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:

Senate Press Release and Report on Offshore Evasion Through Shell Banks Skirting FATCA (8/28/22)

Senator Wyden led a major Senate Finance Committee investigation that produced a press release and report about use of “shell bank” to avoid the FATCA reporting requirements.  See the press release titled Wyden Investigation Uncovers Major Loophole In Offshore Account Reporting, here, and the report titled The Shell Bank Loophole, here.  The press release offers a good summary of the report (see particularly the “Key Findings” in the press release).

The following are summaries of the key points that readers of this blog may be interested in:

1. The gambit requires that the shell bank be registered with the IRS.  The press release says that establishing a shell bank with foreign accounts that do not get reported to the IRS is simple:

The key steps:

1. Establish a shell company in a FATCA partner jurisdiction, even those in well-known tax haven jurisdictions like Bermuda or the British Virgin Islands.

2. Submit IRS form 8957 to register the shell company as a foreign financial institution and obtain a Global Intermediary Identification Number (GIIN).

3. Open an account at a bank in Switzerland, or other FATCA partner jurisdiction, in the name of the shell company now registered as a financial institution. Use an attorney or other intermediary as the signatory of the account.

4. Invest in private equity firms or other investment vehicles and direct the fund manager to wire proceeds from investment activities in the United States to the shell company’s account in Switzerland or elsewhere.

The results:

•  The Swiss bank is no longer required to report that the account is held by U.S. persons because the account is held in the name of an entity with a valid GIIN number. The Swiss bank is also no longer required to conduct due diligence to determine whether the account has a U.S. nexus.

•  The shell company is now operating as a “shell bank” and can self-certify reporting offshore accounts to IRS for FATCA purposes.

•  In the absence of an audit or other federal investigation, is it highly unlikely the IRS will detect whether these accounts are concealing or underreporting assets held by U.S. persons.

District Court for ED VA Dismisses Reverse False Claims Act Proceeding Against Credit Suisse (12/22/21)

In United States Ex Rel. John Doe v. Credit Suisse AG, (E.D. VA. No. 21-CV-00224) Order dated 12/17/21), here, the court dismissed this claim under the False Claims Act’s reverse false claims provision, 31 U.S.C. § 3729(a)(1)(G).  The claim was that the relator, identified anonymously as John Doe, a former employee of Credit Suisse, AG, had information that Credit Suisse had failed to comply with its plea agreement regarding aiding and assisting U.S. taxpayers evade U.S. tax.  See Credit Suisse Pleads to One Count of Conspiracy to Aiding and Assisting (Federal Tax Crimes Blog 5/19/14; 5/20/14), here.  The key basis for the dismissal is that the reverse FCA claim must involve an obligation to the U.S. and here there was no obligation.  At most there was a potential obligation if the Government identified with the information additional claims it could make against Credit Suisse with the information and assess amounts due based on the information.

John Doe, a Birkenfeld-type whistleblower wannabe, claimed to have proof that Credit Suisse had withheld information in violation of the plea agreement that, if disclosed, would have resulted in larger amounts of penalties or other required payments to the U.S. 

 Furthermore, as a basis for dismissal, the court said that

             The Relator's case threatens to interfere with ongoing discussions with Credit Suisse regarding the identification and remediation of remaining Swiss accounts held by U.S. citizens. Civil litigation by the Relator, ostensibly on behalf of the United States and in parallel with the ongoing implementation of the plea agreement, would threaten the Department of Justice's ability to continue working with Credit Suisse in pursuit of uniquely governmental and federal interests. This is sufficient reason to dismiss. See Toomer, 2018 WL 4934070, at *5 (dismissing qui tam where the Government alleged that litigation would consume agency resources and impair its ability to work with the defendant).

