Government Seeks to Reverse Collected Proceeds Tax Court Case10 / 18 / 2017
In briefs filed with the D.C. Circuit Court of Appeals, the Government seeks to reverse rulings out of the United States Tax Court finding that the term "collected proceeds" on which a whistleblower award is based under IRC Section 7623(b) is to include criminal fines and civil forfeitures. The Tax Court had ordered and decided that a husband and wife were each entitled to a whistleblower award of $8,895,803.50, even though the IRS Whistleblower Office had sent letters dated August 13, 2013 denying their applications for awards. This compelled the husband and wife to have to petition the Tax Court for a review of "that" determination.
On appeal, the Government is arguing that when construing the term "collected proceeds" the Tax Court failed to construe the overall statute, and limit recoveries to only violations of Title 26 of the United States Code. As the Government sees it, the Tax Court's ruling creates an unwarranted conflict between Section 7623 and other statutes that require criminal fines and civil forfeitures to be devoted to other purposes. Also, the Government is concerned that the Tax Court's pro-whistleblower ruling creates too much undertainty regarding the funding of mandatory awards.
By comparison, in a responsive brief, the husband and wife point out that the information they provided was essential the Government being able to bring forth a tax conspiracy charge against a foreign company form which it collected $74,131,694. The husband first came into contact with Government agents when, as a result of an IRS sting operation with undercover IRS agents, he was indicted on an unrelated charge of laundering funds from pirated compact discs, in violation of 18 USC Section 1956(h). Following his arrest in October 2009, he began to cooperate with the IRS and other government agents. The husband began to tell the agents that the foreign company was actively helping the US taxpayers evade their federal tax obligations. The husband and wife came up with a plan to catch the parties. The wife participated in covert recordings, and husband was used when the government became concerned that the person of interest was getting cold feet. The husband went to the Cayman Islands and eventually, through the husband and wife's efforts, they were able to convince the target to come to the US, where he was promptly arrested in October 2010. The husband continued to help with the case and assist prosecutors from the SDNY offices of the US Attorney's Office. Eventually, in February 2012, the target was charged with one count of conspriacy to defraud the IRS, under 18 USC Section 3701, and the Government sought to seize one of the target foreign company's bank accounts. Eventually, by January 2013, the target and the government entered into a plea agreement, under which the target agreed to pay the Government a total of $74,131,694. Broken down, the amount included $20,000,001 in restitution to the US under 18 USC Section 3556, a $22,050,000 million criminal fine imposed under 18 USC Section 3571, a forfeiture of $15,821,000 under 18 USC Section 981, and a relinquishment of its claim to $16,260,693 previously forfeited. In exchange, the government agreed not to further prosecute the target foreign company for any other tax offenses.
The husband and wife did not know about IRS Form 211 procedures, but when becoming aware that the Government had collected $74 million, then filed their claims with the IRS Whistleblower Office.
The appeal is of interest because essentially the Government is arguing that awards under IRC Section 7623 are limited to amounts the IRS could collect using its "civil enforcement machinery." As they see it, "collected proceeds" is any amount resulting from the government's action, and an action includes IRS criminal investigations. The argument is made that the Government's position is a departure from its past practice of making awards from non-title 26 amounts, including the fact that prior to 2009, the IRS did pay discretionary awards based on title 31 FBAR recoveries. One of the arguments raised is that the statute uses the terms "violating the internal revenue laws" and "conniving at the same."