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).

Today the United States Government Accountability Office (“GAO”) released a report on the IRS Whistleblower Office titled “IRS WHISTLBLOWER PROGRAM – Billions Collected, but Timeliness and Communication Concerns May Discourage Whistleblowers” for which we were interviewed last year.  Communication with whistleblowers is certainly an issue with the program almost by default due to the taxpayer information confidentiality requirements imposed on the IRS by section 6103 of the Internal Revenue Code, and the report does hit a few hot button topics including some issues with timeliness of awards and the processing of submissions, but as with any report there were fertile grounds for improvement that were not covered.

The GAO Report describes more than $315 million of awards paid between October 1, 2010 and June 30, 2015 on $1.882 billion of collected proceeds, which shows that the program has been successful in raising more revenue for the government.  However, the reported statistics of claims denied does not show just how much additional revenue the IRS is leaving on the table by not bringing enforcement actions on more whistleblower claims.  It also shows as we already know that the IRS is paying out the required award percentages (between 15 and 30%) to whistleblowers on those collected proceeds, notwithstanding the effects of sequestration.   We believe though that the IRS should reconsider its award determination process of starting from the bottom of the 15-30 percent range and working their way up, and instead use the middle of the range as the starting point and vary from that number based on the positive or negative factors of a whistleblower’s contribution in each case.  The IRS is apparently worried about consistency in applying award percentages to whistleblowers with high-dollar claims in the future because they expect the volume of those cases to be increasing, which is at least a hint at some good news in the future.

Because the IRS does not track the expiration of the period of limitations on refunds in every whistleblower case that resulted in the payment of additional tax, the IRS is setting itself up to fail to properly pay out awards in a timely fashion.  Let’s hope the GAO follow up Action Items pressure gets the IRS to utilize their E-TRAK system to better monitor this critical data so that in the future claims are paid out on a more timely basis.

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.

October 1st 2014 marks the beginning of fiscal year 2015 and a new sequestration reduction rate for whistleblower awards.  According to an OMB Report on the reductions for fiscal year 2015, every award payment made to a whistleblower under section 7623 on or after October 1, 2014, and on or before September 30, 2015, will be reduced by the sequestration rate of 7.3 percent.  That reduction rate is up slightly from fiscal year 2014’s reduction rate of 7.2 percent.

It has been and continues to be the position of The Ferraro Law Firm that whistleblower awards should not be reduced by sequestration.  As a technical matter, the reduction of award amounts paid to whistleblowers is in direct conflict with the statutory language of section 7623(b) which unambiguously states that a whistleblower “shall” receive as an award “at least 15 percent” of the collected proceeds.  The sequestration reduction is illegally defying the language and intent of the statute.  As a practical matter, reducing the amount paid to whistleblowers makes zero sense.  The entire purpose of sequestration is to ensure that tax dollars are saved and the nation’s debt is reduced.  Because whistleblower awards are paid directly from collected proceeds; proceeds that in all likelihood would not have been collected absent the whistleblower’s information; these award payments do not have a negative effect on the nation’s debt.  The whistleblower is actually assisting the government in raising money, not causing government to spend money.  As a matter of equity, whistleblowers came forward in reliance on the 2006 law and trusted that the statute would apply to them as written. The fact that the sequestration reduction can arbitrarily impact awards relating to claims made by whistleblowers many years ago, to us, is a prohibited retroactive change in the law.

Unfortunately, the IRS will continue to apply the sequestration reduction rate unless and until a law is enacted by congress that cancels or otherwise impacts the sequester.  A bi-partisan budget agreement has not yet been reached by congress.  The government will be funded through a Continuing Resolution that was passed by the House and Senate which generally maintains current spending at fiscal 2014 levels until December 11, 2014.    

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

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

Kathryn Keneally, Assistant Attorney General, Tax Division of the Department of Justice, acknowledged that the Department of Justice had used information provided by whistleblowers in tracking down unreported offshore bank accounts held by United States citizens while speaking to the Civil and Criminal Penalties Committee of Tax Section of the American Bar Association at its May Meeting on Saturday, May 10, 2014.  Ms. Keneally included whistleblower information along with several other sources of information, including bank disclosures, while discussing the Department of Justice’s Offshore Compliance Initiative.  Ms. Keneally emphasized her quote from a May 9, 2014 Press Release:

As today’s announcement shows, we receive information about U.S. taxpayers with undisclosed accounts from many sources, some of which are not public.  For many accountholders, the time to come forward voluntarily to avoid criminal prosecution has run out.  

