TAX COURT HOLDS THAT WHISTLEBLOWER CANNOT RECOVER FOR CHANGE IN BEHAVIOR

04 / 17 / 2017

Whistleblowers have been encouraged by more recent opinions out of the United States Tax Court finding that use by Congress of the term, "collected proceeds" was an "expansive and general term" and a "sweeping term" not limited to amounts assessed and collected under Title 26.  Whistleblower 21276-13W v. IRS, 147 T.C. at ___ (Aug. 3, 2016).  However, in a decision reached on April 17, 2017, in Whistleblower 16148-14W v. IRS, the Tax Court does hold that there are limits in the construction of the term, "collected proceeds" such that this term will not be extended to include amounts collected for years after the examination years, which arise from the mere change in reporting by the taxpayer.  

To understand these limitations, it must first be recognized that an award under IRC 7623(b)(1) is predicated on the IRS proceeding with "any administrative or judicial action."  Therefore, in the case, the taxpayer was already under examination, but the whistleblower was able to show that on the basis of the whistleblower's information, the IRS expanded its ongoing examination to include the issue the whistleblower had brought forward.  

In Whistleblower 16148-14W, the whistleblower reported on a Form 211 filed in late January, 2009 that the targeted taxpayer had failed to withhold taxes for 2006-2008 on payments of interest and dividends made to foreign persons, and that the whistleblower knew this because the whistleblower was an employee of the taxpayer.  In the case, the Whistleblower Office reviewed the Form 211 it received and provided the information on out to the other business divisions within the IRS, like the Criminal Investigation Division and Large Business and International Division (LB&I).  Upon receiving this information, LB&I expanded on an ongoing audit that was underway on matters unrelated to the whistleblower's allegations.  At the end of the LB&I audit, the IRS issued a "no-change" letter to the taxpayer, informing it that the audit did not result in any adjustments.

At that point, consistent with IRS policies and procedures, the LB&I and WB office filled out and signed a Form 11369, Confidential Evaluation Report on Claim for Award, with the explanation attached to the Form 11369 stating that the whistleblower was correct that the taxpayer had made errors, but the cause of the errors was an "honest mistake" made while updating its reporting systems.  The explanation in the Form 11369 went on to say that "it appears the ...(taxpayer) has been convinced by its close call to become fully compliant with its withholding tax responsibilities and further examination is not warranted."  

Though the whistleblower supplemented its prior submissions with additional information provided in the years 2010 to 2014 relating to the years after 2008, the IRS established to the satisfaction of the Tax Court that the IRS did NOT examine any additional years (after 2008) on the basis of the whistleblower's submissions.  

On June 12, 2014, the Whistleblower Office sent a letter to the whistleblower notifying the whistleblower that the whistleblower was NOT entitled to an award because the information did not result in the collection of any proceeds.  

The IRS moved for summary judgment in the case.  As the Tax Court puts it, the dispute in this case "centers around whether the amount of collected proceeds as provided in Section 7623(b) can include amounts collected for years after examination years because of a taxpayer's change in reporting."  The Tax Court first duly noted that while the IRS claimed that it was entitled to summary judgment because the there was no action taken for years after 2008, the whistleblower argues that the IRS collected proceeds because the taxpayer began (to) properly report and withhold for years after the examination years, which can be attributed back to the years for which there was an action."

The Tax Court then noted that since no proceeds were collected as to the 2008 tax year (the year in which a "no change" letter was issued), there was no future year examination (i.e., no "administrative or judicial action was taken").  But, the Tax Court duly notes that this is not the end of a proper inquiry.

The parties disputed whether amounts collected in future years can be taken into account when determining collected proceeds for the actions takenb in the 2006-2008 tax years.  The whistleblower argues that amounts collected for these future years (2009-2012) should be treated as "collected proceeds" which relate back to the examination that was pursued (i.e., the expanded audit that was, in fact, pursued, but with respect to which, a "no-change" letter was issued).  In other words, should the additional amounts of taxes paid by the targeted taxpayer out of a sense of voluntary compliance (or a change in reporting) be viewed as "collected proceeds."

