No Whistleblower Award for Information Leading to the Creation of OVDI Program

(Parker Tax Publishing March 2023)

The Tax Court held that it did not have jurisdiction to review a denial by the IRS Whistleblower Office (WBO) of a claim submitted by an individual who collaborated with federal agents in securing the highly publicized arrest and cooperation of a Swiss banker who helped U.S. taxpayers conceal income and assets from the IRS, which lead to the 2011 formation of the IRS Offshore Voluntary Disclosure Initiative (OVDI). The court found that under Code Sec. 7623(b) it lacks jurisdiction if the IRS has not proceeded with an administrative or judicial action based on information the whistleblower brought to its attention, and the court determined that the IRS did not proceed with an administrative or judicial action by creating OVDI or by virtue of any taxpayer's participation in OVDI. Shands v. Comm'r, 160 T.C. No. 5 (2023).

Background

Thomas Shands filed a Form 211, Application for Award for Original Information, with the IRS Whistleblower Office (WBO) seeking a whistleblower award for any amounts emanating from his cooperation with the Department of Justice (DOJ) and the IRS Criminal Investigation Division (CI) in their investigations of Swiss bankers Martin Lack and Renzo Gadola. IRS agents arrested Gadola in Miami, Florida, in November 2010, the day after he had a meeting with Shands in which Shands wore a recording device provided by CI. Gadola revealed to prosecutors how he and others helped U.S. taxpayers open Swiss bank accounts to conceal income and assets from the IRS. He eventually pleaded guilty to conspiring to defraud the United States. The DOJ announced Gadola's guilty plea in a December 2010 press release, and the story received media coverage in 2010 and 2011.

In February 2011, the IRS announced OVDI, its second offshore voluntary disclosure program and a counterpart to CI's longstanding practice of allowing taxpayers to avoid criminal prosecution by disclosing noncompliance. OVDI offered the same benefit, along with reduced penalties, for eligible taxpayers that voluntarily disclosed foreign accounts for tax years 2003-2010. Participating taxpayers had to provide information on offshore financial accounts, institutions, and facilitators, and pay back taxes, penalties, and interest. The IRS reserved the right to conduct examinations with respect to OVDI disclosures, and a taxpayer that considered the OVDI penalty unacceptable could opt out of the program and have its case handled under the standard audit process.

In a June 2012 letter to the WBO (OVDI claim letter), Shands claimed the IRS owed him a nondiscretionary whistleblower award under Code Sec. 7623(b) "on the monies collected as a result of the February 2011 OVDI" (OVDI claim), which by that time totaled over $1 billion. Shands alleged that his undercover collaboration with federal agents brought about Gadola's arrest and cooperation, which in turn led to the success of OVDI. The letter quoted the prosecution's supplemental sentencing memorandum in Gadola's case, which asserted that Gadola's guilty plea and "the very public nature of his cooperation" with prosecutors were of "great benefit to the IRS," because they "spurred U.S. taxpayers to enter into the voluntary disclosure program." As compensation for providing information on Gadola, the same information referenced in his 2010 Form 211, Shands sought a whistleblower award of 30 percent of the OVDI proceeds.

The WBO processed the OVDI claim separately from Shands' Form 211. WBO analyst Kenneth Chatham prepared the initial draft of an internal memorandum (Chatham memo) in June 2013. The final version of the Chatham memo recommended denying Shands' claim for lack of a "related action" within the meaning of Reg. Sec. 301.7623-2(c)(1). In May 2016, the WBO denied the OVDI claim, explaining that the IRS took no action based on the information Shands provided with respect to OVDI or any of the taxpayers who participated in it, and that neither OVDI nor the participating taxpayers were valid "related actions" to Shands' whistleblower claim.

Appealing a Whistleblower Determination

If the IRS proceeds with any administrative or judicial action based on information brought to its attention by a whistleblower, Code Sec. 7623(b)(1) generally provides that the whistleblower is entitled to an award of 15 percent to 30 percent of the collected proceeds resulting from the action (including any "related actions") or from any settlement in response to such action.

