IRS WHISTLEBLOWER CASES BEFORE THE UNITED STATES TAX COURT
Smith v. Commissioner, Docket No. 25605-15W (June 7, 2017) In a case of first impression, the Court determined that the term “amounts in dispute” referenced in I.R.C. § 7623(b)(5)(B) includes the total amount of the liability that IRS proposes with respect to a taxpayer’s examination that was commenced using the information provided by a whistleblower and not limited to the part of the collected proceeds attributable to the whistleblower’s information or specific allegations.
In this case, the whistleblower filed a claim for an award. The IRS using the information provided by the whistleblower started an employment tax audit and an income tax audit of the alleged non-compliant taxpayer. The IRS assessed almost $20 million (the combination of the employment and income tax deficiencies and penalties). However, in determining the award, the IRS determined that the amount attributable to the whistleblower’s information was $1.7 million. The IRS then determined that the whistleblower was entitled to an award under I.R.C. § 7623(a) of 10% of the $1.7 million attributable to the information he provided, and a 1% of the remaining employment tax collected proceeds and 1% of the $14 million plus income tax collected proceeds.
The Court determined that the IRS’s method of determining the extent to which the whistleblower contributed to the collected proceeds, and then determining whether that portion exceeded $2,000,000 produced anomalous results. The Tax Court held that for I.R.C. § 7623(b)(5)(B) purposes the IRS needs to include all amounts collected in determining the amounts in dispute.
The Court also declined to answer the questions posed by the Whistleblower until the IRS makes a determination under I.R.C. § 7623(b), namely: 1. Whether “collected proceeds” includes amounts IRS would not have collected without the Petitioner’s whistleblower claim; 2. Whether IRS applied the correct award percentages; 3. Whether IRS has legal authority to reduce an award by sequestration.
Lippolis v. Commissioner (Lippolis 2), Docket no. 18172-12W (June 7, 2017). As Background, in Lippolis 1 (143 T.C. 393 (2014)), the Court held that the amount in dispute threshold (I.R.C. § 7623(b)(5)) was an affirmative defense to be plead by the IRS. Subsequent to the Court’s opinion in Lippolis 1, the IRS amended its answer and affirmatively plead the defense that the case failed to meet the $2,000,000 threshold under I.R.C. 7623(b)(5). In Reply, the whistleblower denied the affirmative defense plead by the IRS.
In Lippolis 2, the issue before the Court is whether IRS is entitled to summary judgment that the whistleblower is not entitled to an award under I.R.C. § 7623(b) because less than $2,000,000 was in dispute. The Court held that because the IRS failed to assert or deny the fact that the IRS has documents showing that more than $2,000,000 is in dispute, and has failed to address whether there are documents which refer to amounts in dispute in excess of $2,000,000 but which IRS contends are not formal positions taken by the IRS in the action(s), the IRS has failed to satisfy the burden of proof to introduce evidence to support an affirmative defense. Specifically, the Court stated that notwithstanding the facts in the IRS’ motion for summary judgment, those facts do not “preclude the existence of other records showing that the amount in dispute exceed $2,000,000.”
The Court issued this opinion concurrently with Gonzalez v. Commissioner, TC Memo 2017-105, wherein the Court stated that absent “an affidavit or a declaration from an appropriate IRS representative stating that a diligent and comprehensive search of IRS records has been conducted, all appropriate personnel have been contacted, and there is no record that the IRS has asserted an underpayment of tax or made any effort to assess or collect tax in excess of $2 million from the taxpayers identified in petitioner's claims or any taxpayers related to those taxpayers”, prior to the Court entering a determination in the IRS’ favor as a matter of law.
Whistleblower 4496-15W v. Commissioner, Docket No. 4496-15W (May 25, 2017). In this case, the whistleblower challenged whether the IRS could sequester a portion of the award payable to the whistleblower. One key issue that the parties disagreed upon was when the final determination occurred by the IRS. The Court held, for the first time, that the issuance of the check by the IRS was the final determination date by the IRS and that the appeal period (30 days from the IRS’ final determination) started when the check was issued.
However, the Court also held that because the whistleblower in accepting the award recommendation, signed the form waiving his judicial and appeal rights in exchange for prompt payment, the Court could not consider whether the IRS was permitted to sequester a portion of the award payable to the whistleblower absent contract principles permitting the Court to void the agreement, mutual mistake, or breach of contract. Because the Court did not final mutual mistake, other errors or a breach of the contract the Court declined to address the propriety of the IRS sequestration of the whistleblower award.
