Does The IRS Really Support the Tax Whistleblower Program?

The answer to this question is….not a clear yes or clear no.  Like all of us, the IRS must follow the law.  Whether it supports, or not supports, the tax whistleblower program, the IRS can only do what Congress has authorized it to do.  In the end, its actions speak louder than words and give us a clue as to whether or not it supports the program.

The Whistleblower Program was amended and changed in 2006 with the enacted by the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, sec. 406, 120 Stat. at 2958. The Whistleblower statute (IRC § 7623) contains no more than 640 words and is subject to interpretation.  Whistleblowers tend to interpret this statute broadly while the IRS interprets it narrowly.  IRS justification might be that it interprets the statute very narrowly in fear that it might pay an award for which it does not have authority to do so.

As an example, the whistleblower statute, IRC § 7623(b)(1) states that the IRS shall pay an

“award of at least 15 percent but not more than 30 percent of the 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 IRS, despite telling Congress and the American public that it supports the whistleblower program, obtained legal advice from the Office of Chief Counsel (IRS legal counsel), which advised it that “collected proceeds” did not include criminal penalties or civil forfeitures for which the IRS might be responsible for determining and collecting.  This often occurred with cases involving taxpayers’ with offshore bank accounts (FBAR penalties) and other criminal tax matters.

In 2010 the Internal Revenue Manual was amended and in 2014, Treasury Regulations were issued that made clear that the IRS did not consider criminal penalties under Title 18 (Crimes and Criminal Procedure) or Title 31 (Money and Finance) collected proceeds and therefore, it would not pay an award on “collected proceeds” from penalties collected under laws other than the Internal Revenue Code. 

In the recently decided case of Whistleblower 21276-13W, Petitioner v. Commissioner, 147 TC No. 4 (August 3, 2016), the United States Tax Court had no trouble in deciding that a whistleblower was entitled to an award based upon a criminal penalty and civil forfeiture that might be imposed outside the Internal Revenue Code (i.e. Title 26).  The court determined that Congress did not intend to limit a whistleblower award should the IRS pursue an action, even if it amounted to a penalty which was not ultimately paid to the IRS.


Again, the actions of the IRS will dictate whether it supports the Tax Whistleblower Program.  The IRS now has court authority (i.e. precedent) to support paying individuals that provide information to the IRS with respect to money laundering crimes, offshore bank accounts, etc.  Will the IRS appeal the recent court’s decision?  If the IRS intends to appeal the decision, it must file a Notice of Appeal within 90 days after the decision is entered. 

Actions speak louder than words.  Therefore, if the IRS does appeal the Court’s decision, Congress and the American public will be told loud and clear that the IRS does not support the Tax Whistleblower program.  As a result, whistleblowers will be alerted as to whether their pending claims will be treated fairly or whether the IRS intends to continue to minimize a whistleblower’s reward.

Historic Win for Tax Whistleblowers

Mary Jane Wilmoth
National Whistleblower Center
(202) 342-1903

Editorial For Immediate Release

Four-Year Campaign Results In Historic-Win For Tax Whistleblowers

On August 3, 2016 the U.S. Tax Court ruled that tax whistleblowers were entitled to a reward based on monies collected in criminal fines and penalties. This landmark decision reversed the position of the Department of Treasury that severely limited the “collected proceeds” upon which a whistleblower reward could be based.The decision ruled that two anonymous whistleblowers, identified only as Whistleblower 21276-13W and Whistleblower 21277-13W were entitled to a reward of $17,791,607.00, based in part on $54 million obtained in criminal fines and civil forfeitures for which the IRS had illegally claimed were outside the whistleblower reward program.

The decision is the accumulation of four years of advocacy by the NWC, led by its Senior Policy Analyst Dean A. Zerbe and its Executive Director, Stephen M. Kohn, both of whom have actively and effectively represented tax whistleblowers since undertaking the representation of Swiss banker Bradley Birkenfeld in 2009.

Since the rule stripping tax whistleblowers who disclosed evidence of criminal tax violations from obtaining a reward was first announced by the IRS/Dept. of Treasury, the National Whistleblower Center has waged an extensive campaign to reverse this illegal and dangerous ruling. For example:

November 29, 2012: The NWC filed an extensive brief to the IRS strongly urging the Service to reward whistleblowers who exposed criminal tax frauds.
February 19, 2013: The NWC filed an 84-page comment on the proposed IRS whistleblower rules, strongly opposing the criminal disqualification.
April 16, 2013: The NWC testified at the IRS rulemaking hearing opposing the criminal reward disqualification.
June 5, 2014: The NWC provides the Secretary of Treasury with and exhaustive 55 page scholarly article co-authored by Kohn and Zerbe explaining in detail the legal basis as to why the criminal reward disqualification was illegal and should not be approved by the IRS. A copy of this article, published in Tax Notes, is linked here.
Finally, Dean Zerbe and Steve Kohn, through their respective law firms, agreed to work with the legal team representing anonymous whistleblowers 21276/77-13W, in order to ensure that the IRS program properly implemented the whistleblower reward law, and criminal fines and penalties were included in any reward calculation.