            Further, the prosecution of the Relator's qui tam action would place a significant burden on Government resources. Courts have routinely held that preservation of Government resources is a valid purpose for dismissing a qui tam action. See, e.g., Sequoia Orange, 151 F.3d at 1146 (holding that the district court "properly noted that the government can legitimately consider the burden imposed by taxpayers by its litigation, and that, even if the relators were to litigate the FCA claims, the government would continue to incur enormous internal staff costs"); United States ex rel. Stovall v. Webster Univ., No. 3:15-V-03530-DCC, 2018 WL 3756888, at *3 (D.S.C. Aug. 8, 2018) (holding that the Government's "interest in preserving scarce resources by avoiding the time and expense necessary to monitor t[he] action" was a valid Government purpose for dismissal).

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:

New York Times Special Investigation Report on Trump Family Tax Avoidance/Evasion (10/2/18; 10/3/18)

The NYT has this report:  Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father (NYT 10/2/18), here.

Some interesting excerpts without getting too much into the details laid out:

The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes. They said the conduct described here represented a pattern of deception and obfuscation, particularly about the value of Fred Trump’s real estate, that repeatedly prevented the I.R.S. from taxing large transfers of wealth to his children. 

“The theme I see here through all of this is valuations: They play around with valuations in extreme ways,” said Lee-Ford Tritt, a University of Florida law professor and a leading expert in gift and estate tax law. “There are dramatic fluctuations depending on their purpose.” 

The manipulation of values to evade taxes was central to one of the most important financial events in Donald Trump’s life. In an episode never before revealed, Mr. Trump and his siblings gained ownership of most of their father’s empire on Nov. 22, 1997, a year and a half before Fred Trump’s death. Critical to the complex transaction was the value put on the real estate. The lower its value, the lower the gift taxes. The Trumps dodged hundreds of millions in gift taxes by submitting tax returns that grossly undervalued the properties, claiming they were worth just $41.4 million.

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).

Whistleblower Claims Swiss Bank IHAG did not Come Clean with DOJ as Category 2 Bank Receiving an NPA (2/11/17)

Finews.com reports (based on a Tax Notes report) that 

A whistleblower reported a Swiss private bank to U.S. prosecutors for violating an offshore settlement, it has emerged. Among his accusations: a Zurich-based bank shielded a gigantic precious emerald from the prying eyes of tax officials. Has IHAG [Private Bank] got a new problem on its hands?

Katherina Bart, Whistleblower Alleges Swiss Bank Cheated in U.S Tax Pact (Finews.com 2/8/17), here.

Other excerpts:

He [Rolf Schnellmann]  is the most recent in a series of Swiss private banking whistleblowers including former UBS banker Bradley Birkenfeld, ex-Julius Baer banker Rudolf Elmer, and Herve Falciani, who stole data from HSBC private bank when he worked at the Geneva-based institute as an information technology specialist.  

* * * * 

Schnellmann came forward as an informant to U.S. justice officials several months before IHAG reached a settlement in the U.S. for helping wealthy Americans cheat on their taxes. The bank, founded in 1949 by a wealthy weapons manufacturer and art collector, agreed in 2015 to pay a nearly a $7.5 million penalty to to avoid prosecution for its wrong-doings with U.S. clients. 

The bank voiced confidence that it is out of the woods. 

* * * * 

$870 Million Emerald 

A cursory read of Schnellmann's accusations, summarized in letters to U.S. officials through a lawyer, appear to at least partly jibe with the bank's own admissions to U.S. prosecutors.  

IHAG admitted to using several steps, including with the help of third parties, to strip assets of any sign they belonged to U.S. taxpayers. 

The gist of Schnellmann's accusations is that IHAG's deception went further: for example, he maintains that IHAG also set up a fund structure to hide beneficial ownership – the true account holder. 

Schnellmann also accuses a Zurich private bank of safekeeping an emerald valued at $870 million for a client who has since died. This claim appears far-fetched: the world's most expensive emerald gemstone, the Bahia Emerald, is valued at $400 million – a 341-kilogram schist. 

U.S. Revisits IHAG? 

The Department of Justice, or DoJ, must determine if Schnellmann's accusations are compelling enough to warrant revisiting IHAG's non-prosecution agreement. The DoJ didn't comment to finews.com. 

