IRS Whistleblower Office Did Not Abuse Discretion in Determining Award Amount

(Parker Tax Publishing November 2023)

The Tax Court held that the IRS Whistleblower Office (WBO) did not abuse its discretion in determining that a whistleblower was entitled to an award of 22 percent of collected proceeds rather than an award of 30 percent, the award amount the whistleblower received in other claims involving the same tax scheme. The court found that when applying the positive and negative factors provided in Reg. Sec. 301.7623-4(b), the WBO has broad discretion, and the mere fact that multiple claims arise from a common scheme does not make each claim identical. Whistleblower 8391-18W v. Comm'r, 161 T.C. No. 5 (2023).

Background

In March 2006, an anonymous individual (the whistleblower) submitted a Form 211, Application for Award for Original Information, that identified a company (the Target) as a participant in a scheme involving the establishment of trading platforms that permitted offshore hedge funds to avoid paying taxes on dividends received from entities in the United Sates.

In 2007, after a year of no contact by the IRS regarding his submission, the whistleblower began meeting with members of the U.S. Senate's Permanent Subcommittee on Investigations (PSI). After collecting documents from the whistleblower and conducting a hearing, the PSI issued a report discussing multiple financial institutions, including the Target. The Senate PSI Report discussed two types of transactions relevant to the instant case: total return swap (TRS) transactions and securities or stock lending (SL) transactions. These transactions were used by U.S. financial institutions, including the Target, to avoid withholding taxes on dividends received from U.S. corporations in which its foreign clients were invested.

In 2008, the whistleblower submitted a Form 211 to the WBO for an award regarding multiple taxpayers, including the Target, as participants in the dividend tax withholding scheme that he had exposed to the PSI. The taxpayers identified by the whistleblower were already under IRS audit with respect to their nonresident alien withholding taxes. The WBO concluded that the audit team used the whistleblower's information during the pre-existing examination of the Target and that proceeds were collected as a result of this action.

In 2018, the WBO issued a final determination that the whistleblower was entitled to a mandatory award of $18,084,957, based on an award percentage of 22 percent of the collected proceeds. The WBO also determined that under the Budget Control Act of 2012, an automatic reduction for sequestration applied to the award. The whistleblower responded that the award percentage should have been 30 percent of the proceeds and asked that 22 percent of the proceeds be paid immediately while the whistleblower challenging the withholding of the remaining 8 percent.

In a final determination letter, the WBO maintained that the whistleblower was entitled to 22 percent of collected proceeds and that the award was subject to an automatic sequestration reduction. The whistleblower filed a petition with the Tax Court. According to the whistleblower, the WBO abused its discretion by not determining an award of 30 percent, which was the percentage he received in other claims involving "the same issue." The whistleblower also argued that the WBO abused its discretion by (1) not paying the 22 percent immediately while the whistleblower challenged the unpaid 8 percent, (2) not paying interest on the award, and (3) applying a sequestration reduction to the award.

Code Sec. 7623 provides for whistleblower awards to individuals who submit information to the IRS about third parties who have underpaid their taxes or otherwise violated the tax laws. Code Sec. 7623(a) authorizes discretionary payments in certain circumstances, while Code Sec. 7623(b) provides for nondiscretionary (i.e., mandatory) awards. Under Code Sec. 7623(b)(1), a whistleblower generally is entitled to a mandatory award if the IRS proceeds with an administrative or judicial action based on information provided by the whistleblower and collects proceeds as a result of the action. The whistleblower is entitled to receive an award of at least 15 percent, but not more than 30 percent, of the proceeds collected, depending on "the extent to which the individual substantially contributed to such action." The WBO analyzes a whistleblower's claim by considering the positive and negative factors provided in Reg. Sec. 301.7623-4(b) to help determine the whistleblower's award percentage. Thus, the WBO may increase or decrease the award percentage on the basis of the presence and significance of any positive or negative factors.

Analysis

The Tax Court held that the WBO did not abuse its discretion in recommending a 22 percent award. In the court's view, when applying the positive and negative factors in Reg. Sec. 301.7623-4(b), the WBO is vested with broad discretion and must exercise its judgment in determining the appropriate award percentage for each claim before it. The court noted that the positive and negative factors do not require comparisons or consistency between claims, even if brought by the same whistleblower or involved in a common scheme. The award percentage recommended in the whistleblower's other claims was simply not a consideration in the determination of the appropriate award percentage for the whistleblower's claim.

Further, the court found that the mere fact that the claims arise from a common scheme does not make each claim identical. To the contrary, the court found that the whistleblower's claim in this case, unlike his other claims that were responsible for the identification of taxpayers, was supported by valuable supplemental information to an audit that was already opened. The court found that in the course of determining the 22 percent award, the WBO analyst who managed the whistleblower's claim considered the administrative claim file, sought additional information from the audit team, and addressed comments from his manager to expand on the differing percentages among the whistleblower's claims. The court said that at each step of his review of the whistleblower's claim, the WBO analyst exercised reasoned judgment in his determination that a 22 percent award was appropriate.

The Tax Court further held that the WBO did not err by (1) not paying the 22 percent immediately while the whistleblower challenged the unpaid 8 percent, (2) not paying interest on the award, and (3) applying a sequestration reduction to the whistleblower's award proposal. The court found that under Reg. Sec. 301.7623-4(d)(1), all appeals of the WBO's determination must be final, or the whistleblower must waive his right to appeal, before a whistleblower award will be paid. The court also found that Code Sec. 7263(b) does not provide for the payment of interest. Finally, the court determined that it is not an abuse of discretion for the WBO to apply the sequestration reduction when paying a whistleblower award.

For a discussion of the rules for determining the amount of a whistleblower award, see Parker Tax ¶262,320.

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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