Tax Court Denies WB Claim Made Contemporaneously With Target Taxpayer’s Voluntary Disclosure (2/23/24)

In Whistleblower 14376-16W v. Commissioner, T.C. Memo. 2024-22, GS here, the Court held that the Whistleblower (“WB”) was entitled to no relief from the Whistleblower Office’s denial of an award. The opinion establishes no new precedent, which is why it is a Memo opinion. The opinion does offer some interesting aspects, which I will discuss here.

1. The WB claim targeting several taxpayers was made a couple of months before some of the taxpayers made a request to CI to participate in an IRS voluntary disclosure program.  (It is not clear whether the request was under one of the offshore variants or was under the general voluntary disclosure program (see p. 3 n. 6); it makes no difference, however, for the point I discuss here, so I will just call it a VDP request.) The VDP request was made before any submissions (amended returns, etc.) required to complete voluntary disclosure; those submissions were delayed a substantial period. After the voluntary disclosure request, the WBO processed and sent to the field the WB claim after CI received the VDP request. The IRS subsequently undertook the work required to determine and collect substantial tax based on the taxpayers' submissions. The IRS says that, although its examination function received the WB information, it took no action based on the information. The record before the Court (essentially the record related to the WB claim and related items) supported the IRS’s claim that the proceeds generated from its activity did not rely on the WB claim and information in the WB claim.

2. The Court denied the WB’s sweeping and broadly written discovery requests designed to ferret out all documents and information that could test even tangentially the IRS’s narrative that no collected proceeds resulted from the WB information (including whether the record the IRS submitted to the Court was complete). In part, the WB requested documents and information in the voluntary disclosure package that, it claims, was “indirectly considered” in collecting the proceeds. (See pp. 33-37.) In part, the Court reasoned:

          Petitioner contends, however, that the WBO “indirectly considered” the VDP materials. As one court has aptly observed, “it is not entirely clear what it means to indirectly consider documents or materials.” Amgen Inc. v. Hargan, 285 F. Supp. 3d 397, 404 (D.D.C. 2017) (treating the “indirect consideration” concept as “captur[ing] materials that are necessary to understand the documents that the agency directly relied upon” and denying motion to supplement the administrative record with documents intended to test a decision by the Food and Drug Administration for consistency with previous decisions). The caselaw provides no general test.24 But it does suggest some guiding principles. One court has observed that if an agency's final decision was based “on the work and recommendations of subordinates, those materials should be included as well.” Amfac Resorts, L.L.C. v. U.S. Dep't. of Interior, 143 F. Supp. 2d 7, 12 (D.D.C. 2001) (collecting cases), aff'd in part, rev'd in part 282 F.3d 818 (D.C. Cir. 2002), vacated in part sub nom. Nat'l Park Hosp. Ass'n v. Dep't of Interior, 538 U.S. 803 (2003). On the other hand, it is not always necessary to include in the administrative record source information upon which agency staff relied in making their recommendations to the agency decisionmakers if other information in the record obviates the need to consider the source information independently. See, e.g., James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (affirming denial of discovery and record supplementation with respect to source documents that bank examiners had relied upon in making their bank-insolvency reports to the Comptroller of the Currency, where “detailed contemporaneous reports from the examiner-in-charge and members of her examination team explain[ed] how and why they reached their conclusions regarding the banks' reserves”); Cape Hatteras Access Pres. All., 667 F. Supp. 2d at 114 (denying motion to supplement the record with a biological report that the National Park Service had relied upon [*35] in developing an interim strategy that was before the Fish and Wildlife Service when it designated certain critical habitats, even though the biological report was referenced by several other documents in the administrative file).

Amicus Briefs in Supreme Court Bittner Case on Nonwillful FBAR Penalty Per Form or Per Account (10/12/22)

I previously blogged that the Supreme Court granted Bittner's petition for writ of certiorari. Supreme Court Grants Cert in Bittner v U.S. On FBAR Nonwillful Penalty Per Form or Per Account Issue (Federal Tax Crimes Blog 6/21/22; 6/22/22), here. The Supreme Court docket sheet for the case (No. 20-40597) is here, with links to all filings in the case.  (Because for some reason, the Supreme Court docket sheet link does not work all the time, the parallel SCOTUSblog docket sheet is here with appropriate links.)

I write today on the amicus briefs in the case (also linked on the docket sheet). Both parties in the case gave blanket consent to filing amicus briefs on the merits. Here is the breakdown of the amicus briefs:

Amicus briefs in support of Bittner:  National Federation of Independent Business Small Business Legal Center; American College of Tax Counsel (note that the docket entry for this brief says it is filed in support of neither party, but the actual brief says it is in support of Bittner); Center for Taxpayer Rights; and The Chamber of Commerce of the United States of America,.

Amicus brief in support of the United States (IRS): National Whistleblower Center.

Amicus brief in support of Neither Party:  American College of Trust and Estate Counsel.

JAT Comments:

Whistleblower FYE 2020 Report (1/6/21)

The IRS Whistleblower Office has released a report titled Fiscal Year 2020 annual report, here.  The opening message from the Director of the WBO, Lee D. Martin, is (have added links for the publications referenced):

The fiscal year (FY) 2020, which began on October 1, 2019, marked the 14th anniversary of the Whistleblower Office and the Whistleblower Program. I am extremely proud of the dedicated women and men in the Whistleblower Office, Small Business/Self-Employed (SB/SE) Initial Claims Evaluation unit, and other divisions across the Internal Revenue Service (IRS). Since 2007, the Whistleblower Program paid awards to whistleblowers totaling more than $1 billion dollars and has led to the successful collection of $6.14 billion from noncompliant taxpayers. 