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 of $11.6 Million; Areas of WBO Emphasis Includes Offshore Accounts (9/1/15)

The National Whistleblower Center announced here yesterday an IRS Whistleblower Award of $11.6 million.

In the press release, one of the lawyers (Dean Zerbe) is quoted.  Here is an excerpt:

The IRS has a strong interest in hearing from – and rewarding -- whistleblowers who know about tax cheats.  From conversations I have had with senior IRS officials, the IRS is especially interested in hearing from whistleblowers who know details about the latest corporate tax shelters as well as informed whistleblowers who have knowledge about US taxpayers with illegal offshore accounts around the world – especially Hong Kong, Singapore and Central America.

Whistleblower Case Apparently Involving Wegelin (6/3/15; 6/6/15)

In Whistleblower 21276-13W v. Commissioner, 144 T.C. No. 15 (2015), here, the Tax Court held that the IRS Whistleblower Office must consider a claim that the whistleblower made after informing Government criminal investigators and the resulting criminal prosecution and guilty plea.  That is an interesting and important holding in and of itself.  I provide the following synopsis of the opinion provided by the Tax Court:

P-H was arrested for participating in a conspiracy to launder money. To minimize his punishment, P-H informed Government agents, including Internal Revenue Service (IRS) agents, that a foreign business (the Targeted Business) assisted U.S. taxpayers in evading Federal income tax. P-H told the Government agents that the Targeted Business had no presence in the United States and instructed its personnel to stay out of the United States. Although he did not have documentation sufficient to inculpate the Targeted Business, P-H was aware of an individual who did. 

Because the individual (X) was outside the United States, P-H and P-W designed a plan to induce him to come to the United States. In executing the plan, P-W met with X and persuaded him to enter the United States. Upon entering the United States, X was arrested. While in custody, X agreed to assist the United States in its pursuit of the Targeted Business. After his release, X tried to back out of his agreement. But after meeting with P-H, X agreed to follow through on his commitment. In part because of X's assistance, the Targeted Business was indicted, pleaded guilty, and paid the United States approximately $74 million. 

Ps filed separate Forms 211, Application for Award for Original Information, with the IRS Whistleblower Office, seeking awards under I.R.C. sec. 7623(b). The forms were filed after the Targeted Business pleaded guilty and paid the United States $74 million. 

Upon receipt, the IRS sent Ps' Forms 211 to its Ogden, Utah, Service Center, where a classifier noted that the forms were filed after the United States collected proceeds from the Targeted Business. On that basis, the Whistleblower Office rejected Ps' award applications and sent Ps separate award determination letters stating that no proceeds had been collected using the information Ps submitted. 

The IRS asserts that the Tax Relief and Health Care Act of 2006, Pub. L. 109-432, div. A, sec. 406(b), 120 Stat. at 2959 (TRHCA sec. 406(b)), provides the Whistleblower Office with exclusive discretion to either investigate the taxpayer or refer the information provided by the whistleblower to an IRS operating division. The IRS further asserts that under TRHCA sec. 406(b) a whistleblower is ineligible for an I.R.C. sec. 7623(b) award if he/she provides the information to an operating division of the IRS before submitting the information, via a Form 211, to the Whistleblower Office. 

Held: TRHCA sec. 406(b) does not endow the Whistleblower Office with exclusive authority to investigate the individual or entity that is the subject of an application for an award. The fact that Ps supplied their information to other Federal agencies, including an IRS operating division, before submitting the information to the Whistleblower Office on Form 211 does not, as a matter of law, render Ps ineligible for an award under I.R.C. sec. 7623(b).

