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.