Statistically in FY 2020, the Whistleblower Office made 169 awards to whistleblowers totaling $86,619,032 (before sequestration), which includes 30 awards under Internal Revenue Code (IRC) § 7623(b). Proceeds collected were $472,080,014. Included in the proceeds collected, as a result of IRC § 7623(c), are the non-Title 26 amounts collected for criminal fines, civil forfeitures, and violations of reporting requirements amounting to $110,438,166. The Title 26 amounts collected were $361,641,848. Whistleblower claim numbers assigned in FY 2020 decreased by 20 percent from those submitted in FY 2019, and closures decreased by 33 percent. 

During FY 2020, we continued our focus on operationalizing the whistleblower statutes under the Taxpayer First Act of 2019 (TFA 2019). This included adding four analysts to meet the increased workload due to the new provisions. To educate whistleblowers about the new TFA 2019 provisions, we updated Publication 5251, Whistleblower Claim Process and Timeline, and Internal Revenue Manuals 25.2.1 and 25.2.2. On December 3, 2019, we signed a Memorandum of Understanding (MOU) with Alcohol and Tobacco Tax and Trade Bureau (TTB) that put in place procedures between the IRS and TTB to process claims for whistleblower awards under Internal Revenue laws that are administered and enforced by TTB. On April 30, 2020, the Whistleblower Office held its first ever Whistleblower Program Forum. Lastly, like other organizations and businesses, the Whistleblower Office worked diligently to maintain Whistleblower Program operations that were impacted by office closures due to the coronavirus crisis. 

GAO Report on IRS Whistleblower Processing and Improvement of Data Controls (10/30/18)

The GAO issued a report titled "Whistleblower Program: IRS Needs to Improve Data Controls for Some Award Determinations (GAO-18-698 published 9/28/18 and publicly released 10/29/18).  The fast facts, highlights and recommendations are here.  The full report is here.

I cut and paste the highlights below:

What GAO Found 

Prior to February 9, 2018, when Congress enacted a statutory change requiring the Internal Revenue Service (IRS) to include penalties for Report of Foreign Bank and Financial Accounts (FBAR) violations in calculating whistleblower awards, IRS interpreted the whistleblower law to exclude these penalties from awards. However, GAO found that some whistleblowers provided information about FBAR noncompliance to IRS. In a sample of 132 whistleblower claims closed between January 2012 and July 2017, GAO found that IRS assessed FBAR penalties in 28 cases. It is unknown whether the whistleblower's information led IRS to take action in all of these cases. These penalties totaled approximately $10.7 million. Had they been included in whistleblower awards, total awards could have increased up to $3.2 million. Over 97 percent of the FBAR penalties collected from these 28 claims came from 10 cases with willful FBAR noncompliance, for which higher penalties apply.

Report of Foreign Bank and Financial Accounts (FBAR) Penalties and Potential Whistleblower Awards for Selected IRS Whistleblower Claims Closed between January 1, 2012, and July 24, 2017

FBAR penalty type	Number of claims	FBAR penalty amount (dollars)	Maximum potential whistleblower awarda(dollars)
Willful penalty	10	10,485,847	3,145,754
Non-willful & negligent penalty	18	263,039	78,912
Total	28	10,748,886	3,224,666

Source: GAO analysis of IRS data. | GAO-18-698
a Maximum potential award is defined as 30 percent of the FBAR penalty amount.

IRS forwards whistleblower allegations of FBAR noncompliance to its operating divisions for further examination. However, IRS Form 11369, a key form used for making award determinations, does not require examiners to include information about the usefulness of a whistleblower's information FBAR and other non-tax issues. After Congress enacted the statutory change, IRS suspended award determinations for 1 week, but resumed the program before updating the form or its instructions, or issuing internal guidance on new information required on the Form. As of June 28, 2018, IRS had not begun updating the Form 11369 or its instructions. The lack of clear instructions on the form for examiners to include information on FBAR and other non-tax enforcement collections may result in relevant information being excluded from whistleblower award decisions.

IRS maintains FBAR penalty data in a standalone database. It uses these data for internal and external reporting and to make management decisions. Because of the change in statute, IRS will need these data for determining whistleblower awards. GAO found that IRS does not have sufficient quality controls to ensure the reliability of FBAR penalty data. For example, IRS staff enter data into the database manually but there are no secondary checks to make sure the data entered are accurate. Without additional controls for data reliability, IRS risks making decisions, including award determinations, with incomplete or inaccurate data. 

This is a public version of a sensitive report issued in August 2018. Information on the FBAR Database that IRS deemed to be sensitive has been omitted. 

Why GAO Did This Study 

Tax whistleblowers who report on the underpayment of taxes by others have helped IRS collect $3.6 billion since 2007, according to IRS. IRS pays qualifying whistleblowers between 15 and 30 percent of the proceeds it collects as a result of their information. However, until February 9, 2018, IRS did not pay whistleblowers for information that led to the collection of FBAR penalties. 

GAO was asked to review how often and to what extent whistleblower claims involve cases where FBAR penalties were also assessed. Among other objectives, this report (1) describes the extent to which FBAR penalties were included in whistleblower awards prior to the statutory change in definition of proceeds; (2) examines how IRS used whistleblower information on FBAR noncompliance, and how IRS responded to the statutory change in definition of proceeds; and (3) describes the purposes for which IRS collects and uses FBAR penalty data, and assesses controls for ensuring data reliability. GAO reviewed the files of 132 claims closed between January 1, 2012, and July 24, 2017, that likely included FBAR allegations; analyzed IRS data; reviewed relevant laws and regulations, and IRS policies, procedures and publications; and interviewed IRS officials. 