Perhaps most interesting for many readers of this blog is that the underlying criminal prosecution and guilty plea appears to involve Wegelin Bank, the Swiss Bank that met its demise for its U.S. tax cheat enabler activities.  (See links to Federal Tax Crimes Blogs at end of this blog entry.)  Opinions in Whistleblower cases often are written to avoid disclosing who the whistleblower is and hence some of the facts are cryptically stated.  Here are some snippets:

Article Questioning Effectiveness of U.S. Swiss Bank Initiatives for Past Misdeeds (5/22/15)

The Economist has an article questioning the U.S.'s claimed success for the U.S. offshore account initiatives from UBS forward.  America the not so brave (The Economist 5/23/15), here.

An excerpt:

But the American government has been nowhere near as energetic and effective as it claims. It has been slow to chase tax evaders exposed by data leakers; it has failed to follow promising leads on some of the biggest fish; it has pulled punches with the biggest banks, for fear of destabilising markets; it botched the most prominent prosecution of a Swiss banker to date; and it has treated whistleblowers shoddily.

The article recounts relatively better success by France.

Another excerpt commenting no the Government's claimed success rate:

But that number is misleading because prosecutors only tend to bring cases when the odds of winning are high. Some of their victories have been questionable, such as the case of a 79-year-old who inherited her husband’s Swiss account. She faced six years in jail despite having come forward to confess to $670,000 of unpaid tax. Bemoaning prosecutors’ heavy-handedness, the judge gave her a few seconds of probation and urged her to seek a pardon. 

The biggest case of all—against Raoul Weil, UBS’s global head of private banking—was an embarrassing failure. Mr Weil was extradited to America in 2013 after being arrested in Italy. The main prosecution witness at his trial last November was Martin Liechti, UBS’s former private-banking head in the Americas, who testified that his erstwhile boss was aware as far back as 2002 that thousands of the bank’s accounts did not comply with American tax laws. Defence lawyers accused Mr Liechti, whom the government had promised not to prosecute if he helped in other cases, of lying to save his skin. The prosecution was widely criticised; the jury acquitted Mr Weil after barely an hour of deliberations.

The article also discusses claims of whistleblowers Brad Birkenfeld and Hervé Falciani that suggest that the U.S. is not actively following important leads.  The article then concludes:

Some wonder if America’s punch-pulling might have had something to do with the long tentacles of Swiss banks. They have certainly spent large sums raising their profile in Washington, DC. Credit Suisse, HSBC and UBS have spent $91m since 2002 on lobbying and political contributions in America, according to the Centre for Responsive Politics (see chart). 

Moreover, numerous officials and political figures have close past or present ties to the banks—including the president himself. Mr Obama has a well-publicised friendship with Robert Wolf, who ran UBS’s American operations until 2012. The IRS’s chief counsel, William Wilkins, is a former lobbyist for the Swiss Bankers Association. Eric Holder, the recently departed attorney-general, represented UBS when he worked in a private legal practice; for that reason, he avoided any involvement in the DoJ’s probe of the bank. (The revolving door spins the other way, too: prosecutors often move into private practice on leaving government, working with tax-challenged banks and companies.) 

Officials dismiss any suggestion that such links have affected the government’s response. The DoJ “makes its decisions based on law-enforcement considerations and nothing else,” says Kathryn Keneally, the former head of its tax division.

Another former official argues that America’s efforts to curb tax evasion have been effective, if you consider that the aim is not necessarily to maximise convictions but to scare those hiding money to come forward. The IRS’s voluntary-compliance programme is deemed a success, having brought in $7 billion in back-taxes and penalties from 50,000 individuals. But it is controversial because it allows for anonymous payment and no admission of guilt. 

America’s tax investigators continue to focus mainly on Switzerland, even as the returns on their efforts diminish. The 100-bank programme is bogged down, with only three banks having settled with the DoJ when most were expected to have done so by now. 

One obvious way to make the crackdown more effective would be to broaden it to tax havens that have so far been given an easy ride. Law firms in Panama, for instance, are giant incorporators of shell entities used by tax evaders, and the country has been slow to sign bilateral deals to exchange information on taxes. If federal prosecutors do eventually train their sights on such places, their experience with Switzerland has provided plenty of mistakes from which to learn.