IRS declines Joseph Insinga's claims, potentially avoiding a negative precedent.

Posted on April 24, 2013 by Erica L. Brady

Joseph Insinga’s case has been watched closely from the time the petition was filed to see if the Tax Court would assert jurisdiction over a case where the IRS had not issued a formal determination but had allowed the claim to linger, causing a de facto denial of Mr. Insinga’s claim.  This proposed an interesting jurisdictional question that captured the attention of tax attorneys, whistleblowers, and the public.  As previously discussed on this blog, The Ferraro Law Firm filed an amicus curiae brief highlighting the fact that the IRS’s refusal to issue a whistleblower award determination, despite having allegedly collected proceeds within the meaning of section 7623(b), is tantamount to a negative award determination, or a de facto denial. 

However, on April 15, 2013, the IRS issued a letter formally denying Mr. Insinga’s claims for all but one taxpayer.  By issuing a formal denial letter, the Tax Court has jurisdiction under section 7623(b)(4) and leaves unresolved whether the Administrative Procedures Act or other non-tax-code procedural provisions might require the IRS to take affirmative action in whistleblower cases.  In a March 13th order, the Tax Court noted that the D.C. Circuit has held the Administrative Procedures Act and the All Writs Act to apply to all congressionally established courts and, under Telecommunications Research and Action Center v. FCC, that the Administrative Procedures Act and the All Writs Act confers jurisdiction over claims of unreasonable agency delay to a court that a statute confers exclusive jurisdiction to review a final agency order. 

The real precedent Insinga was going to set was that if you found out the taxpayer had been paid on an issue you submitted, you could then sue the IRS claiming that they had made a de facto determination not to pay you.  Now it is just a fight over whether the whistleblower provided information used by the IRS to collect tax.  As Greg said, the IRS probably denied the award because it saw the writing on the wall and did not want to set unfavorable precedent.  However, getting rid of the de facto determination issue in Insinga just leaves the question to perhaps be resolved by a court at a later date.  Scott elaborated on this point, saying that he was not surprised by the rejection, since the IRS was facing a potential adverse decision in court that would open up every whistleblower with a case to sue them and have the Tax Court hear the case.

We believe that this issue will be litigated eventually.  However, the next whistleblower in a situation similar to Mr. Insinga's may have a difficult time because it is unclear whether his showing that the taxpayer paid tax will be enough to initiate an award challenge.  Instead, there may need to be evidence to suggest that the IRS intends not to pay the tax whistleblower.  In the Insinga case, there was both the belief of payment of tax by the taxpayer and the suggestion that the IRS had already decided they were not going to pay and just had not issued the formal denial.  It seems the IRS has learned from this experience and is less inclined to discuss the likelihood of an award during an investigation or the status of particular award determinations.

IRS Whistleblower Representatives Present Comments at Public Hearing on Proposed Treasury Regulations.

Posted on April 11, 2013 by Scott A. Knott

A congratulations and a thank you to Erica Brady, who yesterday spoke on behalf of The Ferraro Law Firm’s clients at the public hearing on the Proposed Treasury Regulations that outline how the IRS will interpret section 7623.  Erica joined other practitioners in pointing out that the Proposed Treasury Regulations should not be finalized in their current form. 

Erica reiterated my message from the hearing on the previous Proposed Regulations of, “Do no harm.”  The regulations should not narrow a broad statute or thwart Congressional intent by limiting existing whistleblower’s rights or discouraging whistleblowers from coming forward.  Erica highlighted four topics at the hearing:

  1. The narrowing of “Proceeds Based On,”
  2. The arbitrary cut off for reduced tax attributes to be included in collected proceeds,
  3. The method in which the award percentage is calculated, and
  4. When the administrative proceeding starts.

Erica showed a little chutzpah by asking all those assembled in the large IRS auditorium to raise their hand if they thought that the Proposed Treasury Regulations as written would actually attract whistleblowers into the program… but only the hands of those who were responsible for writing the Proposed Regulations went up.  When she asked if anyone who did not have a hand in writing the Proposed Regulations felt that the Proposed Treasury Regulations would help attract whistleblowers, no hands remained up.

