Whistleblower's Info Failed to Meet $2 Million Threshold; Larger Reward Denied

(Parker Tax Publishing June 2024)

The Tax Court granted summary judgment to the IRS after concluding that the IRS Whistleblower Office did not abuse its discretion in determining an award to a whistleblower. The court found that the record clearly showed that the proceeds collected by the IRS because of the whistleblower's information did not meet the Code Sec. 7623(b)(5) $2 million threshold which would have made the whistleblower eligible for a higher award. McCrory v. Comm'r, T.C. Memo. 2024-61.

Background

In 2018, Suzanne McCrory filed seven Forms 211, Application for Award for Original Information, with the IRS Whistleblower Office (WBO) relating to seven separate taxpayers. McCrory based each of the seven claims on publicly available information about settlement or arbitration awards that may have been received by the target taxpayers, but not reported on their returns as taxable income.

The WBO assigned a claim number to each of the seven Forms 211 but processed them together as one consolidated claim. With respect to five of the claims, the IRS took no action based on McCrory's information because the allegations were not specific, were not credible, or were speculative, or because the classifier could not identify the target. With respect to the sixth claim, McCrory alleged that the target taxpayer may have failed to report an arbitration award of approximately $442,000. For the seventh claim, McCrory alleged that the target taxpayer may have failed to report an award of approximately $3 million. With respect to the last claim, a revenue agent surveyed the target's return, determined that the target was in compliance, and took no further action. The sixth claim, however, prompted the IRS to audit the target's return and, ultimately, to determine approximately $293,000 in total adjustments, resulting in a tax deficiency, plus penalty and interest, of nearly $180,000.

In 2022, the WBO issued to McCrory a Final Award Decision Under Section 7623(a) (Decision Letter). The Decision Letter stated that the WBO made a final decision to award $1,694 to McCrory. The Decision Letter did not identify which claim numbers the award related to but explained the award computation in an attached Determination Report. That Report stated that the final tax, penalties, interest, and other amounts collected based on information provided by McCrory was $179,672 and that the recommended award percentage was 1 percent, subject to a modest reduction under provisions enacted in the Budget Control Act of 2011, Pub. L. No. 112-25.

Code Sec. 7623 provides for discretionary and nondiscretionary awards by the IRS to individuals (i.e., whistleblowers) who alert the IRS to taxpayers that are, or have, underpaid their taxes. Under the discretionary provisions of Code Sec. 7623(a), the IRS can pay an award to an individual for: (1) detecting underpayments of tax, or (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same. Any amount payable under this provision is paid from the proceeds of amounts collected by reason of the information provided, and any amount so collected must be available for such payments.

Under the nondiscretionary provisions of Code Sec. 7623(b), an individual is entitled to an award for bringing to the IRS's attention information under which the government moves forward with an administrative or judicial action relating to the detection of tax underpayments or the detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same. The individual providing such information is entitled to receive an award of at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action.

Code Sec. 7623(b)(4) provides that the Tax Court may review mandatory award determinations made under Code Sec. 7623(b), but generally may not review discretionary payments properly made under Code Sec. 7623(a).

Under Code Sec. 7623(b)(5), the whistleblower award rules apply with respect to any action (1) against any taxpayer, but in the case of any individual, only if such individual's gross income exceeds $200,000 for any tax year subject to such action, and (2) if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2 million. Reg. Sec. 301.7623-2(e) defines the "amount in dispute" as the greater of (1) the maximum total of tax, penalties, interest, additions to tax, and additional amounts that resulted from the action(s) with which the IRS proceeded based on the information provided, or (2) the maximum total of such amounts that were stated in formal positions taken by the IRS.

McCrory filed a petition with the Tax Court disputing the amount awarded to her. She argued that the WBO abused its discretion in determining her award and that IRS's own regulations require it to apply the same rules and procedures to determine discretionary whistleblower awards under Code Sec. 7623(a) and mandatory awards under Code Sec. 7623(b) and that the IRS applied those rules and procedures incorrectly in calculating her award. The IRS responded with a motion for summary judgment on the ground that the proceeds in dispute did not meet the $2 million statutory threshold thus precluding review by the Tax Court.

Analysis

The Tax Court granted summary judgment to the IRS and held that the record clearly showed that the proceeds in dispute did not meet the $2 million threshold under Code Sec. 7623(b)(5) for a mandatory award. The court noted that, of the seven claims McCrory filed, the IRS began an audit against only one of the named targets. McCrory's allegation that the target may have not reported income from a $442,000 arbitration award on the target's tax return was ultimately confirmed in part, leading the IRS to increase the target's income by approximately $293,000, resulting in a total tax deficiency, plus penalty and interest, of nearly $180,000.

The court observed that, if McCrory's allegation in her claim that this target may have failed to report as much as $3 million in income was true, then the IRS would have asserted that the target owed more than $2 million with respect to that income. But, the court said, that did not happen. Under Code Sec. 7623(b)(5), the court noted, the term "proceeds in dispute" does not refer simply to the amount a whistleblower alleges might have been underpaid but instead refers to proceeds actually disputed in an IRS action against a target taxpayer.

The court found that, while the regulations expand the inquiry as to the proceeds in dispute to include not just amounts actually collected but also "the maximum total of such amounts that were stated in formal positions taken by the IRS in the action(s)," they still focus on positions the IRS actually took, not just positions the whistleblower suggested. Because the IRS did not take further action on the claim at issue after surveying it, the court determined that what McCrory alleged about the potential proceeds that might have been in dispute did not change the ultimate conclusion.

The court also rejected McCrory's secondary argument that the IRS's own regulations require it to apply the same rules and procedures to determine discretionary whistleblower awards under Code Sec. 7623(a) and mandatory awards under section 7623(b) and that the IRS applied those rules and procedures incorrectly in calculating her award. The court noted that the gating issue before it was whether one of the monetary thresholds of Code Sec. 7623(b)(5)(B) had been satisfied. Since none of those thresholds were satisfied, the court said, then the IRS was entitled to summary judgment under the statute without regard to the merit of McCrory's arguments about the regulations and how those regulations might apply to discretionary awards under Code Sec. 7623(a).

For a discussion of the rules relating to the determination of whistleblower awards, 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.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com