •   Added clarification of Form 11369 Requirements
  •  Added guidance on the Whistleblower Withholding Program

As mentioned, the changes made to the IRM largely came right out of the regulations.  For example, the IRS added IRM section, Definitions which is verbatim from Treas. Reg. § 301.7623-2 and even includes the same exact examples.  Similarly, IRM, formerly titled Submission of Information for Award under Sections 7623(a) and (b) was retitled Eligibility for Award and is exactly the same as the language under Treas. Reg. § 301.7623-1.

IRM, formerly titled Grounds for Not Processing Claims for Award, was re-titled Examining a Whistleblower Claim.  That section now covers whistleblower indicators used for returns, how tainted or privileged information submitted by a whistleblower should be handled, debriefing the whistleblower, corroborating whistleblower information with independent information, the whistleblower claim file, prohibitions on sharing information with the whistleblower under section 6103, and procedures for transferring a whistleblower case to another group or area. 

It is notable that Form 11369 is now the title of IRM which was formerly titled Processing of the Form 211 7623(a) Claim for Award.  That section, which now includes three subsections, details how the Form 11369 is used and what is included in the Form 11369 package for examined claims, surveyed claims, and transferred claims.  The Form 211 processing information which was previously under that section was moved to IRM

The Whistleblower Withholding Program is now detailed in IRM which was formerly titled Appeal Rights under Section 7623(b).  The Appeal Rights section is unchanged from its previous form and is now under IRM

Also noteworthy was IRM formerly titled Funding Awards has been retitled Confidentiality of the Whistleblower.  That section covers the extent to which the IRS will protect the whistleblower’s identity as confidential.  It notes that in some rare circumstances where the whistleblower is an “essential witness in a judicial proceeding” it may not be possible to pursue investigation without revealing the whistleblower’s identity.  That section adds a note at the end that states “In all instances prior to any disclosure of a whistleblower’s identity, Counsel must be contacted.”

Finally, IRM 1.1.26, was updated to reflect the current structure of the Whistleblower Office, not because new personnel or positions were added.

The Tax Court released Whistleblower 21276-13W v. Commissioner of Internal Revenue, 144 T.C. No. 15 today.  While this decision is positive news for some whistleblowers, it is also a reminder of the importance of following best practices when filing a whistleblower case.

The facts of this case are interesting and a read of the full opinion is definitely worth the time, if you are so inclined.  This case arises from the rejection of Husband and Wife’s Forms 211.  Husband had provided information to Government agents, including IRS agents, that a foreign business, referred to as “Targeted Business,” was assisting United States taxpayers in evading Federal income taxes in order to reduce his punishment after Husband was arrested for taking part in a conspiracy to launder money.  Husband did not have the necessary documents, but he knew someone who did.  As the individual with the necessary documents was outside of the United States, Husband and Wife induced the individual to return to the United States.  Upon entering the United States, the individual was arrested.  While in custody, the individual agreed to assist in the Government proceeding against Target Business.  When the individual was released from custody and tried to back out of his agreement, Husband convinced him to follow through.  In part because of that individual’s assistance the Target Business was indicted, pleaded guilty, and ultimately paid the United States approximately $74 million.  However, the IRS Whistleblower Office rejected their Forms 211 because they were not received until after the payment was made by Target Business. 

The Court limited its opinion to whether petitioners are required, as a matter of law, to file Forms 211 with the Whistleblower Office before providing information to the IRS to qualify for an award under section 7623(b).  The Court held they do not.  The Court stated that the statutory text makes clear “that the Whistleblower Office is charged with being the central office for investigating the legitimacy of a whistleblower’s award claim, not necessarily the underlying tax issue.”  The Court looked to the Form 211 itself, which requests information about who the whistleblower first reported the violation to. 

While this case provides good news for whistleblowers who have provided or will provide information directly to the operating divisions of the IRS, we continue to believe that the best way to preserve your award eligibility and to ensure that the information provided to the IRS is given full and complete consideration while is to provide the IRS Whistleblower Office your information as early in the process as practicable, concurrently with an operating division if necessary, and to submit a Form 211 at that time.

Senator Ron Wyden, the current chairman of the Senate Finance Committee, and Senator Chuck Grassley, the former chairman, jointly wrote an article in Politico discussing an important issue to us, the prioritization of whistleblower claims by the IRS.  They said:

[W]e’ve been puzzled why the IRS often snubs whistleblowers who may provide invaluable evidence of wrongdoing, especially when the costs of inaction are only growing. Taxpayers who underpay what is legally owed are shifting the burden to others. And despite efforts by the IRS to narrow the tax gap, noncompliance looms large. IRS commissioners have routinely come to Congress asking for more money for the agency in the face of a $450 billion annual tax gap — the difference between taxes owed and taxes paid. So when Congress writes a legislative prescription to ramp up its whistleblower program, the IRS needs to prioritize programs to follow whistleblower leads.

This is the first time I’ve seen a specific call by Congress for the IRS to prioritize whistleblower claims when they select cases for enforcement action.  We couldn’t agree with these Senators more.  According to a June 2006 report by the Treasury Inspector General for Tax Administration (“TIGTA”), IRS examinations initiated based on whistleblower information are more effective and efficient than examinations initiated using the IRS’s primary method for selecting returns for examination.  It’s high time the IRS recognized this dollars & cents fact and used it to their advantage when deciding which non-compliant taxpayers they should go after.

October 1st 2014 marks the beginning of fiscal year 2015 and a new sequestration reduction rate for whistleblower awards.  According to an OMB Report on the reductions for fiscal year 2015, every award payment made to a whistleblower under section 7623 on or after October 1, 2014, and on or before September 30, 2015, will be reduced by the sequestration rate of 7.3 percent.  That reduction rate is up slightly from fiscal year 2014’s reduction rate of 7.2 percent.

It has been and continues to be the position of The Ferraro Law Firm that whistleblower awards should not be reduced by sequestration.  As a technical matter, the reduction of award amounts paid to whistleblowers is in direct conflict with the statutory language of section 7623(b) which unambiguously states that a whistleblower “shall” receive as an award “at least 15 percent” of the collected proceeds.  The sequestration reduction is illegally defying the language and intent of the statute.  As a practical matter, reducing the amount paid to whistleblowers makes zero sense.  The entire purpose of sequestration is to ensure that tax dollars are saved and the nation’s debt is reduced.  Because whistleblower awards are paid directly from collected proceeds; proceeds that in all likelihood would not have been collected absent the whistleblower’s information; these award payments do not have a negative effect on the nation’s debt.  The whistleblower is actually assisting the government in raising money, not causing government to spend money.  As a matter of equity, whistleblowers came forward in reliance on the 2006 law and trusted that the statute would apply to them as written. The fact that the sequestration reduction can arbitrarily impact awards relating to claims made by whistleblowers many years ago, to us, is a prohibited retroactive change in the law.

Unfortunately, the IRS will continue to apply the sequestration reduction rate unless and until a law is enacted by congress that cancels or otherwise impacts the sequester.  A bi-partisan budget agreement has not yet been reached by congress.  The government will be funded through a Continuing Resolution that was passed by the House and Senate which generally maintains current spending at fiscal 2014 levels until December 11, 2014.