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.    

Tax whistleblowing took center-stage at the American Bar Association Section of Taxation meeting in Denver last Friday.  I had the pleasure of participating in a round table discussion with fellow panelists, Holly Styles, Senior Counsel in the IRS Office of Associate Chief Counsel, and the Director of the IRS Whistleblower Office, Stephen Whitlock.  Among the topics that our panel discussed were the addition of the 31 new employees to the IRS Whistleblower Office and the implications of the final whistleblower regulations that were released on August 7th. 

Mr. Whitlock expressed that the addition of the new employees in the Whistleblower Office will help to pick up the pace of award payouts, echoing the comments made by IRS Commissioner John Koskinen last week.  Even more exciting for whistleblowers is that Mr. Whitlock stated that award payouts in fiscal year 2015 (beginning October 1, 2014) will be significantly larger than they were in fiscal year 2014.  Between the final regulations, the comments made by IRS Commissioner Koskinen, and the statements made by Director Whitlock, it has been a great couple months of news for tax whistleblowers. 

If there was ever a question whether IRS Commissioner, John Koskinen, believed in the IRS Whistleblower Program, that question was answered affirmatively in his remarks before the Taxpayers Against Fraud Education Fund.  At one point, Koskinen even referred to the information provided by whistleblowers as “a godsend.”  The remarks, given September 15th in Washington D.C., focused on IRS support of the whistleblower program and, of course, budget concerns.

Notably, Koskinen acknowledged concerns about the pace of whistleblower award payouts and said that he expects the pace of awards to pick up in the coming year.  To back up that prediction, Koskinen pointed to his decision to increase staffing for the whistleblower program by more than 70 percent even in the face of tight budget constraints.  Moreover, Koskinen said that the additional 31 employees will “help us continue implementing the 2006 law and working to increase the pace of award payouts.”  Added to this, Koskinen said that the delegation order issued in August, which allows smaller awards to be approved by a senior manager in the whistleblower office, should help pick up the pace of award payouts because everything doesn’t have to flow through to the Director’s office. 

Koskinen also praised the IRS Whistleblower Office and Director Steve Whitlock for paying out over $186 million in awards and collecting more than $1 billion based on whistleblower information over the last three fiscal years.  Professing his support for the program, Koskinen said:  

“By helping the IRS improve tax compliance, the whistleblower program also helps to ensure the integrity and fairness of our tax system.” 

He also noted that while being a whistleblower is not always supported in our society, “if people are cheating on their taxes, it is a public service to let us know.”

Understandably, Koskinen closed his remarks by voicing his concern over the decreased IRS budget he has to work with.  The House passed legislation that would reduce the IRS budget by more than $1 billion below 2014’s budget, forcing the IRS to make “extremely difficult choices on both services and enforcement.”  Specifically, Koskinen said that if the House’s budget were enacted, the IRS would face “a very serious shortfall in personnel, in taxpayer services, in enforcement, and in information technology.”  That shortfall makes the assistance of tax whistleblowers that much more important to successful enforcement actions. Tax Partner, Scott Knott’s comments on Comissioner Koskinen’s speech appear in a recent Tax Analysts article in which he emphasizes that whistleblower information is key to efficient IRS enforcement as supported by data in a TIGTA study


The United States Tax Court released an opinion today, Whistleblower 22231-12W v. Commissioner of Internal Revenue, which continues to piece together the bounds of the Tax Court’s jurisdiction.  The Tax Court held that the IRS Whistleblower Office could not have made a determination under section 7623(b)(1) until it has completed its review of all elements specified in that paragraph, which had not happened in this case at the time the petition was filed.

In this case, the petitioner submitted third claim for an award on August 23, 2011 relating to Taxpayer 1.  Taxpayer 1 agreed to pay a multimillion-dollar civil penalty for failing to report his foreign bank and financial accounts and a relatively small amount of restitution to the IRS reflecting the unpaid Federal income tax due on income earned from the Swiss bank accounts.  Petitioner filed a petition with the Tax Court on September 6, 2012, claiming that the IRS had made a de facto determination, even though petitioner’s claim was still open.  The IRS filed a motion to dismiss for lack of jurisdiction asserting that the IRS had not yet made a determination. 

In analyzing how section 7623(b)(4) applies to these facts, the Court noted that the labeling of the communication is not dispositive in determining if the communication is a determination.  The Court concluded that under the standards set in Cooper v. Commissioner to the email exchange between Ms. Stuart and petitioner’s counsel did not constitute a determination of the Taxpayer 1 claim.  The Court notes that Ms. Stuart’s email expressly stated that the claim remained open and that petitioner would be informed of a determination in official written correspondence once a determination was made.  The Court determined that because the IRS Whistleblower Office had not yet made a final administrative decision, that the Court lacked jurisdiction to hear petitioner’s claim.  The Court notes that the statutory language “cannot possibly have intended that this phrase would embrace every subsidiary finding of fact or conclusion of law that enters into the Office’s ultimate decision as to whether an award is appropriate and (if so) the amount thereof.”

