IRS Whistleblowers Win Big as Court Ruling Stands

• Posted on: Jul 20 2018

In March, the IRS and two whistleblowers reached a settlement to a long-pending dispute regarding the amount of money that an IRS whistleblower is entitled to receive for successfully reporting a tax fraud or other tax underpayment. Under the IRS Whistleblower Reward Program, the IRS rewards a whistleblower who provides information to the IRS concerning the underpayment of taxes by either an individual or business that leads to the recovery of money and meets certain other conditions. The whistleblower is entitled to an award between 15-30 percent of “the proceeds collected as a result of the action.” 26 U.S.C. § 7623(b)(1). 

The IRS Whistleblower Tip that Started it all

The dispute began in 2013 when two whistleblowers filed a tip with the IRS that led to the question about what money counts towards the “proceeds collected as a result of the action.” Eventually, their tip led to the recovery of $20 million in restitution and $54 million in criminal fines and civil forfeiture from a Swiss Bank that helped U.S. taxpayers evade their taxes. (The court seize the assets of the bank that were deemed to be involved in the crime(s).) Although there never existed an issue concerning the whistleblowers’ entitlement to a percentage of taxes that the IRS collected as a result of their tip, the whistleblowers argued that they were also entitled to a portion of the fines and assets that the government seized (civil forfeiture). The whistleblowers argued that the “proceeds collected” should include the criminal fines and civil forfeiture in addition to the $20 million restitution. The IRS disagreed.

In 2015, the United States Tax Court held that under Section 7623(b)(1) of the Internal Revenue Code (“IRC”), the two whistleblowers could continue to pursue their awards based upon a percentage of the “proceeds collected.” Thereafter, the IRS and the whistleblowers reached a settlement in which the IRS agreed to pay the whistleblowers 24 percent of the unpaid taxes that resulted from the original tip.  Notwithstanding, both whistleblowers argued that the “proceeds collected” should include all proceeds — that is, the criminal fines and civil forfeiture in addition to the $20 million restitution.

Court’s Definition of “Collected Proceeds”

On August 3, 2016, the Tax Court ruled that the whistleblowers could recover a portion of the criminal fines and civil forfeiture monies recovered by the government. The Tax Court concluded that there was nothing in Title 26 of the IRC to limit the scope of the definition of “proceeds collected” to only those proceeds recovered under the IRC:  “We herein hold that the phrase ‘collected proceeds’ is sweeping in scope and is not limited to amounts assessed and collected under title 26.” The Court explained that Section 7623(b)(1) was created to incentivize would-be whistleblowers to come forward and report tax underpayments and create a more robust program “in response to the ineffectiveness of the prior, discretionary whistleblower program, now codified as section 7623(a).”

Expanding Upon the Scope of IRS Whistleblower Award

The IRS objected to the decision and appealed to the U.S. Court of Appeals for the District of Columbia. However, before the Court was able to hear the case, the IRS and the two whistleblowers reached a settlement.  The IRS agreed to dismiss the appeal and pay the whistleblowers an additional $12.9 million (24% of the criminal fines and civil forfeiture). Because the settlement was reached before the D.C. Circuit could hear the case, the Tax Court opinion remains in effect.  As such, the Tax Court’s definition of “proceeds” under Section 7623(b)(1) includes all proceeds that the government receives, including criminal fines and assets seized through civil forfeiture.

Takeaway

As the Tax Court observed, the expansive definition of “proceeds collected” maintains the incentive to would-be whistleblowers to come forward and report tax fraud and other tax underpayments. This case, therefore, serves as the basis upon which IRS whistleblowers can receive a larger award when criminal fines and forfeitures are recovered, in addition to unpaid taxes, as a result of their tip.