Tax Court Upholds IRS Denial of Whistleblower Award

(Parker Tax Publishing January 2018)

The Tax Court held that the IRS did not abuse its discretion in denying a whistleblower's claim for an award because the information provided by the whistleblower did not result in the collection of proceeds by the IRS. The court determined that the scope of its review of an IRS whistleblower award determination was limited to the administrative record but could be supplemented if the record was incomplete, and also determined that the applicable standard of review in such a case is abuse of discretion. Kasper v. Comm'r, 150 T.C. No. 2 (2018).

While working for his former employer, who was the target of the whistleblowing claim, Kenneth Kasper detected what he thought was a long term pattern of forced and uncompensated overtime. Kasper notified the IRS by filing a Form 211, Application for Award for Original Information, in January 2009. He claimed the target owed its employees millions of dollars in overtime pay and that the IRS would benefit by receiving the payroll taxes withheld on that compensation.

The Form 211 was received by the IRS Whistleblower Office (WBO) and eventually forwarded to Brett Roskelley in the Large Business and International Unit (LB&I). Roskelley decided that Kasper had identified a Department of Labor issue, not an IRS issue, and recommended that the IRS deny Kasper's claims. A rejection letter was sent to Kasper stating that the information he furnished did not meet its criteria for an award. The letter explained that, due to federal disclosure and privacy laws, the IRS could not give specific reasons for the rejection. Instead, a boilerplate list of common reasons for not allowing an award was provided. In response to the letter, Kasper filed a petition with the Tax Court.

The target entered bankruptcy in January 2009, around the time Kasper sent his Form 211 to the IRS. In February 2009, the IRS filed a proof of claim in the bankruptcy asserting that the target owed over $15 million in income and withholding taxes. The IRS's claim was amended In February 2010 to reduce the amount to about $170,000, all for unpaid corporate income tax, interest and penalties. A second amended claim increased the purported debt, again all for unpaid corporate income tax, interest and penalties. The IRS and the target eventually negotiated a closing agreement. The target agreed to pay the IRS $37.5 million in full satisfaction of its tax liabilities and agreed that those liabilities related to withholding tax under Code Sec. 1441.

Under Code Sec. 7623(b), a whistleblower may be awarded a percentage of the proceeds recovered from an action in which the IRS proceeded based on information provided by the whistleblower. Thus, Kasper had to show that the information he sent to the IRS about the target resulted in the collection of the proceeds the IRS received in the settlement in order to receive a whistleblower award.

Kasper acknowledged that the IRS did not independently act on his Form 211. However, he claimed that he submitted the same information to the IRS's Fresno office on a Form 3949-A, Information Referral, in late January 2009. Kasper believed the IRS used this information in preparing its proof of claim in the target's bankruptcy. He pointed out that the IRS's original proof of claim included employment taxes as a potential outstanding liability and inferred that the Fresno office must have reported his information to the IRS's solvency group. Kasper also noted that Roskelley was copied on an IRS email chain discussing the need for numbers for an amended proof of claim.

The IRS claimed that Kasper's information was never used and that the IRS merely followed its normal course of business in dealing the target's bankruptcy. The IRS claimed that the WBO's records showed Kasper's claim was denied because his tip was about unpaid wages, which was not an IRS issue because no tax is owed on unpaid wages.

The Tax Court noted that because so few whistleblower cases have been decided on the merits since the enactment of Code Sec. 7623(b) in 2006, it first had to analyze the proper scope and standard of review before considering the merits. The court noted that the default rule for review of an agency decision is that review is limited to the record. The court also found that when Congress provided for judicial review of whistleblower awards, it did not establish any rules about judicial review. Based on this lack of guidance, the Tax Court concluded that it should apply the default rule and limit its scope of review to the administrative record. With regard to the appropriate standard of review, the Tax Court determined that abuse of discretion applied because it was reviewing an agency decision where the scope of review is not de novo.

Turning to the merits, the Tax Court determined that the IRS did not abuse its discretion in rejecting Kasper's whistleblower claim. The Tax Court found that the boilerplate denial letter Kasper received did not explain why Kasper was ineligible for a whistleblower award. However, the court found a contemporaneous explanation in the WBO's records, which showed that the claim was denied because Roskelley's tip was about unpaid wages and no tax is owed on unpaid wages. This rationale, in the court's view, was neither arbitrary nor capricious nor an abuse of discretion.

The Tax Court rejected Kasper's theory that the information in his Forms 211 and 3949-A formed the basis of the IRS's proof of claim against the target in the bankruptcy. The court found that there was nothing unusual in the IRS's filing of its original proof of claim followed by two amendments later that year. According to the Tax Court, bankruptcy courts provide the IRS with notice of all chapter 11 petition filings regardless of whether the IRS is listed as a creditor. An IRS insolvency specialist then has 10 days to take action, which may include filing an estimated proof of claim before the bar date to protect the government's interest and provide more time to determine the exact liability. This unassessed claim is then followed as soon as possible by an amended proof of claim with the correct tax liability. The Tax Court determined that when the target filed for bankruptcy, the IRS was notified and an original proof of claim was filed by the insolvency department including unassessed claims for withholding taxes. An amended proof of claim was later filed that corrected these claims to zero. According to the Tax Court, none of the information provided by Kasper in his Form 3949-A would have changed this; the IRS could not have asserted a claim for employment taxes on the allegedly unpaid wages because unpaid wages are not taxed. Kasper's information therefore did not result in the collection of proceeds and he was not entitled to a whistleblower award.

For a discussion of whistleblower awards, see Parker Tax ¶262,301.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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