What GAO Recommends 

GAO recommends IRS update IRS Form 11369 and improve controls for the reliability of FBAR penalty data. IRS agreed with all of GAO's recommendations.

JAT Comments:

Congress Amends Tax Whistleblower Section, § 7623, to Clarify Broad Reading of the Award Base (2/24/18)

Earlier this month, Congress amended the mandatory minimum tax Whistleblower award program to make clear that proceeds for purposes of the award base includes non Title 26 collections for fines, forfeitures and reporting violations (such as FBAR penalties).  See § 41108 of the Bipartisan Budget Act of 2018, P.L. 115-123, here.  The change is effected by using the term "proceeds" rather than "collected proceeds and adding § 7623(c) to provide as follows.

(c) Proceeds.—For purposes of this section, the term ‘proceeds’ includes—
   (1) penalties, interest, additions to tax, and additional amounts provided under the internal revenue laws, and
   (2) any proceeds arising from laws for which the Internal Revenue Service is authorized to administer, enforce, or investigate, including—
      (A) criminal fines and civil forfeitures, and
      (B) violations of reporting requirements.

The expanded definition is both for the award base and for the minimum proceeds for § 7623(b).

I have revised my discussion of the Whistleblower Chapter, Chapter 19, in my working draft of my Federal Tax Procedure Book (pending the next publication) to incorporate these changes and attach a red-lined version of it here.  (Thanks to a reader who notified me by comment below as to an error regarding the effective date in a prior version of the working draft; I have corrected and now link the corrected version.)

ICIJ Offers a New Trove of Offshore Activity Documents -- the Paradise Papers (11/6/17)

The International Consortium of Investigative Journalists (ICIJ) has struck again, disclosing a cache is new documents disclosing offshore activity of the rich and famous.  ICIJ calls the new cache of documents the Paradise Papers (which distinguishes it from the old cache, the Panama Papers, and from future caches).  The ICIJ web page for the Paradise Papers, here.

A helpful ICIJ introductory video is here.

The Wikipedia page is here.

BBC has a good piece "Paradise Papers: Tax haven secrets of ultra-rich exposed," here.

Offshore activity of the type disclosed in the Paradise Papers is not necessarily illegal.

My guess is that somewhere somehow related to these disclosures will be whistleblower claims.  Readers of this blog already have been introduced to the U.S. tax whistleblower regime in § 7623(b) that can be quite lucrative for whistleblowers -- 15-30% of collected proceeds.

A sensitive issue for whistleblowers is whether, in blowing the whistle, they violate U.S. law or non-U.S. laws (such as bank secrecy laws, etc.).  A related issue for whistleblowers affiliated with professional firms (such as law firms and accounting firms) whether they violate professional standards.  In either event U.S. Government agencies receiving such disclosures will be very concerned that the agencies not be viewed as affirmative actors in the violation of non-U.S. laws or professional standards.  And, if the whistleblower is violating legal or ethical standards, the U.S. Government agencies may not act, unless there is some affirmative support (such as the attorney-client crime-fraud exception).  For example, if the whistleblower is a lawyer, the IRS will be keenly interested in whether the attorney-client privilege is implicated with respect to the information and documents disclosed and may not use the disclosed information until they are assured the there is no taint that would prevent the use.  Those of us who have worked through the traps and landmines in this area know that anticipating and addressing these concerns are key to successfully getting to the goal of a whistleblower award.

Tax Court Denies Claim in Offshore Account Case with Very Unusual Facts Because the Information Did Not Produce Collected Proceeds (6/16/17)

In Awad v. Commissioner, T.C. Memo 2017-108, here, a whistleblower case, the following is the key time line:

Date	Event
11/18/2008	Awad files WB claim (Form 211) identifying husband and wife (TH and TW, respectively) and their three adult children as owners of undisclosed foreign bank account.
2/?/2009	WBO assigns to LB&I
	LB&I Agent reviews returns and decides to accept as filed based on insufficient information
8/?/2009	TH dies.
1/?/2010	TW and children file "voluntary disclosures pertaining to a previously undisclosed account at the same foreign bank" Awad had disclosed.to WBO
??/??/2010	SB/SE opens exam incident to voluntary disclosure
7/?/2010	LB&I returns the case to WBO (although a year after LB&I made decision not to pursue)
9/?/2010	WBO discovers SB/SE exam and forwards information to SB/SE for possible use in examination
??/??/2010	SB/SE Agent interviews Awad by telephone; Awad provides additional information
??/??/2010	SB/SE advises WBO that the information did not assist in the audit
8/??/2011	IRS enters closing agreement on the voluntary disclosure requiring tax, penalties (including MOP) in excess of $2M for TW and estate
9/??/2013	WBO learns of estate tax exam for TPH and refers information to SB/SE Estate and Gift Tax
1/28/2014	WBO denies award.

There are some significant, scantily explained, time lapses in the foregoing, but they are not relevant to the outcome because the examining agents involved in LB&I and SB/SE all attested that the Form 211 information did not contribute to the ultimate outcome -- the acceptance of the TH Estate and TW's voluntary disclosure.  After all, for collection, the information does have to contribute to collected proceeds to permit a WB award.

