We get absolutely deluged with hundreds of calls a day during tax return filing season about all kinds of fraud, particularly identity related scams and claiming child exemptions improperly.  In 2016, there was a 400% increase in tax related phishing and malware attacks, and 969,000 potentially fraudulent refunds claiming up to $6.5 billion. You may be unaware that you’re a victim until you try to file your taxes and IRS tells you something’s wrong.

Here are four common scams to watch out for this year:

  • Phishing—Fraudsters send fake emails to trick would-be victims into sharing personal data. The real IRS would never initiate contact with you this way.
  • Phone fraud—Identity thieves impersonate IRS agents. But, the real IRS states it will never call to demand immediate payment. You will first receive a mailed bill.
  • Tax preparer fraud—Use tax professionals? Watch out for emails that appear to be from them asking for private information. Delete and call your service directly.
  • Phony IRS agents visit your home—This scam often targets the elderly. Real IRS agents carry photo IDs, and will try to contact you before visiting.

The full list of the recently released “Dirty Dozen” tax scams can be found here.  As for claiming child exemptions improperly, the best defense is a good offence: file early.  Unfortunately, neither of these big problems make for good whistleblower claims under section 7623(b), the IRS whistleblower program we work with.  The Whistleblower Office does not handle the identity theft scams, that is handled by the Treasury Inspector General’s Office.  Claiming of exemptions for children is unfortunately not an issue the Whistleblower Office handles either, that has to be handled directly with the IRS in connection with the filing of your return.

What we do see a lot during tax season that the Whistleblower Office is interested in is non-filing of returns, positions being taken that are clearly non-compliant, abusive transactions, or anything that represents an underpayment of tax of more than $2 million of tax over the last three years.  If you have information about anything you believe may fit in those categories don’t hesitate to give us a call.

 

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.  

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

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.

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.

Today the IRS Whistleblower Office released a 3-page overview of the tax whistleblower process called Publication 5251 – The Whistleblower Claim Process.  The new publication purports to provide clarity on:

  • What qualifies for an award
  • How whistleblowers submit a claim for award
  • What happens to a claim after the IRS receives it
  • Communicating with the IRS after a claim is submitted
  • Whistleblower Process Timeline
  • Common reasons for Initial rejection/denial of claim

While there are no new procedural changes identified in the overview, this publication does provide a snapshot of the claims process for the uninitiated.  In particular, the Process Timeline” flow chart on page 3 is a relatively realistic display of the timelines involved with the claims process.  Of course, we could cite numerous, and I mean numerous with a capital N, exceptions to the timeline based on the cases we have seen and been involved with[1], this is still a good representation of how the claims process SHOULD work.  Getting a claim through the system without snags is another story, and is something we work on every day.  A copy of Publication 5251 can also be found on IRS.gov.

 


[1] For example, in theory the timeline shows the “Administrative Proceeding” starting at the time a payment is made but well before the IRS starts to wait simply for the period of limitations on refunds to expire before paying an award.  In practice this has not been happening.  This is particularly crucial because it is only the start of this Administrative Proceeding which would trigger the exception to the taxpayer rules of 6103(h)(4).

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.”

The Tax Court’s September 16th opinion echoes what every whistleblower litigating in Tax Court knows; the IRS’s Whistleblower Administrative File is insufficient.  The petitioners in this case moved to compel production of documents and responses to interrogatories that were requesting information at the would show whether the IRS used their information to collect tax, penalties, interest, or additional amounts.  The IRS filed virtually identical responses to both motions stating its sole objection being that the information requested is not contained within the Whistleblower Office’s Administrative File and, therefore, beyond the scope of discovery.  The Tax Court disagreed and granted the motions.

Rule 70 governs discovery in the Tax Court.  Paragraph (b) states that the scope of discovery is “any matter not privileged and which is relevant to the subject matter involved in the pending case.”  The paragraph further provides: “It is not grounds for objection that the information or response appears reasonable calculated to lead to discovery of admissible evidence.”  The Court stated in its opinion that “the standard for relevancy in discovery is liberal.”  The Court went on to note that the information sought by the petitioners is clearly relevant to their case as the petitioners are looking for evidence that will prove that one or more collections of proceeds are attributable to their information.

The Tax Court addressed the IRS’s argument that the information sought is outside of the scope of review by stating that this argument was not a sufficient basis to deny the discovery requests.  The Tax Court stated: “Even were we to agree with respondent as to the scope of review, he cannot unilaterally decide what constitutes an administrative record.”  The Court reasoned that evidence related to whether there was a collection of proceeds and whether that collection was attributable to the whistleblower’s information goes to the very factual inquiries required by section 7623(b), and an administrative file that lacked such information was incomplete. 

While discovery matters are usually handled with the issuance of an order, the Tax Court issued a division opinion in this instance, giving citable precedence for future whistleblowers that are trying to seek discovery relating to what happened with the information they provided to the IRS.  Hopefully, these continued losses in Tax Court, where the Tax Court finds the administrative file is incomplete and opens discovery beyond the administrative file, leading to more complete administrative files within the Whistleblower Office.

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.

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.