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 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.

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. 

There seems to be a trend of interpreting SOX in a way that extends the whistleblower protections to a widening circle of persons. Most recently, a judge in Eastern District of Pennsylvania had allowed a retaliation lawsuit under SOX against non-publicly traded subsidiary of a publicly traded corporation to proceed after examining the agency relationship between the subsidiary and the parent in Wiest v. Lynch. The opinion relied heavily on the U.S. Supreme Court’s 2014 ruling in Lawson v. FMR LLC, which held that Section 806 covers “any officer, employee, contractor, subcontractor or agent of” a publicly held company.