The thing that is curious to me is that there were no procedures to flag the matter when the WBO first assigned it to LB&I so that, after that date, the taxpayers could not qualify for voluntary disclosure.  It is true that the procedure assumes disqualification only after the IRS has flagged the taxpayer for audit.  (I have had one client thus disqualified even though the IRS had never notified him of the audit.)  I understand that LB&I had not yet decided to audit, but it seems to me that there should be some way to disqualify once WBO decides the information has sufficient gravitas to refer to Examination, at least while it is in that status.  Just my view.

The Whistleblower Behind Caterpillar Tax Commotion (6/2/17)

I wrote before on the execution of a search warrant on Catepillar' Headquarters.  Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (Federal Tax Crimes Blog 3/6/17; 3/8/17), here.  I concluded that discussion with the following speculation:

I will raise one possibility, though, and I caution that this is entirely speculation.  I wonder whether her report could have been submitted along with a whistleblower claim?  I have no idea, but given the numbers involved, a whistleblower claim is likely to be very lucrative indeed.  But, I certainly have no idea whether that is the case.

Bloomberg reports that a whistleblower claim is behind the Caterpillar commotion.  Bryan Gurley, David Voraceos and Joe Deaux, The Whistleblower Behind Caterpillar's Massive Tax Headache Could Make $600 Million (BloombergBusinessweek 6/1/17), here.

The article identifies the whistleblower as Daniel Schlicksup, a Caterpillar accountant, and summarizes his saga from company curmudgeon trying to get the attention of superiors on the matter to finally whistleblower.  A very good read.

Schlicksup's journey is consistent with my experience with whistleblowers or persons considering becoming whistleblowers.  All too often the company is just not interested in listening before the problems get out of hand.  The wizards in the company buttressed by their outside professional enablers will not listen to naysayers, and often the internal mechanisms to elevate problems can be thwarted by power structures in the firm.  That is not the way it is supposed to work, particularly for public companies, but unfortunately that is the way it sometimes works.

Now, for a brief review of the tax whistleblower possibilities.  Section 7623(b), here, allows whistleblower awards of from 15% to 30% of collected proceeds from the whistleblower information.  In this case, the collected proceeds would include the tax, the interest on the tax, any penalty (either 20% or 40% accuracy related penalty under § 6662, here, or the 75% civil fraud penalty under § 6663) and interest on the penalty, here).  The article says that the underlying tax bill may be $2 billion and apparently derives a $600 million potential reward based on the maximum award of 30% of that amount.  Of course, the amount of the reward between 15% and 30% is discretionary (although subject to review by the Tax Court), but my experience suggests that an award in this case would probably be at least 22.5% (splitting the difference for a rough and ready solution).  And, of course, if the $2 billion amount does not include interest or penalties, then the reward base would be increased.  In any event, assuming the same $2 billion base, even a 15% reward of $300 million would be sweet.

For more discussion of the whistleblower reward program, see Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.05[4][a][iv] Informants (including whistleblowers seeking rewards) (Thomsen Reuters 2015) (online edition).  (Note, I am the principal author of that Chapter of the Saltzman and Book text).

Statistics from the 2016 Whistleblower Office Report (1/16/17)

The IRS Whistleblower Program Fiscal Year 2016 Annual Report to Congress, here, reports the following statistics:

Table 1: Amounts Collected and Awards under Section 7623, Fiscal Years  2014 to 2016 FY2014 FY2015 FY2016 Total Claims Related to Awards 240 204 761 Total Number of Awards fn4 101 99 418 Total IRC 7623(b) Awards 19 18 Collections over $2,000,000 fn5 9 11 16 Total Amount of Awards fn6 $52,281,628 $103,486,236 $61,390,910 Amounts Collected  fn7 $309,990,568 $501,317,481 $368,907,298 Awards as a Percentage of Amounts Collected 16.90% 20.60% 16.60%

fn4  For Table 1, “Total Number of Awards” reflects the number of payments to whistleblowers. In some cases, awards can include proceeds from multiple taxpayers, which are reflected in the “Total Claims Related to Awards.”
fn5  This row includes pre-enactment section 7623(a) claims that were greater than $2 million and section 7623(b) claims.
fn6 The “Total Amount of Awards” is prior to sequestration reductions.
fn7  The “Total Amount of Awards” [for FY2015] was overstated by $441.84 on the FY 2015 Annual Report, and Table 1 has been revised to reflect the correct amount.

JAT Comments on the Statistics: My own calculations the following averages per award from the numbers above: Average Awards $517,640 $1,045,316 $146,868 These average award numbers are low because of the large number of § 7623(a) awards which generally tend to be significantly less than the § 7623(b) awards.  My inference is that the § 7623(b) awards – 0 in FY 2014, 19 in FY2015, and 18 in FY2016 - would average much more than the indicated average for all awards.  Indeed, I suspect that, although § 7623(b) awards made are a low percentage of total awards, the lion's share of the Total Amount of Awards is under § 7623(b). These numbers for claims awarded under § 7623(b) may seem low, but § 7623(b) is still relatively new (enacted effective 2007) and processing whistleblower claims to fruition with collected proceeds (collections after the refund statute of limitations has expired) takes a long time.  So, the number of awards and the amounts awarded are probably not indicative of the future where awards may be in the pipeline for claims already made or will be received and processed in later years.

Back to the Report:

The Report contains a discussion of "Other Issues of Interest."