The Tax Court says, "no; but...."  The IRS will look at tax attributes that have been adjusted for the year when action was taken, and if there is an effect on other years (going forward or back), the IRS will consider this in determining the proper amount of collected proceeds.  This sort of "monitoring" is expected and arguably required.  The Tax Court cites to the final regulations under 301.7623-2(d)(5)(ii), and gives as examples, reduction of a NOL carryforward because of a whistleblower's information such that the whistleblower may receive a percentage of the collected proceeds resulting from the portion of the NOL deduction that is then disallowed for future carryforward years.  The other example given by the Tax Court is when the whistleblower's information leads to the disallowance of an expense deduction for a portion of equipment that should have been capitalized and depreciated, such that the future allowance of depreciation deductions can actually reduce the amount of collected proceeds (as opposed to simply disallowing the expense deduction).  Both of these examples were in the preamble to the regulations were used by the Tax Court to then hold that neither of these examples suggest that the IRS "would monitor for a change in reporting."  As the Tax Court holds, these are situations in which adjustments to tax attributes made in the year of some action by the IRS have "direct carryover consequences for other years."  Therefore, the Tax Court holds that "collected proceeds" does not include "self-reported amounts" collected when a taxpayer changes reporting for years that are not part of the action, "because of the significant costs and heavy administrative burden (that would then arise if this kind of monitoring were required of the IRS)," the term "collected proceeds" cannot include amounts collected for years after examination years on account of a taxpayer's changing its reporting. As the Tax Court views it, "taking the definition of "collected proceeds" in this manner is more than to "all proceeds collected by the Government from the taxpayer" but to an irrationale extreme.  While the whistleblower then argues that doing so is not "too speculative" in this case--because the IRS would be able to determine with reasonable certainty that the 2006-2008 examination caused the targeted taxpayer to change its behavior and change its reporting, but even there, the Tax Court noted that any attempt to determine the appropriate amount of an award would require yet another action (i.e. examination) by the IRS of the targeted taxpayer for those future years, and this, the Tax Court cannot do, as a matter of law.  "Congress did not authorize the Court to direct (the IRS) to proceed with an administrative or judicial action.  Cooper v. Comm'r, 136 T.C. 597, 600 (2011)."

The Tax Court further rejected efforts by the whistleblower to argue that a dispute of material fact exists as to whether amounts paid for subsequent years are "additional amounts" as used in the statute.  The Tax Court views this term as having a "technical meaning" that means civil penalties, and the whistleblower did not present specific facts to show that the taxpayer paid additional amounts in later years to consitute "additional amounts."  The Tax Court also rejected the argument that "voluntary compliance" in future years is a "related action" as such term is set forth in IRM 25.2.2.2 (June 18, 2010).  While the Tax Court agrees that this is a term that is also a "broad and sweeping term", this "related action" still requires an action and in this case, the IRS did not take an action in later years, it did not conduct a civil or ciriminal proceeding and there is no suggestion of a judicial action of any kind.  With no subsequent action, there can be no recovery.

The whistleblower also argues that there was an "implied settlement" that led to the collection of these proceeds, looking at the aduitor's statement in the Form 11369 that "it appears the taxpayer has been convinced by its close call to become fully compliant with its withholding tax responsibilities and further examination is not warranted"---(i.e., that this means that the IRS would not have to conduct an examination for future tax years so long as the taxpayer changes its reporting).  The Tax Court then agrees that IRC Section 7623(b)(1) allows for whistleblower awards resulting from any settlement in response to such action, but because this is not defined, it would look to contract law principles to determine if the auditor's statement in the Form 11369 was enough.  The Tax Court says that this is nothing more than the auditor's opinion, and in any event, even if a settlement had existed, a "change in reporting" does not give rise to "collected proceeds."

The Tax Court therefore grants the IRS' motion for summary judgment.



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