Duona Liu

1. For a list of reportable items and the corresponding forms used to make the reports, go to https://www.irs.gov/individuals/how-do-you-report-suspected-tax-fraud-activity.
2. See IRS, How Do You File a Whistleblower Award Claim Under Section 7623(a) or (b).
3. Preamble, T.D. 9687, 79 Fed. Reg. 47,246 (Aug. 12, 2014).
4. Reg. §301.7623-1(e).
5. IRM 25.2.2.9 (01-12-18).
6. Id.; §6103(h)(4), IRC §6103(d)(1).
7. CC-2017-005.
8. Id.; Reg. §301.7623-1(e).

Tax avoidance and tax evasion are very different actions; however, the line between the two can be slight. Tax avoidance is the legitimate use of federal and state tax laws and regulations to reduce one’s tax burden. On the other hand, tax evasion is illegally avoiding one’s tax responsibilities—typically, via deceit and/or concealment.

Tax Avoidance

Tax avoidance was addressed by the Supreme Court in Gregory v. Helvering, wherein the court stated that “[t]he legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”¹ Unfortunately many people pay more in taxes than they are required to, because they don’t understand the tax laws which permit them to reduce their taxes.

Examples of tax avoidance include, but are not limited to:

• Making contributions to a pre-tax retirement fund;
• Contributing money to a Health Savings Accounts;
• Deducting “ordinary and necessary” expenses to do your job; and
• Deducting charitable donations

Tax Evasion

Tax evasion, however, is the illegal avoidance of paying taxes. Significantly, Internal Revenue Code (IRC) §7201 states that:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

In other words, tax evaders intend to avoid tax assessment and/or payment of taxes owed. Anyone found guilty of evading taxes can face jail time and/or significant fines.

Examples of tax evasion include, but are not limited to:

• Intentionally concealing assets to hinder the IRS’s ability to determine how much tax is owed;
• Underreporting income;
• Claiming fake business expenses;
• Claiming illegitimate dependents; and
• Not filing returns

It is also important to understand that the broad scope of the language of IRC §7201 means that anyone helping the taxpayer evade taxes, such as an accountant or bookkeeper, may be prosecuted, as well.

It’s always best to consult with a tax professional to discuss any concerns or questions about whether something is permissible avoidance or illegal evasion.

Sources:

1. Gregory v. Helvering, 293 U.S. 465 (1935), at 469.

Sources:

1. See also, United States v. Daniel, 956 F.2d 540, 542 (6th Cir. 1992).  
2. IRC §7201.
3. See, Sansone v. United States, 380 U.S. 343, 351 (1965) (defining a willful attempt to evade federal income taxes in violation of IRC §7201).
4. IRC §7201; See, United States v. Daniel, 956 F.2d 540, 542 (6th Cir. 1992). 

On January 6, 2020, the Internal Revenue Service (IRS) released its Fiscal Year 2019 Whistleblower Report.¹ Although the report shows a decline in awards made as compared to last year, potential whistleblowers should note that the report clearly portrays an overall trend that the IRS is increasingly motivated in today’s mandatory tax whistleblower program. An important takeaway for potential whistleblowers is the report’s emphasis that the number one reason for IRS rejection of whistleblower submissions was due to submissions lacking in specificity—51% of total closures were due to allegations that were not specific, not credible, or speculative. In other words, whistleblowers should understand that their best chance of success is a skillfully drafted submission with specifics which are presented in the clearest way possible. 

According to the report, fiscal year 2019 resulted in awards amounting to $120 million—certainly lower than the $312 million in 2018, but still much better than the $33.9 million awarded in 2017. Clearly, since 2017, the awards have dramatically increased, and while 2019 fell short of 2018, the Director the Whistleblower Office, Lee D. Martin emphasized that:

For a second year in a row, statutory changes have resulted in massive operational changes for the Whistleblower Office and to the Whistleblower Program. Following adjustments to operations resulting from the passage of Section 41108 of the Bipartisan Budget Act of 2018 (BBA 2018), effective July 1, 2019, the Taxpayer First Act of 2019 (TFA 2019) added, to IRC § 7623, several important provisions that would help improve taxpayer service, ensure the continual enforcement of the tax laws in a fair and impartial manner, and ultimately support the continued success of our nation. The new law also extends greater employment protections for whistleblowers against retaliation.²

Significantly, TFA 2019³ expanded whistleblower protections and implemented an anti-retaliation provision. Additionally, the TFA 2019 requires mandatory IRS disclosures to the whistleblowers at various points throughout an investigation. The law offers whistleblowers greater employment protection from retaliation, as well.            

Finally, the report emphasizes that the recent clarification that FBAR violations and criminal fines can also result in a payout for whistleblowers has resulted in approximately $110 million. The report notes that 282 whistleblower submissions were received from whistleblowers located overseas. Clearly, the IRS maintains an aggressive pursuit of whistleblowers’ information regarding offshore accounts
and crimes.