Protecting the Contingency Fee in IRS Whistleblower Representation (12/24/16)

The issue I discuss today is how an attorney may protect his contingency fee in an IRS Whistleblower case.  The background is the substantial awards available under § 7623(b), here.  Based on my experience and anecdotal information from others, contingency fees with respect to IRS whistleblower claims is the norm.  I have not heard of any hourly rate representations.  The reason, I think, is that there are too many contingencies involved in the representation that encourages the client to avoid the financial cost of hourly representation that may not produce any award.  For more on the contingency fees in legal representation, see Adam Shajnfeld, A Critical Survey of the Law, Ethics, and Economics of Attorney Contingent Fee Arrangements, 54 NYLS Law Rev. 774 (2009/2010), here.

In Begelman & Orlow, P.C. v. Ferara, 2016 U.S. Dist. LEXIS 169788 (D NJ 2016), here, the attorney firm had a 1/3 contingency fee, but apparently the agreement had no protection mechanisms if the client received an award.  The attorney firm could sue the client and, provided there were no debilitating problems in the representation, presumably obtain a judgment in some amount.  But, in Begelman, the client fired the attorney firm and withdrew its power of attorney when, according to the facts, she was on the verge of obtaining a recovery.  Thinking that the client had obtained a recovery, the attorney firm sued the client and the client countersued.  (It is an oft encountered phenomenon that a suit against a client for fees will provoke a counter-action -- either separate suit or, more likely, a counterclaim alleging attorney skullduggery or malpractice.)  The case, filed in 2012, has been pending for some time now.  The docket entries as of 12/9/16 are here.  The decision resolves cross motions for summary judgment.  The decision notes that the defendant denies that she has received an award and limits the attorney firms' recovery to quantum meruit -- value of services received -- which will take into consideration defendant's claims of inappropriate representation.

One of the problems in Begelman is that, because of the withdrawal of the POA, the IRS Whistleblower Office could not tell the attorney firm whether an award had been given and discovery against the IRS was unavailing.  And the client insisted that she received no award.  Her insistence raises a credibility issue (because other proof is stymied unless discovery fleshes it out), so the matter will go to trial and could be resolved because there was no award (if the judge, at trial, finds her a credible witness).

I won't try to summarize the factual intrigues reflected in the decision.  (It is a good read.)  Instead, I want to ask readers the question of how an attorney protects his fees from this type of client gambit?  I have represented whistleblowers and have entered a rather plain vanilla contingency fee arrangement.  I have not protected my fees against this type of client gambit but, fortunately, have not had a client go rogue.  The issue, though, is that the client can fire the attorney midstream or even on the cusp of an award and withdraw the POA.

So, what to do?  One solution I have heard is to make the attorney a joint whistleblower on the Form 211.  A POA would still be required to represent the other filing whistleblower (the client) and the client can withdraw the POA.  But, the attorney's personal interest in the claim would then give him access to the status of the claim and a share of the award.  That will not protect against the client making claims of deficient representation as presented in the Begelman case, but the client would have to institute that suit to recover the fee from the attorney.  Or the client desiring to withdraw midstream could perhaps sue the lawyer seeking inter alia that the client withdraw with respect to the original claim and cede the interest to the client.

I would appreciate hearing from readers how they deal with this possibility.  Please do that by comment or by email to jack@tjtaxlaw.com.

Tax Court Includes Title 18 Fines and Forfeitures from Tax Crimes in Whistleblower Collected Proceeds (8/4/16)

In Whistleblower 21276-13W v. Commissioner, 147 T.C. ___, No. 4 (2016), here, the Tax Court interpreted the term "collected proceeds" which is the base to which the Whistleblower award percentage is based under § 7623(b) to include the following:

tax restitution $20,000,001
criminal fine $22,050,000;
civil forfeiture $32,081,693

Total $74,131,694

There was no question that collected proceeds included the tax restitution.  Tax restitution is a payment with respect to Title 26 taxes and thus is a relatively easy fit in the term "collected proceeds" under § 7623(b).  The dispute was over the criminal fines and civil forfeiture which are not collected under Title 26; rather, criminal fines and civil forfeitures are collected under Title 18, the general criminal code.  (See Slip Op. 5 fns. 4 & 5, discussing 18 USC § 3571 (fines) and § 981(a)(1)(A) (civil forfeiture).)  Bottom line, the Tax Court interpreted the term "collected proceeds" expansively and included the criminal fines and forfeitures.

An interesting point for readers of this blog is the payor of the amounts at issue.  The opinion refers to the payor as the "targeted taxpayer."  Actually, the payor was Wegelin & Co. ("Wegelin,", a Swiss Bank, which was not the U.S. taxpayer but was the conspirator required to pay the tax of the client-taxpayers via tax restitution in Wegelin's criminal case.  The opinion does not specifically identify Wegelin, but gives enough details to identify Wegelin from the other public information.  See the USAO SDNY press release dated 3/4/13, here.  Technically, Wegelin was not a taxpayer per se, but I suppose the term "targeted taxpayer" was used for convenience because that concept is the usual application of § 7623(b).

One of the interesting steps in its holding was the following (Slip Op. 17-18) (bold-face supplied by JAT):

The Code itself refers to laws outside title 26 as internal revenue laws. As an example, section 6531 provides periods of limitation on criminal prosecutions:  

SEC. 6531. PERIODS OF LIMITATION ON CRIMINAL PROSECUTIONS. 

No person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted within 3 years next after the commission of the offense, except that the period of limitation shall be 6 years--
* * * * * * *
     (8) for offenses arising under section 371 of Title 18 of the United States Code, where the object of the conspiracy is to attempt in any manner to evade or defeat any tax or the payment thereof. 