Base Erosion and Profit Shifting: Why Corporate Tax Receipts are in the Toilet Despite Rising Profits

Posted on March 26, 2013 by Scott A. Knott

I saw an interesting article today by the President and Publisher of Tax Analysts in which he drew attention to the role of tax professionals in the growing crisis over reduced corporate tax receipts in a time of record corporate profits. He focused his audience’s attention on a recently released study by The Organisation for Economic Co-operation and Development (“OECD”) which described the need for the international tax community to solve the problem of base erosion and profit shifting (“BEPS”). Sure, that’s a lot acronyms to the uninitiated, but at its heart this is a giant shell game of “where’s the income?”, and unfortunately for those of us living in civilized society, the offshore tax haven shell is where it’s at. Large multinationals frequently use abusive strategies, some of highly questionable legality, to minimize their worldwide tax bill. Many politicians have made hay over US based multinationals reporting billions of dollars of income in e.g. the British Virgin Islands, and hardly any here where their employees and a large portion of their sales actually are.

 

We agree that for the most part companies abide by, and optimize their behavior for, the rules that are set for them. However, the grey line is often crossed. In our Ferraro 500 last year we noticed that reserves for uncertain tax positions exceeded total US corporate tax collections*, and that’s just for the Fortune 500 companies. While moving the line to collect more revenue (while maintaining international competitiveness) and to make it more of a black line than a grey line should be the goal of legislators, governments need to get better at enforcing the existing rules. Utilizing valuable information obtained from knowledgeable whistleblowers should be a critical component of that enforcement. Without enforcement, a change in the rules is meaningless.

 

*Fiscal 2011 Fortune 500: Profits $824 billion & Reserves $187 billion; Total IRS Corporate Tax Collections $181 billion. Whereas in Fiscal 2010, Fortune 500: Profits $708 billion & Reserves $197 billion; Total IRS Corporate Tax Collections $191 billion.

Whistleblowers in Quandary Over Potential Whipsaw

Posted on March 13, 2013 by Erica L. Brady

The IRS has spent much time ensuring that they would not be whipsawed by paying an award on proceeds that is ultimately refunded to the taxpayer, but apparently, little consideration has been given to what happens when the IRS whipsaws a whistleblower using their information after it denied the whistleblower’s claim.  On November 2, 2012, Anonymous 1 and Anonymous 2 had their appeal of the IRS’s denial of their claim dismissed by the Tax Court despite the IRS’s notification that a division of the IRS was conducting an investigation of the taxpayer identified in Anonymous 1 and Anonymous 2’s claim.  The order dismissing Anonymous 1 and Anonymous 2’s claim states:

Petitioners provided respondent with information relating to Company X and approximately 90 of Company X’s clients.  Respondent evaluated petitioners’ information for almost two years, yet assets that he did not institute an administrative or judicial action and collect proceeds relating to Company X or its clients.  Furthermore, after the Whistleblower Office denied petitioners’ claims, a separate division of the IRS opened what respondent asserts is an independent investigation into Company X.  While we question whether the information provided by petitioners was used in the subsequent investigation, section 7623 does not provide a mechanism for petitioners to challenge respondent’s assertion.  See Cohen v. Commissioner, 139 T.C. at __ (slip op. at 9) (holding that “Congress *** has charged the Commissioner with resolving these claims and has not provided remedies until after an administrative or judicial action and the collection of proceeds.”).  Respondent established that petitioners have not met the prerequisites of section 7623(b) and petitioners have not set forth specific facts showing that there is a genuine issue for trial.

Now Anonymous 1 and Anonymous 2 are asking the Tax Court to vacate its prior decision in light of the fact that not only has the IRS begun an audit of the taxpayers identified in their whistleblower claim, but Anonymous 1 and Anonymous 2 have received letters from the IRS that the IRS has re-opened their whistleblower claims and the IRS has asked for assistance from Anonymous 1 and Anonymous 2.  We will be watching to see how the Tax Court rules on this motion to vacate its prior decision because the implications may be felt widely.  By reopening the whistleblower claims, the IRS has functionally rendered the prior denial of the claims an interim determination.  If the denial is treated as an interim decision, then it is likely that the case is not ripe under Cooper I.  However, if the decision is allowed to stand the concern is that the IRS will use Anonymous 1 and Anonymous 2’s information in an investigation and collect proceeds based on that information, and when it comes time to pay an award the whistleblowers will no longer have the right of review because the Tax Court has already ruled on that claim.  If the IRS is able to side step their duty to pay awards to whistleblowers by simply denying the claims and then opening an investigation and using the information, then the requirement to pay awards and the right of review are meaningless.  I cannot believe that this is the case.  The best end result for these whistleblowers is that the IRS successfully uses their information and then the Whistleblower Office determines that they are entitled to an award on all the proceeds collected, but in the meanwhile the Tax Court will hopefully see the position that all whistleblowers can be put in if the IRS denies their claim and then uses their information afterwards.  Therefore, we think the Tax Court should treat the previous determination of the IRS as an interim – not final – award determination and vacate its prior decision due to the subsequent re-opening of the case by the IRS.