This decision adds yet another piece to the puzzle that will ultimately define the Tax Court’s jurisdiction to review the IRS’s administrative decisions.  While this case appears to foreclose Tax Court review of certain de facto decisions, it provides more guidance on what is a determination for purposes of section 7623(b)(4).

The Tax Court held that it has jurisdiction to review the IRS’s whistleblower claims award determinations where the informant has alleged that they provided significant information to the IRS before and after December 20, 2006, the effective date of section 7623(b).  Whistleblower 11332-13W v. Commissioner, 142 T.C. No. 21, is a continuation of one of the cases where the whistleblower that was allowed to proceed anonymously and have the record sealed in one of the three cases released on May 20, 2014. 

In this case, the whistleblower first provided generic information regarding the tax fraud scheme engaged in by the whistleblower’s employer and several related entities and subsidiary companies to IRS and the Department of Justice in June of 2006.  The whistleblower had several more meetings with the IRS and DOJ in 2006.  The whistleblower continued to provide additional information relating to the tax scheme and those involved to the IRS and Department of Justice until the fall of 2009.  The whistleblower alleges that the information provided after 2006 was not simply confirmatory details.  The Government entered into a Non-Prosecution Agreement with one of the targets that led to a recovery of more than $30 million in taxes, penalties, and interest.  The Whistleblower Office granted that whistleblower an award under section 7623(a) and denied the whistleblower’s request for an award under section 7623(b).

The Court held that the whistleblower had satisfied the “pleading burden by alleging facts that respondent proceeded with an action against the targets using information brought to respondent’s attention by the whistleblower both before and after December 20, 2006.”  The Court held that the allegations are sufficient to establish jurisdiction. 

The Tax Court also released a second opinion, Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-106.  The Tax Court held, on similar facts as Whistleblower 11332-13W, 142 T.C. No. 21, that the Tax Court also had jurisdiction to hear their appeal of the IRS Whistleblower Office’s denial of their award under section 7623(b).

It is good to see that the Tax Court continues to broadly interpret its jurisdiction when it comes to appeals of whistleblower award determinations.  These cases demonstrate the Tax Court’s continued fairness in providing whistleblower with a venue to appeal award determinations under section 7623.

Judge Kroupa of the U.S. Tax Court issued three memorandum opinions on Tuesday concerning whether or not the whistleblowers in those cases could proceed anonymously under Rule 345(a).  All three memorandum opinions, T.C. Memo 2014-92, T.C. Memo 2014-93, and T.C. Memo 2014-94 were in favor of the whistleblower’s motion to proceed anonymously.  

We believe that these decisions are consistent with what our experience has been to date as far as whether or not the Tax Court will allow docketed whistleblower cases to proceed anonymously or under seal.  So far, the Tax Court is generally willing to let whistleblowers be anonymous if the requirements of Whistleblower 14106-10W v. Commissioner are met, so whistleblowers should take comfort in knowing that they can proceed anonymously in Tax Court to challenge their award determination on that basis. 

However, the Tax Court has not been so willing to seal whistleblower cases on anything more than a temporary basis, although T.C. Memo 2014-92 shows that an exception to this general rule exists if unsealing the case could likely cause physical harm to the whistleblower.  

On a final note, it looks like T.C. Memo 2014-92 and 2014-94 are related cases. This probably resulted from two different EINs and claim numbers for the targets, and that it ended with the whistleblower getting an award under section 7623(a).  That would happen either where the original information was provided to the government before 12/20/06 or the case resulted in collected proceeds of less than $2 million. 

On October 15, 2013, the United States Supreme Court issued an order denying certiorari of O’Donnell v. Commissioner, a case where summary judgment was granted by the Tax Court, and affirmed on appeal, because the information provided did not cause the IRS to initiate an administrative or judicial proceeding that resulted in the collection of Federal tax from the taxpayer to whom the information.  By denying certiorari, the United States Supreme Court effectively solidified Cooper v. CIR, 136 T.C. 597, 600 (2011) as the law of the land.  This means a whistleblower is not eligible for an award under section 7623(b) where the information provided did not result in an initiation of an administrative or judicial action or the collection of tax proceeds.  This is a reminder that it is not enough to merely hand the IRS information, but that the whistleblower’s submission must also cause the IRS to act on the information in a way that results in collected proceeds.

George and James O’Donnell filed a claim for an award on March 6, 2009, alleging significant tax underpayments based on court records.  The O’Donnells filed a petition with the Tax Court alleging that the IRS failed to proceed as required and that their filing of the Form 211 created a bilateral contract.  The IRS filed a Motion for Summary Judgment that stated the IRS “has not initiated any administrative or judicial proceeding nor collected any proceeds based on information provided by petitioners.”  The Tax Court stated that various statements in various documents submitted by the O’Donnells suggested that the IRS had failed to properly consider the information they submitted or failed to proceed as required by section 7623; however, the O’Donnells “do not allege, much less show, that an administrative or judicial proceeding was initiated by [the IRS] or that any Federal tax was collected from any taxpayer as [the] result of information that they provided to [the IRS].”  The Tax Court cited Cooper for the premise that a person’s eligibility for an award under section 7623(b) requires both an administrative or judicial proceeding and that the administrative or judicial proceeding results in the collection of Federal tax in the order granting the IRS’s Motion for Summary Judgment.