The importance of the August 3rd Tax Court ruling, in case 147 T.C. 4, was explained in a June 13, 2014 Action Alert issued by the National Whistleblower Center, calling on the public to strongly oppose the IRS’s plan to block whistleblower rewards, if the tax crimes were so serious as to result in criminal prosecution, and the payment of criminal fines and penalties:

“The Department of Treasury is poised to approve a final rule that will have a devastating impact on the IRS Whistleblower Program. The Treasury Department, along with the IRS office of general counsel, have concocted a rule to exclude whistleblowers from coverage if the violation of law they report is criminally prosecuted. Tax fraud whistleblowers will only receive rewards for information that results in civil or administrative penalties. If a whistleblower has solid evidence of a major fraud that triggers a criminal prosecution, he or she will get nothing.”

“The proposed regulation undermines Congress’s intent that whistleblowers who report tax fraud be protected and rewarded.

This proposed rule, which we have learned is on the verge of final approval, could not have come at a worse time. The IRS and the Justice Department are effectively using the threat of whistleblower disclosures to force international banks to plead guilty to tax fraud violations for illegally harboring non-disclosed offshore accounts. If the proposed rule is approved, the threat that international bankers will become whistleblowers will become toothless.”

What is clear is that the August 3rd landmark ruling, effectively saving the international tax fraud whistleblower program, was the result, in large part, of a long-term campaign of the NWC and its leaders who conducted extensive research into the history and law behind the IRS tax whistleblower program, and thereafter engaged in an extensive public and legal battle to ensure that whistleblowers are fully protected.

This battle is not over. The Department of Treasury can still appeal the Tax Court’s landmark ruling. All Americans who want to hold the millionaires and billionaires who illegally stash an estimated $3 trillion dollars in offshore accounts accountable should join with the National Whistleblower Center in making sure that this key decision is upheld, and that the Department of Treasury change its current regulations to comport with the law.

In addition to the leadership Dean Zerbe and Stephen Kohn gave to this successful campaign, the NWC would also like to thank the whistleblowers who risked all to expose wrongdoing and the attorneys, staff and interns at the NWC who tirelessly worked on this campaign, and the members of the public who strongly supported these efforts.

Related links:

 Tax Court decision in Anonymous Whistleblowers 21276/77-13W, 147 T.C. 4 (August 3, 2016)
Zerbe and Kohn, “The Legality of the IRS’ Proposed Rule,” Tax Notes and Letter to Secretary of Treasury (June 5, 2014).
Sign up to receive updates about the NWC’s Tax Whistleblower Campaign, click here.

Not even Federal IRS Employees or Federal Tax Court Judges are Immune to Alleged Tax Evasion

In a bit of shocking news, a former federal tax court judge (Judge Diane L. Kroupa) and her husband were indicted on charges for filing fraudulent tax returns and conspiracy to defraud the United States.  As recounted in a recent Forbes article, the shocking facts in the indictment reflect alleged evasion of taxes and obstruction of justice in the examination/audit of Judge Kroupa as follows:

  1. Alleged claimed personal expenses as business deduction including “rent and utilities for the Maryland home; utilities, upkeep and renovation expenses of the Minnesota home; Pilates classes; spa and massage fees; jewelry and personal clothing; wine club fees; Chinese language tutoring; music lessons; personal computers; and expenses for vacations to Alaska, Australia, the Bahamas, China, England, Greece, Hawaii, Mexico and Thailand;”
  2. Alleged false insolvency claim to avoid discharge of indebtedness income of $33,301;
  3. Alleged failure to report income from sale of property in the amount of $44,520;
  4. Alleged concealment of records from tax return preparer and IRS compliance officer during an audit in 2006;
  5. Alleged submission of misleading documents to an IRS employee in 2012 audit to conceal expenses of Grassroots Consulting; and
  6. Alleged understated income from 2004-2010 of $1,000,000 and understated taxes in the amount of $400,000. 

While the indictment and allegations contained in the indictment have yet to result in a conviction for conspiracy and tax evasion, the mere fact that the indictment and charges against Judge Kroupa have been filed in Court reflects that even federal tax court judges may still have allegedly evade taxes and allegedly defrauded the IRS and the United States of taxes allegedly owed.

In other news, based on a recent Tax Court case, a federal IRS Revenue Agent was indicted and plead guilty to tax evasion.  A summary of the relevant facts are as follows:

  1. Petitioner Husband was an IRS revenue Agent;
  2. Petitioner Husband had side business in which he set up trusts for another taxpayer to reduce taxes but was used to allegedly embezzle funds from the other taxpayer;
  3. Petitioner Husband allegedly embezzled funds from other taxpayer;
  4. Petitioner Husband was indicted and initially plead guilty to tax evasion related to the alleged embezzled funds because he failed to report the income associated with the alleged embezzled funds;
  5. Petitioner Husband tried to recant plea agreement.

In the Tax Court case, the Court determined that while the Petitioner Husband plead to tax evasion and failed to report income for 2003 in the amount of $252,726, the plea does not support improper calculations by another IRS revenue agent that analyzed the tax deficiency of Petitioner Husband because the other IRS revenue agent failed to account for amounts repaid to the other taxpayer by Petitioner Husband.  The Tax Court ultimately determined that there was no deficiency or penalty liability for 2003.  Despite the Tax Court’s holding that there was no deficiency, the facts in this case reflect that even a federal revenue agent is not immune from allegedly under-reporting or allegedly failing to report his/her tax liabilities.

Both cases show that federal employees and federal tax court judges are not immune from committing alleged tax evasion or other tax violations.  Therefore, if you have specific and credible information (specific documents outlining the tax evasion or other tax violations) on any individual which would result in taxes due in excess of $2,000,000, contact us to discuss filing an IRS tax whistleblower claim to claim an award and to alert the IRS to the alleged wrongdoing.