We find the reference in section 6531(8) to 18 U.S.C. sec. 371 to be especially illuminating inasmuch as the targeted taxpayer pleaded guilty to conspiracy to defraud the IRS, file false Federal income tax returns, and evade Federal income tax, in violation of 18 U.S.C. sec. 371. n15 Finally, the phrase “internal revenue laws” dates from the earliest version of the whistleblower statute enacted in 1867. At that time, the modern title 26 did not exist; internal revenue laws meant all revenue laws. We think it erroneous to impose a post facto restriction on the meaning of the phrase not intended by Congress when it enacted the legislation. In sum, the phrase “internal revenue laws” is not limited to those laws codified in title 26.
   n15 Ours is not the only court to note that tax laws and related laws may be found beyond those codified in title 26. The District Court for the Northern District of California in Hom v. United States, 2013 WL 5442960 (N.D. Cal. Sept. 30, 2013) aff’d, ___ F. App’x ___, 2016 WL 1161577 (9th Cir. Mar. 24, 2016), stated: “[T]he issue here is whether [31 U.S.C.] Section 5314 is either an internal revenue law or related statute (either designation would make the disclosure [of taxpayer information under sec. 6103] permissible). The United States argues that [31 U.S.C.] Section 5314 is a ‘related statute’ under Section 6103 (Dkt. No. 13 at 6). This is correct. Congress intended for [31 U.S.C.] Section 5314 to fall under ‘tax administration.

Tax Court Holds FBAR Penalty Collected Is Not in the $2,000,000 Threshold for Whistleblower Award under § 7623(b) (3/14/16 & 3/15/16)

In Whistleblower 22716-13W v. Commissioner, 146 T.C. ___, No. 6 (2016), here, the Tax Court that collections of FBAR penalties arising from Whistleblower claims under § 7623(b), here. are not in the $2,000,000 threshold calculation.  Here is the Tax Court's summary of its opinion:

P filed Form 211, Application for Award for Original Information, with the IRS Whistleblower Office with respect to TP1. By guilty plea, TP1 agreed to pay an FBAR civil penalty substantially in excess of $2,000,000 and a small amount of restitution, reflecting unpaid Federal income tax on income derived from Swiss bank accounts.
A whistleblower is eligible for a nondiscretionary award under I.R.C. sec. 7623(b) only “if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000.” I.R.C. sec. 7623(b)(5)(B). FBAR civil penalties are imposed and collected under 31 U.S.C. sec. 5321 (2006), not under the Internal Revenue Code. R contends that FBAR payments do not constitute “additional amounts” for purposes of ascertaining whether the $2,000,000 threshold has been met. 

1. Held: The term “additional amounts” as used in I.R.C. sec. 7623(b)(5)(B) means the civil penalties set forth in c. 68, subch. A, of the Internal Revenue Code, captioned “Additions to the Tax and Additional Amounts.” 

2. Held, further, FBAR civil penalties are not “additional amounts” within the meaning of I.R.C. sec. 7623(b)(5)(B), and they are not “assessed, collected, * * * [or] paid in the same manner as taxes.” I.R.C. sec. 6665(a)(1). FBAR payments must therefore be excluded in determining whether the $2,000,000 “amount in dispute” requirement has been satisfied.

Note that the key limiting language for the threshold is "tax, penalties, interest, additions to tax, and additional amounts" § 7623(b)(5)(B) may not be limiting for the award base itself in § 7623(b)(1).  In § 7623(b)(1), the award base is:  "collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action."  The issue is whether "including" is illustrative permitting other items fairly characterized as collected proceeds to be included or limiting so that only the items mentioned after including are in the base.  (I am sure there are at least mini-canons of statutory interpretation on that issue but have not researched them.)  The Tax Court said that the argument for interpreting the award base in § 7623(b)(1) more broadly to include related non-Title 26 amounts is "not without force," but deciding the interpretation of the threshold amount did not require it to resolve that issue.

The Court footnoted on page 6 another IRS "defense" that the Court did not decide because of its holding in the case.

   n6 Respondent also advances the broader contention that whistleblower awards are payable only for recoveries under “the internal revenue laws.” See sec. 7623(a)(2). Because FBAR penalties are paid under Title 31, respondent argues that they are not “collected proceeds” under section 7623(b)(1). Since we rule for respondent under the affirmative defense in section 7623(b)(5)(B), we need not address this alternative contention. We note that the IRS Chief Counsel opinion issued during the consideration of petitioner’s case acknowledges one type of payment made outside of Title 26 that does constitute “collected proceeds.” That opinion notes that “[t]he IRS assesses and collects in the same manner as tax any criminal restitution ordered” in a criminal case, and that “any such restitution should be included as ‘collected proceeds’ for purposes of section 7623, even though ordered pursuant to Title 18.” See supra p. 4.

JAT Comment:  The miscellaneous offshore penalty (MOP) in OVDP or Streamlined presumably would be in the whistleblower award base.  But, in most cases, the MOP collection likely would be attributable to the voluntary disclosure and not be deemed attributable to the information the whistleblower provided.  And, in most cases, if the IRS had the whistleblower information before the voluntary disclosure  (which may have prompted the taxpayer to join a voluntary disclosure program with an MOP), the taxpayer presumably would not qualify for the voluntary disclosure program.

On the restitution issue, I think that is a bit of a rabbit trail.  The ordering of restitution for taxes simply permits the IRS to make a summary assessment of the amount of the restitution and to use IRS collection tools to collect that amount.  Thus, that restitution is really in all practical effects within the scope of the provision, particularly once it is assessed.  For prior blog entries on the recent statute for assessing and collecting tax restitution:

• New Statute for Civil Effect of Restitution in Tax Cases (2/11/11), here.
• More on the Relationship Between Tax Liability and Tax Restitution Assessed as a Tax (10/25/13), here.
• The Rub Between Restitution Assessed as a Tax and a Deficiency (12/18/14), here.