IRS Says that Sequestration Will Mean Reduced Award Payments.

Posted on March 05, 2013 by Gregory S. Lynam

On March 4, the IRS announced through a two-paragraph statement posted to its website, that under the automatic sequester cuts, any section 7623 whistleblower awards paid between March 1, 2013, and September 30, 2013, will be reduced by a “sequestration reduction rate.” The IRS said that in conjunction with the Office of Management and Budget, it has determined that whistleblower awards will be reduced by 8.7 percent.  

Reducing the amount of any whistleblower awards is a step in the wrong direction and makes little sense if the IRS is looking to attract whistleblowers. However for the purposes of reducing discretionary spending, this position would make sense if it was limited to awards paid under the old Informant Rewards Program of section 7623(a). Because awards under the old Informant Rewards Program of section 7623(a) are discretionary, the reduction in the award amount would be a reduction in discretionary spending. However, award payments under the new Whistleblower Program as enacted by section 7623(b) are not discretionary, they are mandated by statute, and not available for reduction.

Section 7623(b) says that the Commissioner SHALL pay 15-30% awards to whistleblowers who meet the threshold requirements of that section. The problem with this sequestration reduction policy can be seen clearly by analyzing the effect of this policy on awards which are determined to be at the top and bottom of the statutorily required 15-30% scale. A 15% award determination that is then reduced 8.7% is a 13.7% award. The Commissioner has no more authority to pay 13.7% to a section 7623(b) whistleblower than he has to reduce a taxpayer's child tax credit. On the top end of the scale a 30% award reduced by 8.7% is 27.4%. By effectively announcing that under no circumstance will the IRS pay an award above 27.4%, any award determination made under the sequestration reduction policy is on its face arbitrary, capricious, and unreasonable.

The Ferraro Law Firm will counsel any client whose award is reduced under the sequestration guidelines to challenge the unlawful reduction in the United States Tax Court. With respect, I suggest the IRS focus on using whistleblower information and collect the billions owed rather than waste time on invalid pronouncements that will only cost the government time and money in court.

Ferraro Law Firm's Comments on the Proposed Whistleblower Regs.

Posted on February 21, 2013 by Scott A. Knott

Earlier this week we filed our comments to Prop. Treas. Reg. sections 301.6103(h)(4)-1, 301.7623-1; 301.7623-2, 301.7623-3, and 301.7623-4 with the Treasury Department. In summary, our specific comments, organized by their corresponding section of the Proposed Regulations, are as follows:

1) §301.6103(h)(4)-1: Disclosures can be made under section 6103 before the preliminary award determination letter is sent out;

2) §301.7623-1: The procedures for how to file a claim are already known;

3) §301.7623-2: The definitions of “proceeds based on” and “collected proceeds” are an erroneous interpretation of the statute;

4) §301.7623-3: Award determination administrative proceedings start before the preliminary award determination letter; and

5) §301.7623-4: The starting point of the Award Computation is unfair to whistleblowers.

As a general matter we questioned what this regulation project – which Treasury has been working on since 2009 – was meant to achieve, and whether the Proposed Regulations as written meet that objective. Because we think that the language proposed is both too narrowly drafted and contrary to the statute, it will likely restrict the ability of the Whistleblower Office to make award determinations that are consistent with the statute. Therefore, we urged that many portions of these Proposed Regulations not be finalized, which would mean they have no legal effect as a “Proposed Regulation” because they were not issued in “Temporary and Proposed Regulation” form.

