Today the GAO released a study wherein they looked at the ability of the IRS to track and then pay awards on monies that are collected by the Government relating to “FBAR” violations.  Recall that FBAR stands for the “Reports of Foreign Bank and Financial Accounts”  and it represents information and return reporting requirements and associated penalties for violations thereof under Title 31’s Bank Secrecy Act.  The law on whistleblower awards changed on February 9, 2018 in the Bipartisan Budget Act of 2018, Pub. L. 115-123, div. D, title II, §41108(a)-(c) Feb. 9, 2018, 132 Stat. 158, so that monies that are paid under those provisions can represent “proceeds” (as defined in section 7623(c)) under section 7623(b) if the whistleblower’s information made a substantial contribution to the collection of these amounts.  So if you have information about FBAR violations, you should consider reporting that to the IRS for an award.

 

But the GAO reports that things are not so easy in IRS-land.  The report itself is here: https://www.gao.gov/assets/700/694825.pdf  Specifically, before the law changed the IRS did not even collect information from agents about whether or not monies were collected under Title 31 as a result of a whistleblower’s information.  So you may have to look in the IRS files to determine this, which means going through the administrative award determination procedure at best, or litigation with the IRS at worst.  We have done and are currently doing both of those things on behalf of our whistleblower clients.  Be prepared to do the same by getting representation early on in the process, preferably before filing anything so that your IRS filing properly documents your claim.

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.  

There seems to be as many ways to cheat on your taxes as there are taxes.  State sales and use taxes are no different.  Some may not realize it but sales and use taxes are two different taxes.  Sales tax is usually collected by the seller at the time you buy an item and most of us have seen this on everything from car purchases to restaurant bills (even residents of the five states without a sales tax have likely left their little tax havens and paid sales tax somewhere else).  Use tax is the backstop when sales tax was not charged.  Bought a new mixer online and had it shipped to your house without a sales tax being collected; congratulations, you probably owe your state use tax.  Has anyone ever actually filed a use tax return declaring their legally owed taxes?  You are probably not surprised to learn the answer is very very few. 

We focus primarily on Federal taxes with submissions to the IRS Whistleblower Office, but there are some possibilities of a whistleblower getting paid for rooting out state tax issues.  Currently, Florida and New York have programs that we work with to report state tax issues.  Florida’s program is similar to the IRS program in that you report the information and they take it from there.  Florida pays a 10% award.  New York amended its False Claims Act in 2010 to add taxes to the list.  There you actually sue the taxpayer on behalf of New York.  It is a lot of work, and a wild ride but the end “Relator Share” that you receive could be up to 30%.

We have dealt with several state tax issues (and even received awards!) but the circumstances must be right to make them worth pursuing.  First and foremost, you need a lot of avoided tax.  While the top Federal income tax rate is 39.6%, Florida has a sales and use tax rate of 6% and New York 4% (8.875% for sales and use in New York City).  It takes some pretty big ticket items to add up to a worthwhile award in a use tax case.  For example, to get a million dollar award from Florida, they would need to find an underreporting of around $170 million dollars’ worth of stuff (170,000,000 x .06 x .1 = 1,020,000 for those playing along at home).  That’s a lot of blenders. 

From where does that level of use tax violation come?  Usually it comes from things that don’t need license plates or captains, like art and jewelry (cars, planes, and boats are almost always registered making avoiding sales and use tax slightly more complicated).  I was reminded of this in today’s Wall Street Journal.  Daniel Grant wrote an interesting piece entitled, “Art Collectors, Pay Your Taxes.”  The article discusses states, particularly California and New York, cracking down on sales or use taxes.  Often, purveyors of art are more than happy to accommodate requests of buyers that help them avoid sales tax, tacitly knowing the use tax will never be paid.  Insiders with quality information about large-scale art or jewelry purchases may do well to consult with a tax whistleblower lawyer to see if their information is actionable.

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.

Trump/Mnuchin

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

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

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

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

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

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.

