Business Litigation Attorney Explains: I.R.S. Whistleblower Awards Expanded by U.S Tax Court
The statute governing whistleblower claims, I.R.C. § 7623, grants awards to private citizens who provide information to the IRS that leads to the collection of at least $2 million in taxes, penalties, interest, and “additional amounts.” The whistleblower can get an award of “at least 15 percent but not more than 30 percent of the collected proceeds.”
This week, the United States Tax Court issued an opinion that expands the definition of “collected proceeds” for purposes of an IRS whistleblower claim. The IRS has generally taken the position that so-called “tax restitution,” or repayment of back taxes and interest, qualified as “collected proceeds,” but any criminal or civil fines or forfeitures did not. For instance, the IRS’s Internal Revenue Manual explains that criminal fines cannot be used for a whistleblower award, because the entirety of the fine must be deposited into the Victims of Crime trust fund. Likewise, a civil forfeiture must be placed in its entirety into a Treasury Department trust fund.
The Tax Court disagreed with the IRS’s position, delivering a big win for whistleblowers. The court found that the term “collected proceeds” is not limited to taxes, penalties, and interest and can include any amounts assessed and collected by the IRS. Instead, the court held that “‘collected proceeds’ means all proceeds collected by the Government from the taxpayer.” In analyzing the statute, the court noted that the whistleblower statute does not limit the source of the money used to pay the whistleblower award. Thus, the fact that money from a criminal penalty or a civil forfeiture must go into a trust fund only means that the IRS whistleblower must be paid the award out of the taxes, penalties, and interest collected from the tax cheat. Just because that money must be the source of the award statute does not mean the award is calculated on that sum alone.
In the case decided this week, the IRS collected from a tax cheat $20 million in tax restitution, a $22 million criminal fine, required forfeiture of $15.8 million in assets, and required relinquishment of another $16.2 million in disputed claims. In total, the IRS collected roughly $74 million. Because the IRS and the whistleblower previously agreed to an award of 24%, the Tax Court awarded the whistleblower an eye-popping $17.7 million bounty. That’s a far cry from the $4.8 million the taxpayer would have received under the IRS’s stingy calculation.
Hopefully, the decision will lead to more whistleblowers coming forward and exposing tax fraud.
The Tax Court’s opinion can be found here.