IRS Whistleblower Office Releases its Annual Report for Fiscal Year 2013

Posted on February 13, 2013 by Erica L. Brady

The IRS Whistleblower Office made leaps forward in fiscal year 2012.  Fiscal year 2012 marked the year that the IRS made a $104 million payment to Bradley Birkenfeld, which is believed to be the largest award paid to a single whistleblower.  This was one of three awards paid in Fiscal Year 2012 and one of five paid under the new law.  Fiscal 2012 was also the year that the IRS issued final regulations that clarified the definitions of “proceeds of amounts collected” and “collected proceeds” for purposes of section 7623.  The IRS also issued interim guidance that incorporated the Treasury Regulations and added additional provisional timing of award determinations and for award computation, established procedures for tax withholding on award payments, and revised and updated procedures for administrative proceedings.  Some of the highlights from the report are:

  • The number of submissions in fiscal year 2012 (332) remained relatively stable from fiscal year 2011 (314), as did the number of taxpayers identified (2011 – 734 Taxpayers Identified, 2012 – 671 Taxpayer identified).  See the charts below.

  • Three awards were paid under section 7623(b).
  • The IRS issued proposed regulations and is seeking comments on the comprehensive regulations that are intended to revise the current regulations implanting section 7623 to reflect the remaining 2006 amendments to section 7623. 
  • The IRS Whistleblower Office incorporated the Informant Claims Examination (“ICE”) Unit.  The ICE Unit is responsible for case management and administration of the discretionary award program under what is now section 7623(a).

Going Forward

The Fiscal Year 2012 Whistleblower Office Report indicates that the IRS whistleblower program also has significant changes planned in fiscal year 2013.  According to the annual report, the IRS Whistleblower Office appears to be moving away from sorting whistleblower cases as 7623(a) claims and 7623(b) claims, and moving towards classifying claims based on the Operating Division responsible for making the tax administration decisions with respect to the issues raised by whistleblowers.  “With LB&I and SB/SE general examination programs receiving the vast majority of whistleblower claims and each processing their inventory differently because of differences in the characteristics of the typical claims referred to those organizations, the Whistleblower Office will change its intake process in FY2013.”  The IRS will stop projecting potential results for claims when they are received, as claims will stay in the Whistleblower Office regardless of size.  Instead, assignment of claims to a Whistleblower Office analysts for monitoring and coordination will be based on factors such as the need for coordination within or among operating divisions to address multiple issues or taxpayers identified in a whistleblower submission.  It is expected that future reports will separate statistics for each Operating Division.

There appears to be some concern over the ability of the IRS to control what is released to whistleblowers in discovery and the ability to limit additional disclosures of confidential taxpayer information after the IRS has disclosed such information.  The IRS has sought protective orders from the Tax Court in some cases, but the Tax Court has not ruled in those requests. 

Just in Time for the New Year...New Proposed Regulations

Posted on December 18, 2012 by Erica L. Brady

Proposed Treasury Regulations for the IRS whistleblower program were released on December 14, 2012.  These regulations cover many issues and deserve a complete reading; however, below is a short outline of what each section of the proposed regulations covers.

§301.6103(h)(4)-1, Disclosure of returns and return information in whistleblower administrative proceedings.

This section of the proposed regulations establishes that that a whistleblower administrative proceeding (as described in §301.7623-3) is an administrative proceeding pertaining to tax administration within the meaning of section 6103(h)(4).  Therefore, the Director, officers, and employees of the Whistleblower Office may disclose returns and return information (as defined in section 6103(b)) to the whistleblower (or the whistleblower’s legal representative) to the extent necessary to conduct a whistleblower administrative proceeding.

§301.7623-1, General rules, submitting information on underpayments of tax or violations of the internal revenue laws, and filing claims for award.

This section of the proposed regulations provides the general rules for submitting information and filing claims for an award.  This is the “who, what, when, where, and how” of submitting a claim for an award.  A whistleblower must follow these rules to ensure that their claim for an award is appropriately filed to ensure that the IRS Whistleblower Office will consider their claim for an award.  The proposed regulations in section 301.7623-1(e) states that the IRS will use its best efforts to protect the identity of whistleblowers.