Again, with 51% of total closures resulting from allegations that were not specific, not credible, or speculative, whistleblowers are well advised to seek an experienced tax professional to help them create a skillfully drafted submission.

If you have a whistleblower claim that would like to discuss, contact Frost & Associates, LLC today at
(410) 497-5947.

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Sources

1. https://www.irs.gov/pub/whistleblower/fy19_wo_annual_report_final.pdf.
2. Id. at 3.
3. Pub. L. No. 116-25.

Eli Noff, Esq., Partner
Mary F. Lundstedt, Esq., Associate

A recent IRS whistleblower case clarifies when the Tax Court is authorized to review the IRS Whistleblower Office (WBO)’s actions or inactions when it receives a whistleblower’s complaint. In Lacey v. Commissioner,¹ taxpayer submitted a whistleblower claim alleging that oil company BP improperly deducted approximately $12.9 billion when it falsely claimed that money was spent in clean-up efforts surrounding the notorious BP Deepwater Horizon oil spill-when it was actually spent on insidious cover-up efforts. The court clarified that it has jurisdiction to review, for abuse of discretion, the WBO’s rejection of the taxpayer’s claim. As such, the case will proceed since the court ultimately denied the IRS motion for summary judgment and ordered the parties to recommend a schedule for additional proceedings.

Facts

Taxpayer was a former BP employee. At times, taxpayer maintained senior level positions, and he worked and interacted with the company’s “decision makers.” Once taxpayer no longer worked at BP, he wrote a book exposing BP’s responsibility for a notorious environmental disaster.

In 2015, taxpayer filed a Form 211, Application for Award for Original Information, with a narrative alleging that:

BP was responsible for an environmental disaster, that it misled the public about the size of the disaster, and that it incurred costs purportedly to clean up the environmental damage, but that it actually made its expenditures as part of a cover up to avoid massive “fines”.²

Ultimately, this first submission resulted in taxpayer’s claim that BP improperly claimed a deduction for the money that was actually spent as part of their cover up attempt. However, the submission lacked sources for the information provided. The submission also lacked any suggestion that taxpayer gained its information via his former BP employment. Additionally, the submission didn’t clarify what the deduction was, and it failed to cite any Internal Revenue Code (IRC) provisions, regulations or other authority.

As such, the analyst in the WBO recommended a rejection of the claim as speculative and/or lacking specific or credible information.  The rejection was sent to taxpayer in a letter dated November 4, 2015. Its express terms provided that it was a final rejection under IRC §7623(a) – the IRC section providing for discretionary awards which the Tax Court may not review.

Shortly after receipt of the rejection, taxpayer’s attorney requested clarification from the WBO regarding the rejection letter, reminded the WBO that the amount in disputed exceeded $12 billion, and requested confirmation from the WBO that taxpayer’s claim was still under review. Significantly, the attorney provided no additional information to the WBO. Oddly, though, in January 2016 letter, the WBO responded to the attorney’s letter indicating that the initial rejection remained—despite the attorney’s additional information provided in the letter (again, there was no new information provided).

So, in March of 2016, taxpayer’s attorney sent the WBO a new Form 211, which did provide additional information. Among other things, this second submission detailed taxpayer’s employment at BP, listed sourced that the taxpayer relied upon to substantiate the allegations, and provided an explanation as to the alleged illegal $12.9 billion deduction.

The WBO maintained its rejection in an April 2016 letter that used the exact language used in the earlier January 2016. Additionally, the April 2016 letter did not assign a new claim number to the second Form 211 submission—instead, it used the same number assigned to the original Form 211 submission. Finally, the IRS didn’t use any of the taxpayer’s information to begin any administrative or judicial proceedings against BP.

Subsequently, taxpayer petitioned the Tax Court for review of the WBO’s determination, asserting that the WBO:

did not review [taxpayer’s] second submission and that no WBO analyst made a recommendation to reject [taxpayer’s] claim as supplemented by his second submission.³

The IRS filed motion for summary judgment, asserting that the WBO’s rejection of the claim was not an abuse of discretion. Taxpayer’s response to the motion included his contention that the WBO did not properly process the second submission of the Form 211 and requested that the case be remanded to the WBO with instructions to process it.

Applicable Law and Analysis            

The court began by considering the two types of whistleblower awards. First, the court noted that under IRC §7623(a), the IRS has discretionary authority to issue an award to whistleblowers from the proceeds collected as a result of the information provided about third parties who are evading tax. Second, IRC §7623(b), provides for a mandatory award, if, based on information from the whistleblower, the IRS proceeds with an action and collects. Such award will be “at least 15 percent but not more than 30 percent of the proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action.”⁴

The court emphasized that the plain wording of IRC §7623(b) is clear that a mandatory award depends upon (1) the IRS initiation of an administrative or judicial action based on the information provided, and (2) that the proceeds collected resulted from such action.

