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 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).

A congratulations and a thank you to Erica Brady, who yesterday spoke on behalf of The Ferraro Law Firm’s clients at the public hearing on the Proposed Treasury Regulations that outline how the IRS will interpret section 7623.  Erica joined other practitioners in pointing out that the Proposed Treasury Regulations should not be finalized in their current form. 

Erica reiterated my message from the hearing on the previous Proposed Regulations of, “Do no harm.”  The regulations should not narrow a broad statute or thwart Congressional intent by limiting existing whistleblower’s rights or discouraging whistleblowers from coming forward.  Erica highlighted four topics at the hearing:

  1. The narrowing of “Proceeds Based On,”
  2. The arbitrary cut off for reduced tax attributes to be included in collected proceeds,
  3. The method in which the award percentage is calculated, and
  4. When the administrative proceeding starts.

Erica showed a little chutzpah by asking all those assembled in the large IRS auditorium to raise their hand if they thought that the Proposed Treasury Regulations as written would actually attract whistleblowers into the program… but only the hands of those who were responsible for writing the Proposed Regulations went up.  When she asked if anyone who did not have a hand in writing the Proposed Regulations felt that the Proposed Treasury Regulations would help attract whistleblowers, no hands remained up.

Tax Analysts recently released a Chief Counsel Memorandum dated April 23, 2012, stating that the IRS cannot pay a section 7623(b) award on recoveries from the failure to report a foreign bank account commonly referred to as “FBAR” penalties.  While we believe Chief Counsel has this one wrong on the law and we will vigorously challenge any award determination for our clients that fails to account for FBAR collections in the collected proceeds base, the memorandum is a validation of the approach we have been taking from day 1 of our practice. 

A submission to the IRS Whistleblower Office should be about putting strong information forward with a full analysis of the law and suggestions for the best strategic manner for audit and collection.  We follow this concept in every submission we make.  Information that an individual has an un-reported offshore account should put you at the very beginning of your inquiry, not its conclusion.  WHY does the individual have an offshore account and HOW did she get it there?  There is a big difference between the grandpa taking several million “post-tax” dollars and stuffing them into a Swiss account hoping to eventually evade estate taxes and a U.S. business owner funneling “pre-tax” dollars offshore by taking fake deductions for costs charged by foreign companies that are ultimately owned by her.  The first case is primarily a failure to report FBAR case and we have consistently declined to represent whistleblowers who only have information about violations of Title 31.  The second case, however, is a great case for the IRS Whistleblower Program.  When people take pre-tax dollars and shift them offshore the highest and best case is the evasion of federal income taxes (a violation of Title 26 and 18) before those dollars even touched St. Somewhere.  Our first part of the submission would be about denying the deductions taken by the legitimate U.S. business.  The next part would involve attributing dividend income to the shareholder or through the unreported income of the CFCs.  After that is all said and done, then, and only then, would we go into possible reporting violations including FBAR.

Admittedly Oversimplified Crib Sheet

Title 18

Crimes and Criminal Procedure

Title 26

Internal Revenue Code

Title 31

Money and Financial Law, including the Bank Secrecy Act

 

Having just said that an un-reported offshore account case should not just be about FBAR violations, we still believe that FBAR collections do in fact fall under the mandatory award of section 7623(b).  Chief Counsel states four legs of its argument that FBAR collections are not award eligible; 1.) Section 7623 only allows an award on violations of Title 26 of the Federal Code; 2.) Section 7623(b) defines collected proceeds as only those proceeds collected under Title 26; 3.) FBAR collections, like criminal fines and penalties, are not available to the IRS and therefore cannot be used to pay an award; and 4.) Because there is already an informant award program for FBAR violations, those collections cannot also be eligible for a section 7623 award.  Each of these reasons are legally deficient and should not withstand judicial scrutiny.

We do not intend to post a hypothetical brief in opposition within a blog posting but will share a couple points.  With respect to the first two points of Chief Counsel we note that every authority cited by Chief Counsel notes that the internal revenue laws are classified GENERALLY to Title 26.  This qualification speaks volumes.  If the internal revenue laws are generally in Title 26 they must then sometimes be found outside of Title 26.  Even the I.R.M. provision cited by Chief Counsel notes that Title 26 contains “most” of the Federal tax law.  Not to dicker, but MOST does not mean ALL. 

As to the availability argument we do not know what to tell Chief Counsel other than reread the statute.  Section 7623 states that proceeds “SHALL be available,” for payments.  Our emphasis is placed on a different word than Chief Counsel’s – shall.  It does not matter where the money goes, Treasury’s General Fund, the Crime Victims Fund, or a lock-box on Commissioner Shulman’s desk.  Congress made the collections explicitly available.  Were that not the case, the statue would say “except Crime Victims Fund, etc.”  This fundamental tenant of statutory construction will be easily handled the first time the IRS is challenged on these grounds as we have stated about criminal fines all along.

Chief Counsel makes an interesting argument that because there is an informant reward program under Title 31 that preempts the award under section 7623(b).  The lean rationale is that section 7623(a) authorizes the Secretary of the Treasury to pay such sums as he deems necessary in cases where such expenses are not otherwise provided for by law.  Because those expenses are “otherwise provided for” under Title 31 the Secretary cannot pay the expense of a section 7623(b) award.  First and foremost, section 7623(b) does not say an award shall be paid only if there is no other reward program applicable.  Section 7623(b) requires the Secretary to pay an award of between 15 and 30 percent of the collected proceeds.  An example may help show the shortcoming of Chief Counsel’s position.  Let us assume that Whistleblower would be eligible for a mandatory award of $10-$20 million under section 7623(b).  Section 7623(a) states that the amount payable shall be paid from the proceeds of amounts collected where not otherwise provided for by law.  Title 31 has a $150,000 maximum award.  At best, Chief Counsel’s argument suggests that our hypothetical whistleblower should be paid $9.85-$19.85 million under section 7623(b).  That is the amount due that is not otherwise provided for by law.