§301.7623-2, Definitions

This section of the proposed regulation defines key terms used in the statute and the regulations.  The proposed regulations build on definitions in the current regulations and define additional key terms for section 7623.  These definitions will affect how the IRS Whistleblower Office interprets section 7623 and ultimately will makes award determinations based on these definitions.  How “proceed based on,” “related action,” and “collected proceeds” are defined will greatly influence the number of awards issued and the amount of those awards. 

Particular attention should be paid to the definition of “proceed based on” and “collected proceeds.”  The definition of “proceed based on” in the proposed regulations seems to be reading the word “only” into the statute and requiring that the IRS take action that it would not have taken but for the information provided to be award eligible.  This reading goes beyond the language of section 7623, which simply requires that the IRS use the whistleblower’s information in an administrative or judicial action in order for the whistleblower to be able to collect an award.  The proposed regulations appear to assume that the IRS would discover an issue simply because the issue was listed generally in an audit plan.  Hopefully, this narrowing of the statute will be addressed in the final regulations after hearing comments from the public.  Either way, we are confident that this regulatory expansion would not survive judicial review.

The definition of “collected proceeds” continues to be an area that should be focused on.  The proposed regulations continue to claim that criminal fines are not part of collected proceeds; however, as discussed at length on this blog and elsewhere, this position goes against the language of the statute and the intent of Congress.  The definition of collected proceeds also touches on the inclusion of tax attributes in collected proceeds.  The preamble to the regulations goes into more detail illustrating that tax attributes that are used as of the date that the award computation is made will be counted as collected proceeds.  There does not appear to be a clear legal theory behind this cut off, but our discussions with various IRS personnel suggests this is an administrative compromise.

§301.7623-3, Whistleblower administrative proceedings and appeal of award determinations.

This section provides outlines of the administrative proceedings and appeal rights for award determinations.  The largest changes here are the creation of administrative proceedings for cases that do not meet the requirements of section 7623(b) (under §301.7623-3(b)) and claims that are denied (under §301.7623-3(c)(7)).  The creation of the administrative procedures for denied cases is likely to reduce the number of whistleblower cases filed in the United States Tax Court that are ultimately dismissed because the IRS did not use the information, did not detect an underpayment of tax based on the information, or collect proceeds based on the information.  The proposed regulations states that, “The Whistleblower Office will send to the claimant a preliminary denial letter that states the basis for the denial of the claim.”  §301.7623-3(c)(7).  This letter and administrative proceeding should provide claimants with a sense of closure as to what happened with the information that was provided. 

§301.7623-4, Amount and payment of award.

This section outlines the procedures that the Whistleblower Office uses to determine the award amount, including what factors are considered in determining the award percentage, what happens when there are multiple independent claimants, and when payment of an award is made.  In particular whistleblowers will want to look at §301.7623-4(c)(3), which discusses the Whistleblower Office’s application of “planned and initiated” for purposes of reduction or denial of an award.  If the Whistleblower Office determines that a claim for award is brought by an individual who planned and initiated the actions, transaction, or events that led to the underpayment of tax, the Whistleblower Office may appropriately reduce the amount of the award percentage that would otherwise result under section 7623.  Section 301.7623-4(c)(3)(ii) of the proposed regulations states when the IRS Whistleblower office is determining whether a whistleblower planned or initiated the scheme that the IRS Whistleblower Office will look at whether the individual “(A) Designed, structured, drafted, arranges, formed the plan leading to, or otherwise planned, an underlying act, (B) Took steps to start, introduce, originate, set into motion, promote or otherwise initiate an underlying act, and (C) Knew or had reason to know that there were tax implications to planning and initiating the underlying act.” 

IRS says whistleblower law a "game changer" in their efforts to combat offshore evasion.

Posted on December 18, 2012 by Gregory S. Lynam

Tax practitioners and government officials recently came together at the American Bar Association International Tax Enforcement Conference in New York to discuss international tax enforcement rules and procedures.  Among the topics of discussion was the federal government’s increased arsenal of tools available in combating offshore tax evasion, making its efforts stealthier and less predictable to practitioners and taxpayers, according to a panel of tax controversy practitioners.  These new tools include data mined from voluntary disclosures; cooperation by taxpayers and bankers; and notably, information obtained from whistleblowers.  

