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).

  • FCA Aficionaco

    The Tax Court has been slow to perceive the IRS’ institutional abuses of 7623(b), but over the past year has, where the Cooper bar has been passed, begun asserting its authority and in doing so is torpedoing the Service’s ability to wage war (or at least malicious statutory compliance) against WB’s.

    In this latest USTC opinion, Judge Jacobs continues his pro-whistleblower, pro-good-tax-enforcement-policy ruling streak, by supplementing his earlier opinion, 144 T.C. 290 (2015), by driving a stake into the heart of the Service’s disingenuous attempts to play both sides of the street in its arguments before the USTC based on internal legal interpretations of 7623 as evidenced in M. Kaizen’s 4/23/2012 memo to St. Whitlock.

    Presumably the Service’s anti-WB stance evidenced here, is less likely attributable to Mr. Kaizen who like any good legal counsel tries to represent his clients by trying to advance arguments supporting the legal foundation of the goals, policies and cultural bias, i.e. St. Whitlock, the Deputy Director of Enforcement, the IRS’ WB award committee, and, the setter of the tone-at-top, The Commissioner.

    So the Court’s opinion here effectively retires a couple of the thought starter points (3 & 3a, see below) intended for Sen. Grassley et Co. from the list I published as a comment in one of the prior blogs on this site.

    Unfortunately, however, this victory does not address the structural deficiencies in 7623 which allow the Service to abuse its discretion in the utilization WB submissions in furthering the goal of good tax enforcement by pursuing those that would steal from the public fisc and their fellow citizens.

    The backstory of 21276/7-13W, gives ample illustration of both the lengths the Service went to to deny making an award, and the lengths the WB’s went to aid the Service’s prosecution of this case (acting as agents under the direction of the Service and CI, by traveling internationally and wearing “a wire” to set the trap that resulted in the successful recovery of the “collected proceeds” (and effectively shattering the illusion among the Swiss that banks without subsidiaries in the USA were beyond the reach of US-justice.)

    So despite the happy “but for” result enjoyed by the IRS (both financially from a single bank as well as strategically, by advancing FATCA sign-ups, by putting the fear of God into the Swiss banking industry), the Service tried every argument to deny and limit the WB’s claim and award.

    Even in the 24% award level, we see clear evidence of the continued institutional bias of the Service against WB’s seen in the tilted playing field (IRS’s instinct to award up from 15%, rather than the SEC’s instinct to award down from 30%); if these WB’s had to fight to get from 15% to 24%, what does a WB have to do to receive the 30% maximum, get injured or killed in their support efforts?

    That the Service still demonstrates its continued cultural bias against WB’s by defending its non-productive interpretations of 7623 shows there is still significant work to be done by the Court (or Sen. Grassley if he awakes from his slumber).

    The short list remains as follows:

    1. Require the IRS to investigate all claims**;
    2. Eliminating the IRS’ discretion in rewards by making 30% the starting point with only reasonable deductions for bad acting in the part of a WB;
    (ACHIEVED) 3. Specifying that regardless of title (26, 18, 31, etc.) all government (not only IRS) recoveries accruing to WB input are part of the reward calculation (I.e. in the event IRS provides WB info to DOJ for FCA prosecution);
    (EFF. ACHIEVED) 3a. In title 31, exempt WB reward portion from being deposited into Victims of Crime Fund;
    4. Eliminating sequester penalty and tax obligation on WB rewards (many modest WB’s are scared off by a unpalatable risk v reward relationship);
    5. Enact anti-retaliation provision as seen in FCA but with unlimited SOL for fraud related retaliation. Consider allowing IRS to collect this directly or on behalf of NLRB.
    6. Incentivize the IRS to devote best resources to prosecuting recoveries based on WB tips by allowing IRS to keep a portion of recoveries as an offset for budget cuts.
    7. In the event that any of the current or past crop of WB submissions suffered due to any of the above defects, review and award those WB’s as if the legislative rectifications were active when 7623 came in to force in 2007. Allow plaintiffs or their heirs to refile in USTC for de novo review;
    8. Prominently display a WBO is Open for Business sign on IRS homepage.

    ** Given the scale of the recoveries already achieved under 7623(a) despite only modest WB rewards (300k$, or 210k$ after tax, and less after legal fees of ca. 30%), 7623(a) needs to be subject to all of the above except point 1 to incentivize yet more WB’s to take the risk of coming forward.

    p.s. It would be great to see a short comment (even if just a hello) from all the usual commentariat below.

  • Eric Rasmusen

    FCA Aficionaco, I like your point 6. I think the main thing the IRS needs, though, is a new Chief Counsel. Come to think of it, that might be a reason to vote for Trump.

    The opinion is solid. For appeal, one argument I don’t see made is that when a case is settled, as almost every big case is, the categorization of payments makes everything fungible. If the two parties decide the case should be settled for $100 million, they can make it $50 million in tax and $50 million in penalties (broadly defined) or $1 million in tax and $99 million in penalties. I suppose they could even make it $0 million in tax and penalties and $100 million in the form of a donation to the budget of the IRS, though that would make Congress angry. So to avoid gaming, “collected proceeds” has to be defined broadly.

  • Disappointed Whistleblower

    Hi Scott,

    Do you believe this case should eliminate the need to wait until the Statute of Limitations has expired to claim a refund? Once the proceeds are collected they are due and payable. It seems to be implicit in the award as well.

  • Unfortunately there is no connection between the 2 year period of limitations on refunds in civil cases and this recent decision of the Court relating to payments made by a taxpayer as part of a criminal case. The IRS is still taking the position that the relevant tax year has to be nail-in-the-coffin final before paying any award on that year[s], because in their view that is the point at which they are “collected” in the sense that the taxpayer can’t ask for the money back. Its semantics though due to the refund netting rule in the Regs.