Today the Treasury Inspector General released a Report titled “The Whistleblower Program Helps Identify Tax Noncomplicane; However, Improvements Are Needed to Ensure That Claims Are Processed Appropriately and Expeditiously” about the IRS Whistleblower Program.  It contained some interesting statistical analysis of various processes relating to the inner workings of the Program but a quote from page 7 of the Report stuck out:

[A] majority of claim closures in FYs 2015 and 2016 (83 and 85 percent, respectively) are rejected or denied before going to an operating division field group for an investigation or examination, with only a small portion (2 percent each year) resulting in an award. Most claims were rejected because the allegations were not specific enough for the IRS to take action or denied because the allegation was below the threshold to justify resources for compliance action.

We understand that about 85% of the submissions that the IRS Whistleblower Office receives are pro se filings, and the problem is that often those claims are speculative or are not developed enough for the IRS to use them as a basis for taking action.  Of the remaining 15% on which the IRS does take action and passes the whistleblower’s information to the field agents for examination, approximately 2 out of every 15 are getting an award.   We believe a whistleblower’s odds of getting an award can be significantly higher [than 13.333%] for a thoroughly vetted submission with good facts and good law that are clearly laid out.  The hurdle of getting the IRS to take action in the first place is certainly a high one but then you have to deliver your information in a way that helps them win their case.

The TIGTA Report spent a lot of time looking at the procedures for the debriefing intake and the claim rejection processes, but in our view that is not the most material weakness of the IRS Whistleblower Program.  The biggest weakness is that under the current claim processing system it is still far too easy for the IRS field examination divisions to simply walk away from a good case even when the facts and the law are on their side.  Often people have a difficult time convincing the IRS to take even a slam dunk case, no matter how much it costs taxpayers if they give it up.  Our mission is to set forth a whistleblower’s information in such a way that it not only convinces the IRS to take action, but it forms the solid foundation of a winning case once they do decide to take action.

The Tax Court’s opinion in Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4 (2016), was a clear and decisive win for whistleblowers.  The IRS has long been improperly trying to limit what should be included in “collected proceeds” and today’s opinion restores Congress’s intention that all proceeds that are collected be included in the amount on which the whistleblower’s award is computed.  By specifically including criminal fines and forfeitures in the collected proceeds amount, this court decision means that a whistleblowers’ award will reflect the full amount that the government collected based on their information.  In this opinion, the Tax Court examined the definition of “collected proceeds” as used in section 7623(b)(1).  The court found that the language of that

Section 7623(b)(1) is straightforward and written in expansive terms, namely, where, using information provided by the whistleblower, the Secretary proceeds with an administrative or judicial action regarding underpayments of tax or any action regarding the violation or, or conniving to violate, the internal revenue laws, the whistleblower is entitled to an award based on a percentage of the collected proceeds resulting from the Secretary’s action (as well as any related actions) or from any settlement in response to such action.

The court refused to follow Respondent’s request to narrow the definition of collected proceeds.  The court stated:

We are leery of arbitrarily limiting the meaning of an expansive and general term such as “collected proceeds”. In drafting section 7623(b)(1), Congress could have provided that the whistleblower’s award is to based on taxes and other amounts assessed and collected by the IRS under title 26. But it did not.

The court explained that this case is not in conflict with Whistleblower 22716-13W v. Commissioner, which had ruled that FBAR penalties were not to be included in the $2 million threshold amount used to determine if section 7623(b) applied.  The court here stated that:

In reaching our holding today, we determined that the wording in the threshold requirement of section 7623(b)(5)(B) … is different from that of section 7623(b)(1), which provides for an award of a percentage of the collected proceeds …

The Tax Court held that the phrase “collected proceeds” is sweeping in scope and is not limited to amounts assessed and collected under Title 26 of the United States Code.  The Tax Court goes on to hold that criminal fines under Title 18 as well as civil forfeitures under Title 31 are both collected proceeds under section 7623(b)(1).

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.”