Tax Court Win for Whistleblowers

Tax Court Win for Whistleblowers

As previously discussed in these summaries, the Tax Court in Whistleblower 21276-13W determined that collected proceeds includes amounts collected outside of Title 26 (the Internal Revenue Code).  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 then denied IRS' Motion for Reconsideration on December 20, 2016.

In the IRS' Motion for Reconsideration, the IRS stated that the basis of their motion was to resolve the inconsistency between the Court's opinion in Whistleblower 21276-13W and the Court's prior decision in Whistleblower 22716-13W (where the Court determined that under I.R.C. § 7623(b)(5)'s amounts in dispute determining additional amounts did not include penalties outside of Chapter 68 of Title 26). This inconsistency, as argued by the IRS, is a problem because how can cases that fail to meet the $2,000,000 threshold under I.R.C.§ 7623(b)(5) and which do not include the non-Title 26 penalties be different than cases that meet the "insignificant" $2,000,000 threshold which would include penalties previously excluded by I.R.C. § 7623(b)(5).

The IRS also makes the following points in its Motion for Reconsideration:

  1. IRS' position regarding collected proceeds is the best because collective proceeds are taxes, penalties, interest, additions to tax and additional amounts.
  2. Court improperly separates 7623(a) and 7623(b) programs as two separate programs.  Instead, the IRS reads the 7623(a) restriction on payments being derived solely from amounts collected as equally applicable to 7623(a) and 7623(b) cases.

In response to the IRS' Motion, the Petitioners made the following points in their Reply:

  1. IRS fails to raise new arguments in its Motion to Reconsider.
  2. Despite IRS claiming an inconsistency exists with the Court's opinion in 21276-13W, the Court has explained exactly why its opinion did not contradict 22716-13W.
  3. IRS' inconsistency argument is disguising its real argument that it does not have access to the funds to pay the whistleblowers.
  4. Court's position in prior opinion are correct.

As stated above, the Court denied IRS' Motion for Reconsideration, so the Court opinion and the positions in that opinion are still the Court's interpretation of the law.

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.