We could go into greater detail on each argument and will do so if and when the time comes.  In the meantime we strongly urge those with information about offshore accounts to seek the advice of qualified tax attorneys before making a section 7623 submission to the IRS.  An FBAR only submission is inherently weak and probably already gobbled up in list disclosures.  Offshore accounts linked to other tax non-compliance are far more likely to be undisclosed by third-parties or through the Voluntary Offshore Disclosure Program

Fiscal year 2011 was a big year for the IRS whistleblower program according to the IRS Whistleblower Office’s Fiscal Year 2011 Report to the Congress on the Use of Section 7623. Some of the highlights from the report are:

  • The number of submissions in fiscal year 2011 dropped by approximately 25 percent from the number of submissions in fiscal year 2010 and the number of taxpayers reported in the submissions dropped by 87 percent for the same time period.  See the charts below.

Fiscal year 2011 charts Submission.bmpFiscal year 2011 charts Taxpayers.bmp 

  • The first awards were paid under section 7623(b).
  • The IRS issued proposed regulations and sought comments on regulations to define the term “collected proceeds,” which were finalized on February 22, 1012.
  • For the first time, the IRS included tables that detail the number of open claims that in are in each of the nine status designations; and the average time, the longest time, and shortest time that claims spend in each status.

Going Forward

The Fiscal Year 2011 Whistleblower Office Report indicates that the IRS whistleblower program also has significant changes planned in fiscal year 2012.  According to the annual report, the IRS Office of Chief Counsel is working with the Assistant Secretary of Tax Policy, the Whistleblower Office, and other IRS offices on the drafting of comprehensive proposed regulations.  These regulations are expected to revise the current regulations implementing section 7623 to reflect the remaining 2006 amendments to the statute.  Also, the IRS Whistleblower Office is looking for ways to improve the administrative process for evaluating whistleblower contributions, and for communicating with the whistleblower about a proposed award determination based on its experiences with the initial cases that have proceeded through the award determination phase.  The timeliness of subject matter review was also the subject of a field directive released on the same day, which is discussed here.

Today the Treasury Department issued the finalized Treas. Reg. Section 301.7623-1(a) and (g) relating to the definition of “collected proceeds” for purposes of section 7623 tax whistleblower awards.  Although the language of the final whistleblower regulation was unchanged from the proposed regulation, the supplementary information to the final regulation reveals that the Treasury Department shares our view that section 7623‘s definition of “collected proceeds” should be read broadly.  Treasury affirmatively responded to our hearing testimony with respect to the question of whether restitution payments are award eligible and whether the reduction of a tax attribute in one year can result in an award from proceeds collected in another year.  The unchanged final regulation confirmed that awards can be paid on information that that leads to the “denial of a claim for refund that otherwise would have been paid” – which is a huge victory for whistleblowers because the IRS initially sought to make these amounts ineligible for awards. 

Today The Ferraro Law Firm sent out a letter to IRS Commissioner Douglas Shulman (PDF) disputing an IRS policy that is negatively effecting most tax whistleblowers.  In July of 2009 Chief Counsel decided – without telling anyone – that the IRS will not pay any section 7623 whistleblower awards on “collected proceeds” resulting from whistleblower information until after the period of limitations has expired on claims for refund.  Prior to that date, whistleblower award determinations were made after the period of limitations on assessments had closed.  There is evidence that this policy change has had a drastic effect on the IRS Whistleblower Program.  In the “Fiscal Year 2010 Report to the Congress on the Use of Section 7623,” the

IRS disclosed that it collected more than double the amounts of proceeds than it had received as a result of the Whistleblower Program in the prior three fiscal years

yet it still paid out roughly the average amount it had been paying out in awards over that period.  In other words, receipts from tax whistleblower cases have doubled, but the awards have basically stayed the same. Why? Because the current rule about when award determinations are eligible to be made is freezing out awards under section 7623(b). 

Under section 6511(a) the period of limitations on refunds expires no sooner than two years after the date a tax is paid, and a claim for refund can only be allowed to the extent of the tax actually paid in that two year period under 6511(b)(2)(B).  This is often referred to as the “two year rule.”   The two year rule regularly effects whistleblower cases because they often lead to the collection of additional taxes at the conclusion of an IRS examination (which were based at least in part on the whistleblower’s information).  What ends up occurring as a result of the two year rule and the IRS’s policy about when award determinations are eligible to be made is that the taxpayer pays the tax and then the whistleblower has to wait an additional two years to get their award.  Therefore, much of the $464,695,459 the IRS reported that it collected in Fiscal 2010 won’t be eligible for an award payment until Fiscal 2012, and the much of the awards the IRS paid in Fiscal 2010 actually relate to monies they collected in Fiscal 2008, or earlier.

However, we believe that the recent guidance in PTMA 2010-62 (September 1, 2010) (PDF), to the extent that it now allows for whistleblower awards to be paid when a claim for refund is denied, makes the two year rule irrelevant because the IRS still has to pay out awards under section 7623 if such a taxpayer later claims a refund.  In other words, it no longer matters if the refund statute is open, and the IRS is holding up award payments anyway because of a policy they put in place when they couldn’t pay awards on denied claims for refund.  We call upon the IRS to take action and reverse this outdated rule that is hurting the Whistleblower Program.