Whistleblower 16158-14W v. Commissioner of Internal Revenue, 148 T.C. No. 12 In this case, the Tax Court determined that despite the Whistleblower’s claim causing an expansion of the audit of a Taxpayer for tax years 2006-2008 to include the Whistleblower’s claims, and which resulted in a change of behavior by the taxpayer and payment of additional taxes by the Taxpayer in subsequent years (2009-2014), the IRS did not “collect proceeds” from which to pay the whistleblower because the IRS did not conduct an action (an audit or examination) relating to the Whistleblower’s Claims for the subsequent years. The Court reasoned that since I.R.C. § 7623 (b) requires both an action and collected proceeds; and in this case the Court determined that there was no action by the IRS which could be tied to years in which the IRS collected additional proceeds by the Taxpayer’s change of reporting as a result of the Whistleblower’s claim; and granting the IRS’ motion for summary judgment was appropriate.
The Court also held that the IRS is not required to monitor a taxpayer’s voluntary change in reporting for years for which there was no action.
Whistleblower 12568-16W v. Comm’r, 148 T.C. No.7 (March 22, 2017). In this case, the Petitioner (whistleblower) filed a motion to proceed anonymously. The Petitioner’s claim involved a tax liability in excess of $3 billion. Petitioner believes that if Petitioner’s identity were disclosed Petitioner would suffer retaliation, physical harm, social and professional stigma, and economic distress. The Court, after considering the parties’ positions determined that since this case was at an early stage, the public’s interest in knowing the Petitioner’s identity was weak and did not outweigh the need to protect Petitioner’s identity. The Court granted Petitioner’s motion to proceed anonymously; however reserved the right to revisit the balancing of interests between the public and Petitioner’s need to remain anonymously, should the Petitioner receive an award.
Whistleblower 6121-16W v. Comm’r, Docket 6121-16W (March 22, 2017). In this case, the Petitioner filed a petition and a motion to proceed anonymously. The Court ordered IRS or Respondent to file a response to Petitioner’s motion to proceed anonymously. Respondent filed a response stating that it did not object to Petitioner proceeding anonymously, but objected to permanently sealing the case.
The Court issued an order granting Petitioner’s motion to proceed anonymously, but denying Petitioner’s motion to permanently seal the case. In the Court’s Order, the Court informed Petitioner that Petitioner could withdraw any filings Petitioner previously filed that might reveal Petitioner’s identity, if Petitioner filed an appropriate motion.
Petitioner then filed a Motion to Withdraw Whistleblower Petition stating that no amount of redaction would be sufficient to hide Petitioner’s identity. Petitioner also stated that granting the motion would not be prejudicial to Respondent. The Court then treated Petitioner’s motion as a motion to dismiss and requested that Respondent file a response to Petitioner’s motion. Respondent’s response stated that IRS has no objection to Petitioner’s motion to dismiss.
The Court then examined its prior ruling in Jacobson v. Commissioner, 148 T.C. at ___ (slip op. at 5-6) (quoting Wagner v. Commissioner, 118 T.C. 330, 334 (2002)) and whether it met the requirements of Whistleblower 14106-10W v. Commissioner, 137 T.C. 183 (2011). The Court then determined that since the Motion to Dismiss occurred before any substantive proceeding had begun in this case, the Court would seal all documents in the case, except for the Order of Dismissal. The Court stated that this would be the best way to protect Petitioner’s identity while allowing the public’s interest in open records.
Whistleblower 21276-13W v. Comm'r (December 20, 2016). In this case the Tax Court Determined that collected proceeds includes amounts collected outside of Title 26 (IRC). Since the August 3, 2016 opinion, the IRS filed a motion on September 2, 2016, requesting the Court to reconsider its opinion. Petitioners then filed their response on September 13, 2016. The Court denied IRS' Motion for Reconsideration on December 20, 2016(additional information).