Thomas E. Bishop, Assistant Special Agent In Charge, IRS Criminal Investigation division in New York, referred to the 2006 IRS whistleblower law as a "game changer" for the IRS's efforts to combat offshore evasion.  Bishop stated that the Criminal Investigation division is investigating individuals based on information provided by whistleblowers.  The use of whistleblower information was also discussed by Sandra Brown, Assistant U.S. Attorney/Tax Division Chief (Central District of California), who said that the Justice Department has ongoing investigations because of information provided by whistleblowers.  Brown continued by saying that people tend to picture the jilted ex-spouse as the whistleblower who provides information on individual taxpayers, but that view is antiquated.  Business partners and associates are providing information as well, she said, adding, "Those who lie with dogs know where the fleas are."

Not only has whistleblower information brought specific information forward, whistleblower information, along with other tools used by the government, has created a situation where practitioners can no longer predict the next wave of enforcement, said Charles P. Rettig of Hochman, Salkin, Rettig, Toscher & Perez PC.  Practitioners used to be able to mine their own data to predict those enforcement efforts, but that's changed, he said.  Scott D. Michel of Caplin & Drysdale agreed, citing subpoenas recently issued by the U.S. attorney's office for the Southern District of New York to account holders of Bank Frey & Co., a Swiss bank.  Those subpoenas essentially "came out of the blue," with no inkling by practitioners that the bank was even on the government's radar, he said.

We note that this is anecdotal until the IRS publishes statistics on the mater, but it is encouraging to hear from Criminal Investigation and the United States Attorney’s office that they think the whistleblower program is providing them with good cases.  But this is not all together surprising as we have referred a number of cases to the IRS Criminal Investigation Division with good results.  A well-informed whistleblower can be a key asset in any tax case, not just in offshore evasion.  I will be speaking with Stephen Whitlock, Director of the IRS Whistleblower Office, at the ABA Tax Section meeting in January.  One of the talking points of our panel will be the IRS’s great successes in utilizing informant information and its impact on all levels of enforcement both civil and criminal. 

As the calendar year winds to a close we wish you and your loved ones a Merry Christmas and Happy New Year.  We look forward to another year’s hyper-aggressive tax transactions being locked in place waiting for a fresh crop of IRS Whistleblowers to bring the transgressions to justice.

Eleventh Circuit sends a reminder that whistleblowers must follow the proscribed procedure in order to have their claim for an award.

Posted on December 10, 2012 by Erica L. Brady

The Eleventh Circuit released Ware v. Commissioner, an unpublished opinion, in which the Eleventh Circuit upheld the Tax Court’s dismissal of the pro se taxpayers’ request for redetermination of their tax liability and their whistleblower claim.  The Eleventh Circuit upheld the decision of the Tax Court to dismiss the taxpayer’s whistleblower claim because the Tax Court found that there was no evidence that the taxpayers filed a Form 211.  As there is no record of a Form 211 being filed, the IRS did not consider their claim for an award.  As the IRS did not consider their claim for an award, the IRS did not issue a final determination on their claim for an award and thus there can be no appeal of a determination to the Tax Court. 

This case serves as a reminder that the procedures for submitting a claim for an award must be followed.  The Eleventh Circuit does not give any details about the information that the taxpayers provided to the IRS.  The Eleventh Circuit simply states that the taxpayers’ last argument is that the Tax Court failed to consider their whistleblower claim.  However, the Eleventh Circuit states that the Commissioner asserts that the taxpayers never filed a Form 211.  The Eleventh circuit goes on to state that, “As a result, the Secretary did not issue a determination on a whistleblower claim, and the Tax Court could not hear the case.”  The Eleventh Circuit simply looked at the Treasury Regulations that describe the procedures that must be followed to file a claim for an award.  “Under § 7623, the Secretary of the Treasury may pay a reward to an individual for bringing information to the IRS about the underpayment of taxes.  A whistleblower must file a Form 211: Application for Reward for Original Information.  26 C.F.R. § 301.7623-1(f).” 

Decisions such as this serve as a reminder that the ensuring that proper procedures are followed is just as important as the information that is provided.  If a whistleblower fails to file a Form 211, then the whistleblower has not made a claim for an award.  An attorney can help ensure that a whistleblower meets all of the procedural hurdles throughout the process.  If you have provided information to the IRS without properly filing a claim for an award, you should contact an attorney who can discuss how you should proceed in order to protect your claim.