IRS Whistleblower Program, if Properly Utilized by the IRS will Reduce the Tax Gap.

IRS Whistleblower Program, if Properly Utilized by the IRS will Reduce the Tax Gap.

The Internal Revenue Service (IRS) estimates that over the past 30 years, the tax gap has fluctuated in a narrow range—15 to 18 percent of total tax liability.  In 2016, the IRS provided data for 2008-2010, showing a tax gap of $458 billion.  For 2006 the tax gap is estimated to be $450 billion.

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Accountability by IRS Whistleblower Office

Should the United States Tax Court (in suits initiated by Whistleblower) and Congress be holding the IRS accountable for the Whistleblower Program? 

Background: 

Recently, the “most exciting two minutes in sports”, aka the Kentucky Derby, ended in controversy when the race stewards disqualified the 2019 race winner, Maximum Security, after the race for veering too far to his right after the second turn and interfering or impeding the progress of other horses.  

See this Bloomberg video commenting about the correctness of the outcome.  

See also this Sports Illustrated commentary about the rules are the rules, and they should be followed, even at the Kentucky Derby. 

Even the President got involved in the controversy tweeting that the result was incorrect and only due to political correctness. 

Significance to Whistleblower law: 

The Kentucky Derby result, while shocking, and as noted above, was the right result because there are specific rules in place in horse racing that must be enforced regardless of the stage or event.  Similarly, there is a whole body of law (statute and regulations) regarding the whistleblower program that should be enforced by the United States Tax Court, Congress and the IRS.  Yet, despite this existing body of law, often when the IRS makes award determinations, it appears as if the IRS is ignoring the statute and regulations to minimize an award.  

One example of the IRS’ interpretations not following the written rules is the IRS’ attempt to exclude amounts from collected proceeds.  I.R.C. § 7623(a) states in pertinent part:  

The Secretary, under regulations prescribed by the Secretary, is authorized to pay such sums as he deems necessary for— 

(1) detecting underpayments of tax, or 

(2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same

in cases where such expenses are not otherwise provided for by law. 

Likewise, I.R.C. § 7623(b) provides in pertinent part: 

If the Secretary proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary’s attention by an individual, such individual shall, subject to paragraph (2), receive as an award at least 15 percent but not more than 30 percent of the proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action (determined without regard to whether such proceeds are available to the Secretary) 

In Smith v. Commissioner, United States Tax Court Docket No. 25605-15W, the IRS attempts to subdivide an administrative action between issues for which the whistleblower provided information, and issues from the same administrative action for which the whistleblower did not provide information, as a way to exclude certain amounts from collected proceeds and the calculation of an award to the whistleblower.  However, the IRS’ approach attempts to subvert I.R.C. § 7623(b), because the IRS is excluding amounts from the action generated by the Whistleblower’s information by trying to bifurcate an administrative action, when there was only one administrative action.  The IRS is trying to bend I.R.C. § 7623(b) to limit the award payable to the whistleblower.  Instead, as with the Kentucky Derby, the IRS should read the law as it is written (namely, proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action) and award a percentage of the additional amounts collected from the same administrative action started by the whistleblower’s information to the whistleblower.  Clearly the rule contemplates to award the whistleblower additional proceeds derived from the same action(s), or a portion thereof, which were initiated by the whistleblower’s information, and the IRS should be held accountable to the language of the statute. 

Another example of the IRS’s interpretation resulting in a negative outcome for the whistleblower is sequestration. (See the prior blog on sequestration).  In an award determination, the statute and regulations provide for a specific formula for the IRS to follow to determine an award.  The simple formula is: award percentage multiplied by collected proceeds.  The IRS has discretion to determine the award percentage, applying both positive and negative factors in determining an award percentage.  One would assume that if there would be a reduction of the award it would be at this stage.  However, the IRS’ sequestration reduction is applied after the award is determined, and this reduction is not provided for under the statute or regulations.  The only permissible reductions, after a determination is made, are for less than substantial contribution (publicly available information), and/or initiation and contribution of the tax scheme; neither of which permits the IRS to reduce the award for sequestration.  The IRS should be held accountable for making an award determination and should not be allowed to pay an award less than that which they determined.  The formula for determining the award and payment of the determined award are set by statute; the IRS should not be allowed to unilaterally determine and pay a lesser amount 

Finally, a third example of the IRS not following the rules as they are written is with respect to anonymity.  The IRS in its regulations (Treas. Reg. § 301.7623-1(e)) promises to protect a whistleblower’s anonymity.  Specifically, Treas. Reg. 301.7623-1(e) provides in pertinent part:  

Under the informant's privilege, the IRS will use its best efforts to protect the identity of whistleblowers. In some circumstances, the IRS may need to reveal a whistleblower's identity, for example, when it is determined that it is in the best interests of the Government to use a whistleblower as a witness in a judicial proceeding. In those circumstances, the IRS will make every effort to notify the whistleblower before revealing the whistleblower's identity. 

Despite this directive to protect a whistleblower’s identity, the IRS throws this directive to the wayside when a whistleblower seeks additional information through a United States Tax Court Petition seeking review of the determination of award. (In many cases, these actions are undertaken by the whistleblower to determine what exactly was undertaken by the IRS using the whistleblower’s information).  If the rule is to protect the whistleblower’s identity before filing suit in the United States Tax Court, the rule should also be followed after the whistleblower files suit to obtain information as to what the IRS undertook with the whistleblower’s information.  If the IRS prefers to avoid tax court, they should consider being more forthcoming before rejecting/denying claims and allow administrative appeals.  (See the prior blog on administrative appeals). 

The above examples are just a sampling of statute and regulations that the IRS does not follow as written.  Congress, IRS Management, and whistleblowers should not accept the IRS’ continual obfuscation of statutes and regulations.   

If you have concerns that the IRS is not properly following the statutes and regulations in your whistleblower case, contact us about reviewing your case, and possible action in U.S. Tax Court. 


Author, SHINE LIN strives to present a balanced yet focused claim which allows the IRS to concentrate on the key facts, legal issues, law and legal analysis so that the IRS may successfully pursue the alleged wrongdoers.

Remand an IRS Whistleblower Case - Right Move or Just Delaying a Decision?

Remand an IRS Whistleblower Case - Right Move or Just Delaying a Decision?

The Court appears to reach the conclusion that the Court will just keep sending the case back to the IRS for reconsideration via a Remand when the IRS fails to adequately support its findings, or ultimately abuses its discretion. The key question here is: how many times will Congress, and the Court allow the IRS to keep getting the determination wrong?  At some point, reason suggests that the Court will have to make a real determination on whether the IRS erred in their determination and order an appropriate remedy to redress the wrong, or the Court’s review under I.R.C. § 7623(b)(4) will be meaningless.

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