Whistleblower Award for FBAR Penalties? (8/5/14)

In Whistleblower 22231-12W v. Commissioner, T.C. Memo. 2014-157, here, the Tax Court accepted the IRS position that the jurisdictional prerequisite for Tax Court review -- a determination by the IRS WBO -- had not been made and, hence, the Tax Court did not have jurisdiction over a whistleblower claim still pending before the WBO.  The IRS asserted an alternative defense that FBAR penalties are outside the scop of the whistleblower statute, Section 7623(b), here.  The Tax Court deferred ruling on that issue because there had been no determination which is the jurisdictional prerequisite for the Tax Court to do anything  in the matter.

Here are some key excerpts of the opinion:\

At the hearing the Court received testimony from Stephen Whitlock, Director of the Office. He testified about the Office's procedures for processing claims generally and about its handling of the particular claim at issue here. We found his testimony instructive and credible in all respects. 

Petitioner filed Form 211, Application for Award for Original Information, with the Office in November 2010. On the application petitioner asserted that he was cooperating with the Department of Justice and the IRS Criminal Investigation Division in connection with the ongoing investigation of two Swiss bankers. Petitioner alleged that his cooperation with those agencies had led to, and would lead to more, information about these bankers' involvement in tax evasion by U.S. persons having undeclared offshore financial accounts. 

* * * * 

III. Foreign Bank Account Reporting 

In the alternative, respondent contends that this Court lacks jurisdiction because payments under title 31 are outside the scope of section 7623(b)(5)(B) and are therefore outside the scope of our jurisdiction under section 7623(b)(4). Petitioner agrees that this issue is jurisdictional and urges that the Court resolve it. 

Because we have concluded that the Office did not make a "determination" within the meaning of section 7623(b)(4) sufficient to confer jurisdiction on this Court, we need not decide whether FBAR payments are "additional amounts" for purposes of ascertaining whether the monetary threshold in section 7623(b)(5) has been met, or whether that question is a jurisdictional one. See Friedland v. Commissioner, T.C. Memo. 2011-217, 102 T.C.M. (CCH) 247, 249 (not addressing the monetary threshold question when granting respondent's motion to dismiss for lack of jurisdiction).

So, at least for  now, there is no court ruling on the authority of the IRS to make whistleblower awards under Section 7623(b) for information leading to FBAR penalties.  Notwithstanding that, it would seem a streatch for that expanded scope.

Whistleblowers and FBAR Penalties (12/3/12)

The IRS has determined that the whistleblower award provided in 7623, here, does not allow awards for information leading to FBAR penalties.  See PMTA 2012-10 (April 23,2012), here.  Practitioners have questioned the propriety and the wisdom of  that interpretation.  See e.g., a National Whistleblower Center tome, dated 11/5/12, here.

The issue seems to turn upon whether the scope of Section 7623 covers collections related to non-tax matters administered by the IRS.  I will not  get into the merits because the  items above do that adequately.

I will note that this possibility should give at least the bigger players in the offshore evasion game some concern.  Even if Section 7623 were not to cover FBAR penalties, it would cover any of the related penalties (such as the 5471 penalty and the 3520 penalties).  And, if the IRS were ever to impose an "in-lieu of" penalty instead of the FBAR penalty, that penalty would be subject to award.  I know that the only "in lieu of" penalties on the table now are the OVDI /  OVDP penalties where the taxpayer voluntary outs himself before the IRS knows about the taxpayer's offshore antics.  But, it seems to me that the IRS could offer the whistleblown taxpayer an in lieu of penalty instead of an FBAR penalty in order to have a basis for a whistleblower award.  Keep in mind that, at least for the 7623(b) award, over $2 million has to be involved, so that this opportunity to pay an award could generate some good leads and revenue for the IRS.

Whistleblowers for Swiss Banks Appear to be Live and Well (9/15/12)

In a blog entry on my Federal Tax Procedure blog, I discuss whistleblower activity with respect to both so-called fee conversions for hedge and private equity firms taxable as partnerships and also whistleblow activity for Swiss banks.  See Whistleblowers, Carried Interests, Fee Waivers and Swiss Banks (Federal Tax Procedure Blog 9/15/12), here. I thought some readers might be particularly interested in the discussion regarding the Swiss banks, so I cut and paste it here:

I should also note with regard to whistleblowers that the offshore bank activity / opportunity for whistleblowers seems to be heating up.  I previous blogged that Bradley Birkenfeld who threw the light on the Swiss bank U.S. tax evasion activities (UBS in particular) received a reward of $104 million.  See Birkenfeld Gets $104 Million Whistleblower Award (9/11/12), here. That should grab the interest of Swiss bank employees who might want to deliver up data to the IRS.  And, other European tax authorities and politicians are showing a keen interest in obtaining similar data for their taxpayers and, like the U.S., might be willing to pay handsomely for it.  See Katharina Bart, Apologetic Swiss banks sweat it out as U.S., Europe mull redress (Reuters 9/12/12), here.  This excerpt after recounting the Swiss parries and thrusts with the IRS:

Birkenfeld Gets $104 Million Whistleblower Award (9/11/12)

Bradley Birkenfeld the Whistleblower who whistleblowing brought UBS to its knees and set in motion the IRS offensive against Swiss and other foreign banks has been awarded $104 million as a whistleblower award under Section 7623(b), here.  Birkenfeld was also convicted and sentenced for crimes related to his alleged reticence in coming fully clean.  Still, he was the man.  He was formerly named Tax Analysts "Person of the Year" for 2009.