On appeal to the United States Court of Appeals for the District of Columbia Circuit, the DC Circuit Court affirmed the Tax Court’s Order and Decision in an unpublished per curiam decision.  The DC Circuit Court stated that “The Tax Court correctly concluded that because the information appellant provided did not result in ‘initiation of an administrative or judicial action’ or ‘collection of tax proceeds,’ Cooper v. Comm’r of Internal Revenue, 136 T.C. 597, 600 (2011), appellant was not eligible for a whistleblower award under 26 U.S.C § 7623(b).”  Following the decision of the DC Circuit, George O’Donnell sought certiorari, which was denied.  

The IRS Whistleblower Office renewed its position that awards under section 7623 are subject to the automatic sequester cuts, on its website, stating that:

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, whistleblower award payments issued under Internal Revenue Code section 7623 are subject to sequestration. This means that every award payment made to a whistleblower under Section 7623 on or after October 1, 2013, and on or before September 30, 2014, will be reduced by the fiscal year 2014 sequestration rate of 7.2 percent. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.

The sequestration reduction will be applied after the Whistleblower Office determines the amount of collected proceeds and the applicable award percentage to be paid under section 7623. Whistleblowers will be advised of the sequestration reduction in correspondence from the Whistleblower Office concerning a proposed award amount and an award determination.

As discussed previously, we believe that ANY sequestration rate that reduces a 7623(b) award is illegal.  The IRS is confusing its discretion under section 7623(a) with their “shall pay” mandate under section 7623(b) and will almost certainly be successfully challenged by a whistleblower in tax court.  Awards paid under section 7623(a) are discretionary and, therefore, may be reduced by the sequestration reduction rate.  However, awards under section 7623(b) are not discretionary, as their payment is mandated by statute, and are not available for reduction.  Section 7623(b) states that the Commissioner shall pay whistleblowers, who meet the threshold requirements, 15 to 30 percent of collected proceeds.  Under the Fiscal Year 2014 sequestration reduction rate cuts these awards would be limited to between 13.92 and 27.84 percent, effectively precluding the Commissioner from paying an award of 30 percent. 

We hope that the battle over the budget ends soon and the issue of sequestration reduction cuts becomes moot; however, in the mean time we will continue to counsel any client whose award is reduced under these guidelines to challenge the reduction in the United States Tax Court.  

An order issued yesterday by the U.S. Tax Court in the case of Albert G. Hill, III v. Commisioner of Internal Revenue (No. 25539-10W) gave the Whistleblower (who is the Petitioner in the case) access to documents in the administrative file of the taxpayer who was the subject of a whistleblower claim. The order is a big win for the Whistleblower in the case because the determination of whether the Whistleblower is entitled to an award or not centers on how and when the IRS discovered information that led to collection of taxes from the taxpayer who is the subject of the whistleblower claim.

The question of whether or not the Whistleblower in the case is entitled to an award is further complicated by the fact that the IRS was conducting an examination of the underlying taxpayer at the time the Whistleblower provided information to the IRS. With access only to the documents that the Whistleblower initially provided to the IRS concerning the underlying taxpayer and a single document written by the IRS examiner containing that examiner’s thoughts on the Whistleblower’s claim, the Whistleblower was at a disadvantage in trying to show that it was his information the IRS utilized that led to the collection of taxes from the underlying taxpayer.

Although the IRS took the position that the Whistleblower was not entitled to documents from the underlying taxpayer’s administrative file, the Tax Court sided with the Whistleblower and directed the IRS to submit the underlying taxpayer’s administrative file to the Court. The order also instructed the Whistleblower to submit a list of specific documents or types of documents he sought to obtain from the underlying taxpayer’s administratrive file.  After an in camera inspection of the administrative file, the Court granted the Whistleblower’s motion to the extent of the Bates numbered and redacted documents listed in the order. 

In conclusion, the discovery order is a nice win for whistleblowers going head to head with the IRS on the issue of whether or not the collection of proceeds resulted from the use of whistleblower information.  An even greater appreciation for the discovery order in this case can be obtained when there is pause to consider that if the Tax Court sided with the IRS on this issue and prevented the Whistleblower access to the underlying taxpayer’s administrative file, it would have been tantamount to forcing the Whistleblower to fight for his award with one hand tied behind his back. In that respect, the Whistleblower in this case can keep swinging.



Last year we wrote about several welcomed memoranda issued by the IRS Whistleblower Office on June 7, 2013.  These memoranda outlined temporary changes and expired a year after issuance.  The new memoranda are simply reissuances of the memoranda that were released last year and are set to expire on June 7, 2014.  While these memoranda do not add anything new, it is important that they be reissued annually until the changes are permanently made to the Internal Revenue Manual.


The reissued memoranda are: