As part of the Tax Relief and Health Care Act of 2006 (P.L. No. 109-432, Section 406, 120 Stat. 2911, 2958-60 (2006), the IRS Whistleblower Office came into being, with Stephen Whitlock serving as the initial director. This is a centralized office for processing tips that can either investigate a reported matter itself or assign it to another IRS office. The IRS Whistleblower office will determine what to do with an informant tip.
Under the law, two types of whistleblower IRS awards are possible: (1) Mandatory-Type Claims under Section 7623(b); (2) Discretionary Type Claims (Section 7623(a)).
Section 7623 of the Internal Revenue Code now has been amended to allow for individuals to receive rewards of at least 15% but not more than 30% of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from one’s “substantial contribution” to the taking of IRS action (and related actions) or from a settlement taken by the IRS. Under the law, investigations made of individuals with gross income of over $200,000 for any taxable year or other entities (regardless of income, apparently) will qualify. Provisions drop the award in cases where the contribution by the informant is viewed as benefiting from other disclosures, dropping the maximum recovery to 10%, unless the informant is the original source of the information provided. No written contract is needed. Previously, payments or rewards were discretionary, and absent a written contract, were capped at $2 million dollars. Attorneys fees and costs incurred to pursue and recover a reward are specifically eligible for an above-the-line deduction. Awards can be reduced or denied if a tipster is found to have planned and initiated? the tax strategy that forms the basis of the claim for a reward.
In the second type of award, whistleblowers not able to meet the Section 7623(b) criteria may still seek an award. The awards are discretionary and a maximum award of 15% up to $10 million is possible. An adverse determination cannot be appealed, absent entry into a written contract with the United States Government.
In June, 2012, Director Whitlock updated IRM 25.2.2, by way of interim guidance, to provide new guidance as to Whistleblowers and their practitioners, in particular, as to a process by which application may be made for a reduced rate of withholding to be used by individuals looking to receive a reward under IRC Section 7623(b). Awards paid under the law are includible in gross income and are subject to federal tax reporting and withholding requirements. Section 62(a)(21) of the Code provides an allowable deduction for attorneys fees and costs paid by or on behalf of a whistleblower in connection with an award, limited to the amount of the award includible in gross income. This Code section does not allows the same deduction for awards issued under IRS Section 7623(a). WO-25-0612-03.
In June, 2012, a field directive issued by the IRS suggests that the IRS Whistleblower Office can be expected to utilize 6103(n) service contracts and debriefings of whistleblowers on complex cases and hidden arrangements in the future. To date, no use is known to have been made of such contracts, though recent guidance suggests that some may be entered into in the near future.
Informant, relators, and practitioners will need to monitor these administrative developments when considering the issues that arise with regard to the filing of claims.
In late 2014 and into 2015, allegations arose by an insider with the IRS Office of Chief Counsel, Jane Kim, reporting that key executives were undermining the whistleblower program. In February, 2015, Congress began inquiries into these issues. It remains to be seen if concerns about the efficacy of the IRS Whistleblower Office will be remedied.
In recent years, the Tax Court has attempted to resolve thorny issues that have come before the Court in whistleblower cases. These include how to best address whether a petitioner can appear as an anonymous party, and what the rules shall be with regard to the discovery of the entire “administrative record.” In many situations, the IRS has taken very restrictive, anti-whistleblower positions in the cases before the Court. For example, the iRS has taken the position that “collected proceeds” as that term is defined under the statute should not extend to criminal fines and restitution or to non-Title 26 penalties. The United States Tax Court rejected this position in a case, Whistleblower 21276-13W v. Commissioner of Internal Revenue, 147 T.C. __, No. 4 (2016), but the IRS then has appealed this decision which is still pending. However, on February 9, 2018, Congress enacted and the President signed the Bipartisan Budget Act of 2018. Included in this new law was a new section, Section 7623(c), in which Congress made clear that the definition of “proceeds” “collected as a result of IRS action on the whistleblower’s information includes “penalties, interest, addition to tax, and additional amounts provided under the internal revenue laws,” and “any proceeds arising from laws for which the Internal Revenue Service is authorized to administer, enforce, or investigate, including specifically (A) criminal fines and civil forfeitures and (B) violations of reporting requirements.” In other words, proceeds now expressly includes Title 18 fines and restitution related to tax conspiracies under 18 USC Section 371 and FBAR penalties collected under Title 31 as a result of whistleblower’s information.