Insigna v. Comm'r, Docket no. 9011-13W (January 27, 2017). In this case the Tax Court has ordered the IRS to provide additional responses to the Petitioner's discovery requests. Specifically, the Court ordered the IRS to provide adequate responses to outstanding document production requests, and to admissions prepared by the Petitioner (i.e. clear outright admissions or denial instead of the convoluted responses submitted by the IRS). The Court also cautioned the IRS from an unduly narrow construction of I.R.C.§ 6103 (Confidentiality and limitations on the disclosure of return information) to limit the IRS' responses to the requested documents.Also noteworthy in this order, is in dicta, the Tax Court through the use of a hypothetical example appears to announce that taxes collected in subsequent years due to amended returns filed by a Taxpayer as a result of an agreement with the Taxpayer and the IRS, after examining year 1 of a transaction based on information provided by a whistleblower, can be "collected proceeds" for I.R.C. § 7623(b). In the past, the IRS has argued that unless it undertakes an administrative action for the year in which taxes are collected, there would not be any collected proceeds.
Whistleblower 26876-15W v Comm'r, 147 T.C.No 12 (November 9, 2016). In this case, the Tax Court held that a determination letter mailed to a whistleblower at the wrong address, because it was not the whistleblower's last known address, is invalid; and that the whistleblower has 30 days from the date of the properly re-mailed notice of determination to the whistleblower at the correct address to file a tax court petition. In dicta, the Court also denied the Petitioner's claim that the notice of determination was invalid because the director of the whistleblower office did not sign the notice of determination but was signed by his staff, holding that Delegation Order 25-7 did not require the director of the whistleblower office to sign the determination letter.
Whistleblower 21276-13W v. Comm’r, (August 3, 2016). In this case, the Court determined that the term “additional amounts” includes criminal fines and civil forfeitures. The parties had previously agreed to the percentage payable to the whistleblower but could not agree as to what the total amount of collected proceeds from which the IRS could pay the agreed upon percentages was. The IRS conceded that the tax restitution paid by the target taxpayer was collected proceeds.
The Court also determined that whether the additional amounts (criminal fines and civil forfeitures) are includable in the term collected proceeds involves statutory interpretation. IRS took the position that proceeds assessed and collected under Title 26 (Internal Revenue Code) are eligible to be paid to whistleblowers. The criminal fines and civil forfeitures at issue were under Title 31 and Title 18, respectively. The Court reasoned that 7623(a) and 7623(b) were different programs and that the term collected proceeds includes criminal fines and civil forfeitures.
Finally the Court clarified that it was not overruling its prior holding in Whistleblower 22716-13W v. Comm’r, because the prior case dealt with the definition of additional amounts which the Court deemed to be a term of art that included only amounts collected under Title 26. In this case, the Court held that the term collected proceeds is broader and can include criminal fines and civil forfeitures. The Court determined that collected proceeds are not limited to amounts collected under Title 26.
Whistleblower 11099-13W v. Comm’r, (Docket 11099-13W) (July 28, 2016). In this case, the Court granted Petitioner’s motion to compel the IRS to produce documents. The IRS objected to the granting of the motion to compel on relevance grounds, which the Court stated is a question of law as to when the IRS proceeds on the basis of information provided by a whistleblower and would be best resolved in a motion for summary judgment and not as an objection to the motion to compel.
One issue the Court identified but refused to resolve in this order was whether tax adjustments for other issues not specifically identified by the whistleblower in his submission are considered in the term “proceeds based on” if the IRS collects tax on the ancillary issues and conducts the audit based on the whistleblower’s information.
Insigna v. Comm’r, (Docket No.9011-13W) (July 27, 2016). In this case, the Court ordered the IRS to produce additional discovery outlining a relationship between Petitioner’s information and the underlying audit conducted by IRS with respect to the transactions identified by the Petitioner. The Court outlined 5 transactions which it determined that the IRS should provide additional information, if any, which would shed light on the IRS’ use of the Petitioner’s information. The Court also ordered additional production of documents related to 4 transactions in which it appeared to the Court that no action was undertaken by the IRS or no collected proceeds were obtained by the IRS, or in the alternative to provide a sworn statement stating that requested documents do not exist.
The Court also ordered the IRS to provide additional answers or additional sworn statements for several interrogatories posed by Petitioners.
The Court also denied Petitioner’s request for nonconsensual depositions of IRS employees because the Court determined that the additional ordered discovery should be a better source of information than ordering the nonconsensual depositions. The Court also denied Petitioner’s request to have the IRS produce documents that were not redacted.
The Court declined to resolve the standard and scope of review issues raised by the parties in limiting the discovery requested, but highlighted its holding in Whistleblower One 10683-13W v. Commissioner, stating that the IRS cannot unilaterally determine what constitutes the administrative record.
