US Tax Court Sides With Whistleblower in Award Case

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US Tax Court Sides With Whistleblower in Award Case

In June, the Tax Court issued its opinion in 21276-13W v. Commissioner, 144 T.C. No. 15 (2016).  This is one of the better written case opinions addressing the procedures and history of IRS whistleblower claims.  A taxpayer who has tipped off the IRS and offered substantial assistance can claim up to 25% under the whistleblower procedures.  As an Assistant U.S. Attorney, I have some familiarity with whistleblowers and whistleblower tax cases.

There were essentially two arguments the IRS proffered in an attempt to deny the whistleblower the award he/she was seeking.  First, the IRS argued that the relevant information must be provided to the whistleblower office first, rather than another arm of the IRS, because the whistleblower must investigate the case.  But the Tax Court correctly called the IRS out on this argument, stating:

According to respondent, the Whistleblower Office is able to maintain the discretion granted it by TRHCA sec. 406(b)(1)(B) to investigate the matter or assign it to an appropriate IRS office only if the whistleblower information is first provided to it. Similarly, respondent maintains that the discretion granted to the Whistleblower Office by TRHCA sec. 406(b)(1)(C) to ask for assistance from the whistleblower would be jeopardized if it did not first receive the information. Respondent posits that this interpretation is consistent with the conclusions of the TIGTA Report emphasizing the need for centralized management of the whistleblower award program.

Respondent’s position does not survive close scrutiny. As the TIGTA Report noted, audits under the old whistleblower award program were effective; it was the process by which awards were issued that was problematic. TRHCA sec. 406 addresses this problem. It is clear from the statute that the Whistleblower Office is charged with being the central office for investigating the legitimacy of a whistleblower’s award claim, not necessarily the underlying tax issue. To interpret TRHCA sec. 406(b)(1)(B) as respondent does would mean the Whistleblower Office is authorized to open an examination relating to a taxpayer. But the Whistleblower Office has neither sufficient staff nor institutional expertise to investigate taxpayers

As a secondary argument, the IRS argued that the information was necessary for a complete form, but the Tax Court also rejected that argument:

Respondent also argues that the Whistleblower Office must first receive a whistleblower’s information in order to permit Form 11369 to be filled out. Respondent maintains:

The Form 11369 is the key document used by the Whistleblower Office in making the determinations required by section 7623 and only is created on a contemporaneous basis when information is referred by the Whistleblower Office. Thus, allowing individuals to file an award claim based on information previously submitted to a different function of the IRS would circumvent the centralized oversight and management of the program that was mandated by congress when section 7623(b) was enacted and undermine the Whistleblower Office’s ability to make well-supported determinations.

In considering respondent’s argument, we have reviewed Form 11369. The form allows an IRS operating division to inform the Whistleblower Office of each issue raised by the whistleblower, the disposition of that issue (i.e., whether the issue was pursued), and the level of assistance the whistleblower provided. Upon examination of the form, we do not believe it must be completed contemporaneously with a taxpayer-related examination. There is no reason for the contact information provided by Form 211 lines 5 and 6, other than for it to be used by the Whistleblower Office to contact the IRS employee who received the whistleblower information. And there is no reason for the Whistleblower Office to contact the IRS employee except when evaluating the whistleblower’s claim.

Ultimately, the Tax Court withheld making a final order, instead giving the IRS time to reconsider its position (or consider it for the first time).  Nonetheless, the opinion stands as a scathing evisceration of the IRS for its failure to consider the whistleblower claim appropriately in the first place.

Daniel Layton, the author of this post, is the principal of Tax Attorney OC.

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