The court then clarified that the dispute in this case involves the question as to whether the Tax Court has jurisdiction to “review the WBO’s actions or inactions that forestalled further proceedings.”⁵

Regarding the first Form 211 submission, the court noted that the WBO is responsible for reviewing a submission and determining whether it meets a minimum standard requiring “specific and credible information.” The court considered that the regulations helpfully list certain criteria for a claim that may be eligible for an award. Focusing on the criteria providing that the claim doesn’t provide speculative information, the court noted the Internal Revenue Manual provides that:

Claims are considered purely speculative in nature if the claim lacks any basis or support for the allegations. If the allegations are based on or supported by information, including public information, then the claim is not purely speculative in nature. If the submission does not contain a specific or credible tax issue, or is purely speculative in nature, then no further review is required.⁶

Next, the court stated that, according to Regs. §301.7623-1(c)(4), if the claim is rejected by the WBO after the initial evaluation, the whistleblower is able to perfect and resubmit it. As such, the court considered that after the WBO’s rejection of taxpayer’s claim, the taxpayer was entitled to make the second Form 211 submission and the WBO was obligated to review it.

The court then explained that its jurisdiction to review WBO determinations is found in IRC §7623(b)(4), which provides that:

Any determination regarding an award under paragraph (1), (2), or (3) may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).

Interestingly, in a footnote of the opinion, the court notes that the WBO’s April 2016 rejection letter qualifies for Tax Court review, because a “rejection is a (negative) ‘determination regarding an award.'”⁷ As such, the court stated that:

Having been given jurisdiction over “[a]ny determination regarding an award”, sec. 7623(b)(4), and having been charged with the review of the WBO’s exercise of its discretion, we do have authority to review its abuse of discretion in a decision to reject a claim for failure to meet threshold requirements without referring it to an IRS operating division.⁸

Having established that the court had jurisdiction here, it further clarified that it reviews a WBO determination only on the grounds stated per the “Chenery Doctrine.”⁹ Furthermore, the court indicated that recently it held that remand in a whistleblower case under IRC §7623(b) may, in fact, be appropriate.¹⁰

The court proceeded to determine whether there was an abuse of discretion as to the second Form 211 submission.¹¹ Here, the court noted that it was unable to determine “what consideration, if any, the WBO gave to [taxpayer’s] second submission.” The court lacked the completed administrative record, and the IRS hadn’t provided staff memoranda or other evidence or recommendations regarding the rejection.

Importantly, the court highlighted the fact that the mistake in the January 2016 letter (wherein the WBO claimed to review additional information-even though no additional information was provided) is proof that the WBO sent the January 2016 letter without giving the actual attention to taxpayer’s correspondence. Accordingly, the court did not think that the IRS showed “no genuine dispute” regarding whether the WBO considered the face of the claim.

Thus, finding no actual attention was given to taxpayer’s submission by the WBO, the court denied the IRS’s motion for summary judgment.

Similarly, the court maintained that the WBO’s rejection failed to explain itself in any substantive way; however, it found that remanding the case for the WBO to provide a reviewable decision would be premature at this point. The court stated that:

To hold, on the partial record before us, that a genuine dispute exists as to whether the WBO failed to consider the claim does not resolve that dispute. The complete administrative record might shed the necessary light, and it remains to be seen whether it does so.¹²

Ultimately the court denied both the IRS’s motion for summary judgement and the taxpayer’s remand request and instead ordered the parties to recommend a schedule for additional proceedings.

Conclusion

This case helps clarify when the Tax Court may review the WBO’s determinations-and this case also shows that the WBO is going to need to be able to demonstrate that it paid actual attention to a claim. Boiler plate language without substantive reasoning in a rejection is likely to create considerable doubt that actual attention was given to a claim.

If you have a whistleblower claim you would like to discuss, contact Frost & Associates, LLC today at (410) 497-5947.

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1. 153 T.C. No. 8 (Nov. 25, 2019).
2. Id. at 5.
3. Id at 17.
4. IRC §7623(b)(1). Under the regulations, “collected proceeds . . . include: tax, penalties, interest, additions to tax, and additional amounts collected because of the information provided; amounts collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.” Reg. §301.7623-2(d)(1).
5. Lacey, 153 T.C. No. 8, 23.
6. Id. at 25, citing IRM pt. 25.2.1.3.2(5) (Jan. 11, 2018).
7. Id. at 28, footnote 19. Note that the court was careful to point out that its jurisdiction does not extend to reviewing the IRS’s determinations of alleged tax liability. Id at 29.
8. Id. at 33-34. The court was clear that its review is not “preempted” just because of a lack of an “action” or “proceeds” at this time. Id. at 38.
9. Id. at 31, citing SEC v. Chenery Corp. (Chenery II), 332 U.S. 194, 196 (1947).
10. Id., citing Whistleblower 769-16W v. Commissioner, 152 T.C. 10 (Apr. 11, 2019).
11. The court did not need to determine this with regard to the first Form 211 submission, since taxpayer conceded that his first submission was properly rejected. Id. at 40.
12. Id. at 44.