The Tax Court’s subject matter jurisdiction is currently under review as a result of the DC Circuit’s decision in Li v. Commissioner, No. 20-1245 (D.C. Cir. 2022). In the case, in 2018, a whistleblower, LI, had filed a Form 211 with the IRS Whistleblower Office (WBO), alleging violations by a target taxpayer and seeking a monetary whistleblower award under 26 USC Section 7623(b). A WBO classifier reviewed the Form 211 and target taxpayer returns and concluded that Li’s allegations were speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws, thus making Li ineligible for an award. The WBO did not forward Li’s form to an IRS examiner for any potential action against the target taxpayer. Thus, there was no proceeding, and no “award determination” so that Tax Court had no jurisdiction to review the WBO’s threshold rejection of Li’s Form 211.
The decision in Li reiterates the view that a whistleblower will not obtain relief in the Tax Court if they seek to have the Tax Court direct the IRS to take action against the taxpayer. This, the Tax Court won’t do.
However, in Li, the DC Circuit was careful to state that it did not address a situation where the whistleblower believes that the IRS wrongly denied an award.
In a more recent Tax Court case, Whistleblower 972-17W, 159 T.C. 1 (2022), the Tax Court took on an the question as to what happens if the Whistleblower disagrees with the IRS claim that the whistleblower claim was the subject of a threshold rejection. In other words, that the whistleblower believes that the submission was, in fact, sent out to the field and did, in fact, result in collected proceeds. Thus, the Tax Court, even after Li, is of the view that it does have jurisdiction to review a whistleblower case focused on whether the WBO wrongly denied a whistleblower’s award. In the Whistleblower 972-17W case, the Court also notes that Section 6103(h)(4)(A) authorizes the disclosure of redacted information as to the actions the IRS took in response to whistleblower submissions.
Because of the narrow reading so often being applied to the statute, practitioners are well advised to continue to monitor this area closely for further developments.
As part of the Taxpayer First Act signed into law on July 1, 2019, there are additional reforms made to the IRS whistleblower laws. Two major reforms were made. First, under new Section 7623(d), IRS whistleblowers, when employees, are protected from retaliation or reprisal. Second, the IRS is now required under Section 6103(k)(13) to provide notice to IRS whistleblowers when a referral of their claim is made and when taxes have been collected. These cannot be waived. Also, under new Section 6103(k)(13), the IRS is required by these new laws to respond to written requests for updates as to the status of a claim.
Mr. Tufts has over 30 years of legal experience as a tax lawyer that includes assisting with potential whistleblower and informant representations in matters before the IRS. While representation on such matters is extremely sensitive and fraught with challenges, legal representation prior to the bringing forth of such information may be critical. We can assist potential informants in evaluating the processes by which they might bring forth information and know how to help concerned citizens come forward make an appropriate disclosure.
If you have information that you believe may be of interest to the IRS and are interested in obtaining legal advice with respect to the status of the law in this area, please contact us.
Current Law: No Relator Claim Available
Under current law (Section 3729(e) of the False Claims Act), courts lack subject matter jurisdiction to hear a relator’s claims that depend entirely upon the establishment of a violation of the Internal Revenue Code. By this “tax bar” provision, “claims, records, or statements” made under the Internal Revenue Code are not actionable under the False Claims Act (which otherwise authorizes private citizens to sue on behalf of the United States to recover treble damages from those who knowingly make false claims for money or property upon the Government or who knowingly submit false statements in support of such claims or to avoid the payment of money or property to the Government). A recent case seems to confirm that this tax bar will apply even when the relator does not seek to recover federal taxes. See United States v. Sakura Global Capital Markets, Inc., BNA Daily Tax Report, No. 150, at K-5 (ISSN 1522-8800)(August 5, 2004)(FCA’s tax bar deprives federal district court of subject matter jurisdiction over complaint filed by private citizen, as relator, which alleged that defendant was engaged in “yield burning” that caused municipalities to make false claims to the federal government with respect to the provision of forward supply agreements in connection with the advance refunding of federal tax-exempt municipal bonds).
If you have any questions about the new IRS whistleblower law, or wish to receive consultation on a potential whistleblower claim, please contact us.