Vernoia, Enterline + Brewer, CPA LLC

Whistleblowers not required to give information first to IRS Whistleblower Office to be eligible for award

Whistleblower reform legislation does not require that a whistleblower first bring his or her information to the IRS Whistleblower Office to be eligible for an award, the Tax Court has held in consolidated cases. The whistleblowers, a married couple, provided information to other federal agencies, including an IRS operating division, before contacting the Whistleblower Office. However, this did not make them ineligible for an award, the court held.

Whistleblower provision
Congress passed the Tax Relief and Health Care Act of 2006 (TRHCA) to strengthen the whistleblower program. The TRHCA created the IRS Whistleblower Office, among other reforms. It also added Code Sec. 7623(b), which provides that if the taxes, penalties, interest and other amounts in dispute exceed $2 million, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000.

Background
The informants were a married couple. The husband, in order to minimize his own punishment after he was arrested for money laundering, informed federal government agents, including some from the IRS, that a foreign company was helping U.S. taxpayers to evade federal income tax. He told the agents that the foreign company had no presence in the U.S. and that it had instructed its employees to stay out of the U.S. to avoid arrest. The husband did not have enough information to support the prosecution of the foreign business, but he knew of someone who did. The informants helped to design a scheme to induce the foreign individual to come to the U.S. where he could be arrested.

The informants participated in a complex sting operation with the assistance of federal agents. As a result of the informants’ efforts, the foreign individual came to the U.S. and was arrested. He, in turn, agreed to help the government in its pursuit of the foreign company. The company was indicted, pleaded guilty and paid $74 million to the U.S. as part of a settlement.

After federal agents thanked the informants for their help and told them about the IRS’s whistleblower award program, the informants filed Forms 211, Application for Award for Original Information. They filed their Forms 211 approximately three months after the foreign company pleaded guilty and settled.

The IRS Whistleblower Office rejected the claim without reviewing it. Before the Tax Court, the IRS argued that to be eligible for an award under Code Sec. 7623(b), an individual must submit the whistleblower information to the Whistleblower Office on Form 211 before any IRS action or examination is carried out with respect to that information.

Court’s analysis
The Tax Court rejected the IRS’s argument. It found that the TRHCA did not endow the Whistleblower Office with unlimited discretion or exclusive authority to investigate the individual or entity that was the subject of an award application. Rather, the TRHCA clearly provided that the Whistleblower Office is the central office for investigating the legitimacy of a whistleblower’s award claim, but not necessarily the underlying tax issue. Therefore, the Tax Court found that the fact that informants provided information to other federal agencies, including an IRS operating division, before submitting Form 211 did not, as a matter of law, render them ineligible for an award under Code Sec. 7623(b).

Whistleblower 21277-13W, 144 TC No. 15

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