This is a stunning development.  I am sure there will be a lot of buzz and hype.  But I do think this signals some significant movement in the Whistle Blower office.

Also, since the Swiss would say that his whistleblowing violated its law, we now know that the IRS admits having used the information in violation of other country law to collect revenue (which is what is required to grant an award).  So for all who thought that our Government might not used illegally obtained information, think again.  See also Payner v. United States, 447 U.S. 727 (1980), here, Government can use against a depositor information from a "flagrantly illegal search."

Whistleblower Cases and the Criminal Process (2/28/12)

Readers are at least generally familiar with the whistleblower provisions in the Code.  See Section 7263, here.  I have written on them before.  (See the Whistleblower tag below for the blogs on the subject.)  Very briefly, one provision is for a discretionary award.  The other, more potentially lucrative provision, is for a minimum of 15% of taxes, penalties and interest collected, with a discretionary further award between 15% to 30% (with a 30% maximum after the exercise of full discretion).  This latter provision came into the Code in 2006 and, for reasons to be noted, we do not yet have much anecdotal evidence of major awards.

This is not the appropriate place to address the details of that program and the limited anecdotal data (including the annual Whistleblower Office reports), but in a recent meeting, the director of the Whistleblower Office spoke.  A report of his comments is at Jeremiah Coder, IRS Whistleblower Office Implementing Improvements, 2012 TNT 35-13 (2/22/13).  Here are some key parts of that article:

Complaints about how long it takes to close whistleblower cases are unlikely to end anytime soon. Whitlock said the audit process for high-dollar cases takes longer given the complexities of those cases and the opportunities for taxpayers to appeal. While officials originally expected that high-dollar claims awards would be issued within three to five years of claim submission, it now appears that the payout time frame is likely five to seven years, because the IRS cannot pay an award until the underlying tax liability has been collected, he said.

And, as respects the interface of the whistleblower information with the criminal process:

When it becomes clear during the intake process that a case is criminal, the case is passed along to the IRS Criminal Investigation division, Whitlock said, adding that during the audit process, other whistleblower cases can be referred to CI after consultation with a fraud technical adviser. Whether the Justice Department will grant a whistleblower immunity in a criminal probe depends on the individual's role in the noncompliance, he said.

Just a couple of comments:

IRS Finalizes Whistleblower Regulations (2/21/12)

Today, the IRS published final regulations addressing certain issues under the whistleblower provision of the Code, Section 7623.  The regulations are here and Section 7623 is here.  Readers will recall that Section 7623 authorizes the IRS to pay awards from collected proceeds for information that results in the collection of tax, penalties and interest.  Subsection (a) is a discretionary award in a suitable amount ("as the IRS deems necessary").  Subsection (b), the provision drawing the most interest, is a mandatory reward of at least 15% scaling up to 30%.  In part relevant to this blog, the new regulations provide (applicable to both subsections) that the:collected proceeds include:

1.  Amounts collected subject to reward do not include criminal fines.

2.  Amounts collected subject to reward do include criminal restitution for tax order by the court.

Thoughts on the Corporate Audit Lottery (2/11/12)

The audit lottery is a gambit in which taxpayers claim tax benefits to which they are not entitled in the hope that the IRS will never audit the returns or, if audited, the improper benefits will not be discovered.  The audit lottery is simply an attempt to exploit the IRS's limited resources.  The IRS has limited audit coverage.  Most taxpayers are not audited and, when audited, tax benefits may not be reviewed.  The taxpayer wins the audit lottery if the IRS does not discover the improperly claimed benefits.

Taxpayers’ positions exploiting the audit lottery often are criminal in nature.  By criminal I mean that the taxpayer voluntarily violated a known legal duty.  This is often referred to as the Cheek definition of willfulness which is the standard for most tax crimes (e.g., tax evasion in § 7201, tax perjury, in § 7206(1) and aiding and assisting in § 7206(2)).  Taxpayers’ whose conduct is criminal are playing the audit lottery.  Very few of them would engage in that conduct if they knew they would be detected; hence, their conduct is explainable only because the probability of detection is sufficiently low that the risk / reward ration is quite favorable.  For reasons, I describe below, the audit lottery is not limited to criminal misconduct. Taxpayers merely taking super aggressive positions, positions they know are not likely to prevail but are not criminal, may also play the audit lottery.  In either event, both types of taxpayers seek to exploit the IRS’s limited ability to discover, understand and correct their erroneous tax benefit claims.

In this blog, I analyze the audit lottery through the perspective of the criminal tax regime and the civil tax penalty regime.  Both regimes offer penalties for misconduct with respect to claiming improper tax benefits.  The criminal penalty risks can usually be practically eliminated by sophisticated, well advised taxpayers, so that the only penalty risks to playing the audit lottery are the civil penalties.  Perversely, the civil penalties are too low to encourage aggressive taxpayers to forgo the audit lottery.  I therefore focus here on the civil tax penalties.

Wikileaks Takes Aim at Swiss Bank Secrecy

Wikileaks is reported to be in the process of vetting and publishing some "secret" Swiss bank data.  See the Reuters article here.  As reported, this is not the first time.  The new data has information about "around 2,000 bank clients -- including prominent business people, artists and around 40 politicians -- who have parked their money offshore" -- "probably to avoid tax."  The data comes from 3 financial institutioins, including Julius Baer.