The Tax Court has held in favor of a taxpayer who claimed a whistleblower award that the Internal Revenue Service wanted to reject because the whistleblower had brought the information directly to an IRS operating division before filling out paperwork requesting an award from the IRS Whistleblower Office.
In the opinion, filed Tuesday, the court noted that the taxpayer, referred to only as “P-H” to preserve his anonymity, was arrested in a money-laundering conspiracy. In exchange for lighter punishment, he offered to tell IRS and other federal agents about a foreign business that was helping U.S. taxpayers evade income taxes.
According to a report Friday by Bloomberg, the unidentified whistleblower is Stefan Seuss, a German man living in Florida who is seeking a $22.2 million award as part of a $74 million penalty against the Swiss bank Wegelin & Co., which pleaded guilty in 2013 to helping Americans hide assets from the IRS (see U.S. Tax Informant Dodged Prison, Now Seeks $22 Million Reward).
The whistleblower told the government agents that the foreign business had no presence in the U.S. and instructed its employees to stay out of the country. He lacked any documentation to incriminate the business, but he knew someone else who did. He and another unidentified whistleblower succeeded in luring the foreign businessman to the U.S., where he was arrested. The foreign businessman initially agreed to help the government build its case against his company, but then tried to back out of the agreement until the whistleblower persuaded him to cooperate. In part because of that assistance, the foreign business was indicted, pleaded guilty, and paid the U.S. government approximately $74 million.
After the business pleaded guilty and paid the $74 million penalty, the two whistleblowers filed separate Forms 211, “Application for Award for Original Information,” with the IRS Whistleblower Office. When the IRS received the forms, a classifier in its Ogden, Utah office noticed that the forms were filed after the government collected the proceeds from the business. On that basis, the Whistleblower Office rejected the applications for awards and sent letters to the whistleblowers saying that no proceeds had been collected on the basis of the information they had submitted.
The IRS claimed that the Tax Relief and Health Care Act of 2006 gave the Whistleblower Office the exclusive discretion to either investigate a taxpayer or refer the information provided by the whistleblower to an IRS operating division. The IRS also asserted that, under the same law, a whistleblower is ineligible for an award if he or she submits the information to an IRS operating division before submitting it to the Whistleblower Office via Form 211.
However, the Tax Court disagreed, saying that the law does not endow the Whistleblower Office with exclusive authority to investigate an individual or entity that is the subject of a whistleblower award application. The fact that the whistleblowers submitted their information to other federal agencies, including an IRS operating division, before submitting the information to the Whistleblower Office on Form 211 does not render the whistleblowers ineligible for an award, according to the court.
“The law was intended to direct whistleblowers and the IRS to work together to catch tax cheats,” said Sen. Chuck Grassley, R-Iowa, in a statement Wednesday. “Bureaucratic barriers don’t get the job done. The IRS should welcome whistleblowers with a red carpet instead of putting up arbitrary legal hurdles at every turn.”
Grassley also said Wednesday he has received a response from IRS Commissioner John Koskinen to questions he had submitted for the record after a February hearing on the agency’s budget, including a response on the IRS Whistleblower Office. Grassley noted that he wrote the provisions in the 2006 law that beefed up the office and he has closely monitored their implementation.
Grassley had asked Koskinen about the slow pace of whistleblower award payments by the IRS. “The payments to whistleblowers have slowed to a trickle at best,” he complained. “This is whistleblowers waiting for payment where dollars have been collected and the holdup is with the IRS processing and checking the boxes for a payment. Often it is the whistleblower office waiting for someone in the field or in senior management to move paper. I ask that that your office review all whistleblower cases pending payment and bring the Drano to unclog the holdup.”
In response, Koskinen wrote, “I have discussed with the Director of the Whistleblower Office the pace of award payments under section 7623, and have verified that he has made timely processing of claims for which an award is payable a top priority. Awards cannot be paid until the relevant taxpayer audit or investigation is completed (including any appeals), proceeds are collected, and the statute of limitations for filing a refund claim has expired. When those preconditions are met, the Whistleblower Office moves as quickly as possible to notify the whistleblower of a proposed award, obtain comments on the proposal, and make an award decision.”
To date, Koskinen noted, the IRS Whistleblower Office has paid 12 awards, and the director of the office estimates that six to 12 additional awards will be paid in fiscal year 2015.
Grassley also wrote that he was “frustrated with an IRS Chief Counsel office that seems to wake up every day seeking ways to undermine the whistleblower program both in the courts and the awards.”
“I am especially concerned that chief counsel is throwing every argument it can think of against whistleblowers in tax court,” he added. “It appears at times that the Chief Counsel’s office thinks its job is to come up with hyper-technical arguments and seek to deny awards to whistleblowers who have risked their lives to uncover big time tax cheats. I ask that your office and the director of the whistleblower office review the chief counsel’s wasteful and harmful litigation positions that undermine the whistleblower program and go directly against your support for the whistleblower program.”
In response, Koskinen pointed out that the IRS Office of Chief Counsel is responsible for defending the determinations of the IRS in Tax Court, including those of the Whistleblower Office.
“The Office of Chief Counsel coordinates with the Whistleblower Office in defending its determinations before the Tax Court to ensure that Chief Counsel’s litigating positions are consistent with the program’s goals as well as the statutory and regulatory framework,” Koskinen wrote. “In most cases before the Tax Court, the record of the case is sealed to protect both whistleblower and taxpayer interests. As a result, I cannot comment on specific arguments made in defending particular Whistleblower Office determinations that are subject to an order of the Tax Court sealing the record. The positions taken by the Office of Chief Counsel support the IRS’s administration of the law.”
However, Koskinen agreed that the IRS could do more to work with whistleblowers and their counsel and pointed to a memorandum from last August in which the IRS’s Deputy Commissioner of Services and Enforcement reinforced previous guidance on the importance of thorough debriefing of whistleblowers during the evaluation of their submissions. But after the IRS begins an investigation based on whistleblower information, Koskinen acknowledged, the law provides limited authority to interact with a whistleblower since disclosure of taxpayer information would be necessary to gather additional information while pursuing the audit or investigation.
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