Although contributions by whistleblowers frequently go unacknowledged, Ms. Keneally’s statement shows that the information provided by whistleblowers is vital to the continued success of the Department of Justice’s enforcement efforts.  This begs the question of how these whistleblowers will ultimately be rewarded for the information they provide.

Today’s CFO Journal reported that a warning from the Public Company Accounting Oversight Board (“PCAOB”) late last year has resulted in much more stringent external audits being conducted by auditors of public companies.  PCAOB has been auditing the auditors to make sure public companies’ financials are not being rubber stamped.  Increased audit scrutiny can be a great thing for potential IRS whistleblowers.  When auditors take a closer look at uncertain tax positions this can result in far greater detail being in the tax accrual workpapers.  As we have noted in the past, Schedule UTP has done little to change company behavior.  Knowledgeable insiders with access to a company’s tax accrual workpapers could provide extremely useful information to the IRS and be rewarded handsomely.  Large companies maintain billions of tax reserves to account for tax positions where the company believes the IRS is more likely to prevail on the issue than the company.  We know firsthand that IRS whistleblowers with access to information about the tax positions that make up those reserves can successfully present a submission to the IRS.  Now, more than ever, there are great opportunities for a tax department insider to make a meaningful impact on the tax gap.

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

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

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

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



The IRS Whistleblower Office made leaps forward in fiscal year 2012.  Fiscal year 2012 marked the year that the IRS made a $104 million payment to Bradley Birkenfeld, which is believed to be the largest award paid to a single whistleblower.  This was one of three awards paid in Fiscal Year 2012 and one of five paid under the new law.  Fiscal 2012 was also the year that the IRS issued final regulations that clarified the definitions of “proceeds of amounts collected” and “collected proceeds” for purposes of section 7623.  The IRS also issued interim guidance that incorporated the Treasury Regulations and added additional provisional timing of award determinations and for award computation, established procedures for tax withholding on award payments, and revised and updated procedures for administrative proceedings.  Some of the highlights from the report are:

  • The number of submissions in fiscal year 2012 (332) remained relatively stable from fiscal year 2011 (314), as did the number of taxpayers identified (2011 – 734 Taxpayers Identified, 2012 – 671 Taxpayer identified).  See the charts below.

  • Three awards were paid under section 7623(b).
  • The IRS issued proposed regulations and is seeking comments on the comprehensive regulations that are intended to revise the current regulations implanting section 7623 to reflect the remaining 2006 amendments to section 7623. 
  • The IRS Whistleblower Office incorporated the Informant Claims Examination (“ICE”) Unit.  The ICE Unit is responsible for case management and administration of the discretionary award program under what is now section 7623(a).

Going Forward

The Fiscal Year 2012 Whistleblower Office Report indicates that the IRS whistleblower program also has significant changes planned in fiscal year 2013.  According to the annual report, the IRS Whistleblower Office appears to be moving away from sorting whistleblower cases as 7623(a) claims and 7623(b) claims, and moving towards classifying claims based on the Operating Division responsible for making the tax administration decisions with respect to the issues raised by whistleblowers.  “With LB&I and SB/SE general examination programs receiving the vast majority of whistleblower claims and each processing their inventory differently because of differences in the characteristics of the typical claims referred to those organizations, the Whistleblower Office will change its intake process in FY2013.”  The IRS will stop projecting potential results for claims when they are received, as claims will stay in the Whistleblower Office regardless of size.  Instead, assignment of claims to a Whistleblower Office analysts for monitoring and coordination will be based on factors such as the need for coordination within or among operating divisions to address multiple issues or taxpayers identified in a whistleblower submission.  It is expected that future reports will separate statistics for each Operating Division.

There appears to be some concern over the ability of the IRS to control what is released to whistleblowers in discovery and the ability to limit additional disclosures of confidential taxpayer information after the IRS has disclosed such information.  The IRS has sought protective orders from the Tax Court in some cases, but the Tax Court has not ruled in those requests.