Reg. Sec. 301.7623-2(a) defines the terms "administrative action" and "judicial action" for claims open as of August 12, 2014. An "administrative action" is defined as an IRS civil or criminal proceeding against any person that may result in collected proceeds, including, for example, an examination, a collection proceeding, a status determination proceeding, or a criminal investigation. "Judicial action" means a proceeding against any person in any court that may result in collected proceeds. Reg. Sec. 301.7623-2(c)(1) describes "related actions" as certain administrative or judicial actions against persons other than the ones the whistleblower identified. Under Reg. Sec. 301.7623-2(c)(1)(iii), the IRS must be able to identify the target of the action using the information the whistleblower provided, without first having to use the information provided to identify any other person or having to independently obtain additional information.

Code Sec. 7623(b)(4) grants the Tax Court jurisdiction to review any determination regarding an award under Code Sec. 7623(b)(1). In Li v. Comm'r, 2022 PTC 8 (D.C. Cir. 2022), the D.C. Circuit held that the Tax Court does not have jurisdiction under Code Sec. 7623(b) if the IRS has not proceeded with an administrative or judicial action based on information the whistleblower brought to its attention.

Based on the holding of Li, the IRS filed a motion to dismiss, arguing that the IRS did not proceed with an administrative or judicial action that would confer jurisdiction on the Tax Court. Shands argued that the court had jurisdiction because the IRS proceeded with an administrative or judicial action by creating OVDI or by virtue of taxpayers' participation in OVDI. According to Shands, the creation of OVDI and certain taxpayers' participation in OVDI were Code Sec. 7623(b)(1) related actions that entitled him to an award. Shands also challenged the process by which the WBO denied his claim. He submitted the OVDI claim in 2012, and the WBO sent the denial letter in 2016. Shands suggested that the "initial decision" to deny his claim occurred on June 6, 2013, the date of the first draft of the Chatham memo, and alleged that the WBO may have sought to shore up the legal basis for its decision by withholding the denial letter until the definitions in Reg. Sec. 301.7623-2 took effect in 2014.

Analysis

The Tax Court agreed granted summary judgment for the IRS. The court held that it lacked jurisdiction to review the WBO's denial of Shands' claim because the IRS did not proceed with an administrative or judicial action by creating OVDI, or by virtue of any taxpayer's participation in OVDI.

In the view of the Tax Court, neither of the purported administrative or judicial actions Shands identified fit the definitions in Reg. Sec. 301.7623-2(a). The court found that by creating OVDI, the IRS did not undertake a "civil or criminal proceeding against any person" along the lines of the examples provided in the regulation, let alone a court proceeding. The program required voluntary disclosure of foreign accounts and assets, and excluded participation by taxpayers already under examination or investigation. The court likewise rejected Shands' argument that inherently voluntary participation in OVDI by a taxpayer constitutes an administrative or judicial action by the IRS. The court noted that in Whistleblower 16158-14W v. Commissioner, 148 T.C. 300 (2017), it recognized that a taxpayer's voluntary compliance absent an examination entailed no administrative action, even if IRS scrutiny prompted the taxpayer's compliance. Further, assuming for the sake of argument that the IRS proceeded with an administrative or judicial action against Gadola based on information Shands brought to its attention, any related action the IRS took against other taxpayers must itself be an administrative or judicial action. Because neither of Shands' proposed "actions" was an administrative or judicial action, the court concluded that neither could be a related action.

The Tax Court also found Shands' argument regarding the timing of the WBO's denial to be without merit. The court noted that he cited no authority requiring the WBO or the Tax Court to ignore Reg. Sec. 301.7623-2 in reviewing claims filed before its effective date, and the court found that he identified no other action he took that would entitle him to such review. The court therefore concluded that it would not inquire into the IRS's reasons for issuing the regulation before the denial letter.

For a discussion of appealing a whistleblower determination to the Tax Court, see Parker Tax ¶262,340.

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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