IRS Whistleblower Program and Life's Ugly Situations

/

While an IRS Whistleblower waits the average 9.32 years (as stated in the IRS’ 2018 Annual Report) for payment of an award, life goes on.  Unforeseen events, such as divorce, bankruptcy and death can create issues for the whistleblower claim. 

Divorce

Because state law controls marriages as well as the dissolution of marriages, the information contained in this blog is simply general in nature and should not be relied upon for legal advice.  The reader is encouraged, if applicable, to share this information with their family law attorney.

Typically, in a divorce situation the assets will be divided as agreed by the parties in a prenuptial/postnuptial agreement, or equitably divided by the court at the time of divorce.  As part of the proceedings, the parties are required to list all of their marital assets (i.e. the property acquired during the marriage, regardless of ownership or who holds the title).   This would include the obvious assets such as real estate, cash, stocks, bonds, cars, pensions, insurance and perhaps an often forgotten asset such as the IRS whistleblower claim.

Although the success of a claim and the award amount are unknown until the IRS sends out a Preliminary Determination Letter (PDL), it would be advisable to list the whistleblower claim and its value as a marital asset if it was filed by one of the spouses during the marriage.  If the IRS has not yet issued a PDL, then the fair market value of the whistleblower claim is likely unknown by the parties.  Therefore, as part of the proceedings the parties might agree to value the whistleblower claim with a negligible value or a stated amount for purposes of full disclosure as well as an equitable division of assets.  Failure to list the whistleblower claim may open the door for the non-whistleblower spouse to come back to court after learning of a successful whistleblower claim.

Whistleblower valuation experts are rare, but such an expert may be engaged in order to value the claim at fair market value.  The expert would look at the facts of the claim including the length of time the claim has been pending, the nature and quality of the claim, the expertise and experience of the whistleblower’s legal representation, the complexity of the claim, the underlying tax issue, the taxpayer and its ability to pay, whether the whistleblower has been debriefed by the IRS or any other communications between the whistleblower and the IRS, the tax years involved, etc.

Bankruptcy

When an individual files for bankruptcy, most of the property that the whistleblower owns (or is entitled to receive or has an interest in) becomes property of the bankruptcy estate. If an asset is property of the bankruptcy estate, the bankruptcy court has the right to administer it.  Therefore, unless the property is considered exempt, the property will either be collected by the trustee to pay creditors or be abandoned by the trustee. 

Therefore, a whistleblower claim that is filed pre-bankruptcy, should be disclosed in the bankruptcy.  Once the whistleblower claim is disclosed, the bankruptcy trustee then has a responsibility to accept or challenge its value.  Again, the failure to disclose a whistleblower claim, may leave the door open in the future for the trustee and/or creditors to later pursue the undisclosed asset.  Again, as in a divorce, the value of the claim is the issue.  What is it worth? 

 Death 

Because of the enormous length of time an IRS whistleblower claim is pending, a frequent question is “does my whistleblower claim survive me?” This answer was made clear in August 2014 in Treasury Regulation 301.7623-4(d)(4), which provides:

(4) Deceased Whistleblower. If a whistleblower dies before or during the whistleblower administrative proceeding, the Whistleblower Office may substitute an executor, administrator, or other legal representative on behalf of the deceased whistleblower for purposes of conducting the whistleblower administrative proceeding.

Therefore, as a property right, the proceeds from a whistleblower claim will survive the whistleblower in the case of death and can be made available to the whistleblower’s beneficiary(ies).

 Conclusion

In the end, a whistleblower that faces any of the above situations, should be aware that it is their own action that may cause the disclosure of their identity as a whistleblower.  A family court, bankruptcy court and or a probate court could be in a position to discover the asset and its value.

Author Thomas C. Pliske is a former IRS attorney.  He established the Tax Whistleblower Law Firm in 2008. whose sole practice is representing Whistleblowers before the IRS and the U.S. Tax Court.

Anonymity... The Whistleblower should be aware that each of the above situations may result in the disclosure of the individual’s identity as a whistleblower. A spouse, a bankruptcy trustee, or a beneficiary could challenge the whistleblower value and conduct discovery as to the claim so as to present to the Court for proper distribution in each of these situations.