  • Eric Rasmusen

    Disappointed Whistleblower’s question is interesting. The decision doesn’t bear on that, but the attitude of the judge does. If somebody challenged the IRS position, they might well win.

    Really, the problem would be solved by IRS sharing of information, though. That would remove a lot of the uncertainty. If you know you’ll be getting $2 million, plus interest, once the process is ended, then the length of the process doesn’t matter so much.

    Currently, does the IRS pay interest on whistleblower awards?

  • No interest is paid on whistleblower awards, so time is money.

  • Bubba Shawn

    The worst decision I ever made was turning in a tax cheat that paid multi-millions in taxes, penalties and interest and pays me after 9 years a mere pittance.

    Becoming an IRS whistleblower without the counsel of Scott is a fool’s dream and complete waste of life!

  • MyheadHurtz

    I am sorry to hear that you are not too happy with your settlement Bubba Shawn. 9 years is a very long time. We are in our 8th year with our case. It is a bit ridiculous in how long the process. It’s hard to believe there isnt a way to get these cases from the beginning to the end done alot quicker. What is sad is that majority of the time, your case is just sitting there in limbo. The unknown has sure taken years off my life. I am hoping in the end, it makes going through this whole process worth it. But as of now, I dont feel like it has.

  • Disappointed Whistleblower


    Do you know if this was appealed? If not, when is the deadline?

  • I have not seen anything yet. The time to appeal is 90 days from the date the decision (rather than the opinion) is entered. As the docket is still under seal, we have no way of knowing if the decision has been entered and, if it was, when it was entered.

  • ellis wyatt

    it seems the 90 days to appeal should have expired.
    what happens if the IRS doesn’t appeal?

  • The time runs from when the Tax Court enters its decision. The decision is different than the opinion. See for additional information regarding the difference between an opinion and a decision. In this case, we do not know when, or even if, the Tax Court has entered a decision as the docket sheet for these cases are under seal.

  • Ellis Wyatt

    Thank you

    Can we infer anything from the IRS not having issued an Action on Decision or a comment in the IRS weekly Bulletin?

    Do you expect the IRS to appeal?

  • We don’t believe there is a Decision yet on which the IRS would file such Action. They may very well appeal this, even though we believe that would be a losing move.

  • ellis wyatt

    at a minimum it seems the IRS did not welcome the decision , which I imagine points in the direction of an appeal or non-acquiescence

  • I don’t think we should assume the IRS has a unanimous view on that.

  • ellis

    Very Interesting. Perhaps that’s why the IRS has been silent, no consensus within. However, there has also been no further comment from the law firms involved in the case.

    Do you think we see a decision in 2016?

  • No.

  • Bad Dog

    Scott, Erica and Gregory –

    My two questions are at the end of these three paragraphs. You may be aware that a couple of weeks ago (January 2017), the National Whistleblower Center emailed an “action alert” stating that the Treasury Department is threatening to appeal to a higher court, presumably against the Tax Court’s highly favorable whistleblower ruling, in the case known as Whistleblower 21276-13W and Whistleblower 21277-13W, filed August 3, 2016.

    According to the NWC action alert – “The Treasury Department is arguing that whistleblowers are only protected and rewarded when they turn in violations resulting in civil or administrative penalties (i.e. the smaller cases). But whistleblowers who turn in criminal tax fraud resulting in criminal penalties get no protection and no reward”

    On your blog concerning this particular Tax Court ruling in early August 2016, many comments posted from other whistleblowers and responses from Scott run all the way into November 2016 – suggesting that the government is divided about whether to take action against the Tax Court rulings implications.

  • Responses to your questions:
    1) I know of no public document that says that. The Whistleblower Office Annual Report did state:
    “The Whistleblower Office is also working with the Office of Chief Counsel and Treasury to consider amending the final regulations to reflect recent developments and to improve the administration of the Whistleblower Program. Administrative guidance may be considered in FY 2017 and, if so, the IRS will provide notice and request public comment on any guidance it issues.”
    With regards to that case in particular, the docket is still under seal, and there does not appear to be a published Action on Decision for that case.

    2) If and when that case get appealed for sure we’ll consider how we can best contribute to the collective cause of protecting the rights of tax whistleblowers.

  • Bad Dog

    Scott – your prompt response was insightful and reassuring; no news is good news. We trust that you will keep everyone immediately informed if or when you hear that Treasury/IRS moves to alter the ramifications of this particular case, Whistleblower 21276-13W and Whistleblower 21277-13W. I may be able to assist in a modest capacity.

    It is interesting that your larger cases are civil via LB&I. The original quoted passage from the National Whistleblower Center about bigger criminal cases may allude to the much higher media profile of criminal cases. As such, tax-based whistleblowing deserves much greater media attention – the specialization should realistically be worth hundreds of billions of dollars – annually. In the future, most tax audits should, surely, be initiated exclusively upon whistleblower guidance – particularly with respect to offshore issues, including transfer pricing (Section 482). By contrast, most audits would seem relatively ineffectual when they are not in cooperation with whistleblowers.

    Moreover, from this particular case, Whistleblower 21276-13W and Whistleblower 21277-13W, it is worth reiterating the tremendous potential categories of awards for future cases –

    1. Whistleblower awards for tax restitution; and
    2. Whistleblower awards for criminal fines; and
    3. Whistleblower awards upon forfeiture amount; and
    4. Potential whistleblower awards for money laundering; and
    5. Potential whistleblower awards upon FBAR violations.

    Thank you again for keeping everyone informed about any hints that Treasury/IRS might move against this case.

  • just another whistleblower

    Decisions now entered in 21277-13w and 21276-13w. (1/27/2017)