Whistleblower 22716-13W v. Comm’r, (Whistleblower 22716-13W 2) (March 14, 2016). Holding: Tax Court determined that amounts collected as penalties for failing to properly report a taxpayer’s foreign accounts on the Report of Foreign Bank and Financial Records (“FBAR”) are not considered “additional amounts” as used in I.R.C. § 7623(b)(5)’s threshold requirement of $2,000,000. The Tax Court also determined that additional amounts is defined as civil penalties set forth in Title 26 (Internal Revenue Code) Chapter 68 and does not include Title 31 civil penalties (FBAR penalties). Tax Court further held that the FBAR penalties cannot be included in the determination of “amount in dispute” and the $2,000,000 threshold required under I.R.C. § 7623(b)(5).
Kasper v. Commissioner (Kasper 2) (October 8, 2015). Holding: Tax Court denied IRS’ motion for summary judgment with prejudice (meaning that the Court is preventing IRS from re-fling its motion for summary judgment) because IRS’ motion contained factual statements which were not properly supported by a Tax Court Rule 121(d) Declaration. The Tax Court also held that notwithstanding the factual support deficiencies of IRS’ motion, the Court would nonetheless have ruled against IRS because there are still genuine issues of material fact; namely: 1) whether IRS undertook an administrative examination of the taxpayers, 2) whether the examination was initiated or aided by the whistleblower’s information, and 3) whether any proceeds were collected as a result of the proceeds.
Whistleblower One 10683-13w, Whistleblower Two 10683-13w, and Whistleblower Three 10683-13w v. Commissioner (September 16, 2015) Holding: Tax Court orders IRS to produce examination documents and responses because IRS can’t unilaterally decide what constitutes the administrative record. Tax Court also held that IRS’ responses suggest that the record is incomplete.
Whistleblower 21276-13w, and Whistleblower 21277-13w v. Commissioner (June 2, 2015)Holding: Tax Court held that submission of information to federal agencies, including an IRS operating division, prior to the submission of a Form 211 does not disqualify the whistleblower from an award.
- Lippolis v Commissioner. T.C. Memo No. 20 (November 20, 2014) Holding: Tax Court held Section 7623(b)(5)(B)’s $2 million requirement is an affirmative defense which must be pled by IRS and IRS has the burden of proof.
Ringo v. Commissioner, 143 T.C. No. 15 (October 6, 2014) Holding: Tax Court held that IRS’ denial letter to Whistleblower was a determination and the denial letter established the Tax Court’s jurisdiction. Tax Court also held that IRS’ continued consideration of whistleblower claim after prior determination does not terminate Tax Court’s jurisdiction.
Comparini v. Commissioner, 143 T.C. No. 14 (October 2, 2014) Holding: Tax Court held that it had jurisdiction where IRS issued multiple letters to whistleblower in which IRS attempted to communicate denial of whistleblower’s claim. Tax Court also held that it would not require whistleblower to parse language of IRS letters and determined that the 2013 letter, which whistleblower timely filed a petition based on this letter, established the Court’s jurisdiction.
Whistleblower 22231-12W v Commissioner, T.C. Memo. 2014-157 (August 4, 2014) Holding: Tax Court lacks jurisdiction to hear a case where the claim remains open and the IRS has yet to make an administrative decision on the claim because conferring jurisdiction would lead to absurd results.
Whistleblower 11332-13W v. Commissioner, 142 T.C. No. 21 (June 4, 2014) (Whistleblower 11332-13W 2) Holding: The Tax Court held that it has jurisdiction to review the IRS's determination of the whistleblower claim where the whistleblower has alleged in the pleadings that they provided information to the IRS before and after the effective date of section 7623(b).
Whistleblower 10949-13W v. Commissioner, T.C. Memo. 2014-106 (June 4, 2014) (Whistleblower 10949-13W 2) Holding: The Tax Court held that it has jurisdiction to review the IRS's determination of the whistleblower claim where the whistleblower has alleged that they provided significant information and not just confirmatory information to the IRS before and after the effective date (December 2006) of section 7623(b).
Whistleblower 11332-13W v. Commissioner; T.C. Memo. 2014-92 (May 20, 2014) (Whistleblower 11332-13W 1) Holding: The Tax Court granted a whistleblower's motions to proceed anonymously and to seal the record, because the whistleblower received a death threat from the targets, communicated through their counsel, and the Government offered to place the whistleblower in the witness protection program.
Whistleblower 13412-12W v. Commissioner; T.C. Memo. 2014-93 (May 20, 2014) Holding: The Tax Court granted a whistleblower's motion to proceed anonymously, finding that the risk of harm to the whistleblower outweighs the public interest in knowing the whistleblower's identity. The whistleblower had provided the IRS information on the whistleblower's former employer. The whistleblower was retired and relied on retirement benefits the whistleblower received from the former employer.
Whistleblower 10949-13W v. Commissioner; T.C. Memo. 2014-94 (May 20, 2014) (Whistleblower 10949-13W 1) Holding: The Tax Court granted a whistleblower's motion to proceed anonymously, finding that proceeding anonymously is necessary to protect the whistleblower (targets were allegedly linked to terrorist organizations and had used physical force and armed men to intimidate the whistleblower and prevent disclosure).
Anonymous 1 and Anonymous 2 v. Commissioner; Docket No. 12472-11W (May 10, 2013) Holding: Tax Court vacated its Order and Decision granting IRS summary judgment because IRS re-opened the whistleblowers’ claim; used the whistleblowers’ information in a subsequent investigation; and provided the Court with incomplete, misleading and possibly inaccurate information to obtain the summary judgment against the whistleblowers. The Tax Court also determined that IRS’ determination were not valid.
Cohen v. Commissioner. 139 T.C. No 12 (October 9, 2012) Holding: The Tax Court held that the Court is not authorized by section 7623(b) to order the IRS to reopen a claim or to order the IRS to pursue particular information provided by a whistleblower.
Whistleblower 14106-10W v. Commissioner, 137 T.C. No. 15 (December 8, 2011) Holding: Tax Court held that the potential harm from disclosing a whistleblower's identity as a confidential informant outweighs the public interest in knowing the whistleblower’s identity, and that redacting identifying information adequately protects the whistleblower's legitimate privacy interests as a confidential informant.
Friedland v. Commissioner, T.C. Memo. 2011-217 (September 7, 2011) [Friedland 2] Holding: Tax Court held that it did not have jurisdiction to review a whistleblower’s adverse award determination because the Petitioner failed to timely file a petition with the Tax Court. This case is noteworthy because the IRS argued that the letter mailed to the Petitioner denying an award was an administrative decision, thus apparently acquiescing to the Court's ruling in Cooper 1.
Kasper v. Commissioner, 137 T.C. No. 4 (July 12, 2011) Holding: Tax Court held that the 30-day period to petition the Tax Court under section 7623(b)(4) begins on the date of mailing of the determination by the Whistleblower Office, and the IRS must prove by direct evidence the date and fact of mailing of the determination to the whistleblower.
Cooper v. Commissioner, 136 T.C. 30 (June 21, 2011) [Cooper 2] Holding: Holding that the Tax Court's jurisdiction in a whistleblower case does not include opening or ordering the IRS to open an administrative or judicial action to redetermine the tax liability.
Friedland v. Commissioner, T.C. Memo. 2011-90 (April 25, 2011) [Friedland 1] Holding: Tax Court held that the Court has jurisdiction to review the IRS's denial of an individual's whistleblower claims, determining that an IRS letter to the individual denying his claims constitutes a "determination" under section 7623(b)(4), following Cooper 1. However the Tax Court6 dismissed the case because the individual failed to file a timely petition with the court, within 30 days of the original denial letter. Established the 30 day filing deadline from the date of the original denial letter.
Cooper v. Commissioner, 135 T.C. No. 4 (July 8, 2010) [COOPER 1] Holding: Tax Court held that an IRS letter denying whistleblower awards constitutes a final administrative determination necessary to allow the court to review the petitioner's claim, and denied the IRS's motion to dismiss.
Dacosta v. United States, No. 07-807T (Court of Federal Claims, Jul. 11, 2008) Holding: The Court of Federal Claims dismissed actions against the government appealing whistleblower claims to rewards finding that the Tax Court has sole jurisdiction, there is no contractual claim, and transfer of the case to the Tax Court is not statutorily permissible.
Wolf v. Commissioner, T. C. Memo 2007-133 (May 30, 2007) Holding: Whistleblower information submitted prior to the Code Section 7623 amendment by the Tax Relief and Health Care Act of 2006 (December 20, 2006) prohibited Tax Court review of the denial of the whistleblower’s claims.