Does the IRS have the authority to issue Whistleblower awards under Section 7623(b) to an individual who provides information that results in the assertion of FBAR penalties? In Whistleblower 22231-12W v. Commissioner, T.C. Memo. 2014-157, the Tax Court came close to deciding this issue.
The only reason it stopped short was because the jurisdictional pre-requisite for the Court to act – a determination by the Whistleblower Office on whether to accept or reject the petitioner’s claim – had not yet been made. In other words, because the petitioner’s claim was still pending before the Whistleblower Office, the Tax Court did not have jurisdiction to do anything.
As a result, there is no court ruling on the authority of the IRS to issue Whistleblower awards under Section 7623(b). However, this does not mean that this case will not be the watershed case that spawns case law on what is likely to be a polarizing issue. Why? Because the Tax Court merely deferred ruling on the seminal issue: whether the petitioner’s claim fell outside the scope of Section 7623.
Because we have not heard the end of this case, it is worthy of discussion. Below is a summary of the facts:
In November 2010, the petitioner filed an “application for an award for original information” (i.e., Form 211) with the Whistleblower Office (“Office”). On the application, the petitioner said that he was cooperating with the Department of Justice and IRS Criminal Investigation Division in connection with an ongoing investigation of two Swiss bankers.
The petitioner alleged that his cooperation with those agencies had led to – and would lead to more – information about these bankers’ involvement in tax evasion by U.S. persons with undisclosed offshore financial accounts.
On December 1, 2010, the Office notified the petitioner that it had assigned claim numbers to his claims regarding the two Swiss bankers. At the same time, the Office advised him that if it initiated an investigation as a result of the information, final resolution of his claims could take several years. In other words, no award could be paid until the IRS had collected any taxes or other amounts assessed by virtue of the information he had supplied.
The attorney for the petitioner attempted to convince the Office that his client’s cooperation was the “linchpin” in the prosecution of the two Swiss bankers. Accordingly, the petitioner argued that he alone was responsible for the incriminating information that the Government received about numerous U.S. taxpayers.
On August 23, 2011, the petitioner filed a third claim for an award, which became the subject of this case. The petitioner filed this claim after learning that Taxpayer 1 (let’s call him “John”) had agreed to pay a substantial penalty when he pleaded guilty for filing a false tax return. In his plea allocution, John admitted that a Swiss banker had helped him open up Swiss bank accounts in order to hide his income and assets from U.S. authorities. John subsequently agreed to pay a multimillion-dollar civil penalty for failing to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). See 31 U.S.C. sec. 5321(a) (2006).
John also agreed to pay the IRS a relatively small amount of restitution, reflecting unpaid Federal income tax due on income earned from the Swiss bank accounts. Seeing so many zeros at the end of the civil FBAR penalty, the petitioner naturally wanted to claim his stake. He argued that he was entitled to an award – one that was based upon the aggregate amount paid by John – due to fact that he had supplied invaluable information about the nefarious Swiss banker, which ultimately led to John’s arrest.
The attorney for the petitioner sent the Office a detailed memorandum outlining the petitioner’s connection with John and urging that an award for that claim be finalized. In response, the Office mailed the petitioner a letter informing him: “[t]he claim for award under Section 7263is still open and under active consideration” and that “a number of actions * * * must be completed before a determination is made.”
The attorney for the petitioner sent the Office a number of follow-up letters. The Office replied that it had not yet received the information necessary to make a determination and that John’s claim was not ready for decision. In an email dated August 8, 2012, Ms. Stuart, the Office analyst assigned to the petitioner’s claims, closed her message by saying: “As for your inquiry regarding [the John] claim * * *, I believe you spoke to [an Office employee] about your concerns. I have included the Service’s position on this topic. If you still have concerns you can contact me.”
One concern that the petitioner’s attorney had was whether FBAR payments were included in “collected proceeds (including penalties, interest, additions to tax, and additional amounts)” that form the basis for an award under section 7623(b)(1). Aware of this concern, Ms. Stuart attached a memorandum prepared by an attorney from IRS Chief Counsel’s Office.
This memorandum articulated the legal basis for the Office’s position that FBAR payments are not “collected proceeds” within the meaning of section 7623(b)(1). The Office received this advice after it had sought guidance on the matter. Ms. Stuart attached this document to her email as a courtesy to the petitioner.
The attorney for the petitioner responded by email: “Please confirm our reading of your email below that based on the Service’s position expressed in the April 23, 2012 memo you attached your Office has now officially denied [the John] Claim.” At that time, the Office had not yet determined whether “the John” claim merited an award because it had yet to find out from the operating side of the IRS whether the petitioner’s information was used – if at all – in investigating John.
Ms. Stuart responded by email the next day:
“The [John] claim * * * remains open. When the Whistleblower Office has made a determination related to the claims for award filed by [petitioner] you will be issued official written correspondence. At this point we have not made a determination regarding * * * any of the related claims. The Service’s position expressed in the April 23, 2012 memo that I provided you was simply to let you know that at the point a determination can be made proceeds collected under Title 18 and/or Title 31 would not be considered as part of the claim.”
Because the bulk of the proceeds collected from John consisted of FBAR payments for violation of title 31, the petitioner decided that there was nothing worthwhile for the Office to investigate with respect to this claim. Thus, he viewed Ms. Stuart’s emails as a denial of his claim.
The petitioner filed a petition in the Tax Court to challenge the supposed determination. The Office filed a motion to dismiss for lack of jurisdiction. In so doing, it alleged two alternative grounds: first, that the case was moot because the IRS had not yet made a determination regarding an award. Therefore, the Court did not have jurisdiction to hear the claim. And second, even if it did, the petitioner’s claim fell outside the scope of section 7623 for whistleblower claims.
The Office subsequently learned that the Government had not used petitioner’s information as a basis for taking action against John. The Office issued the petitioner a letter stating, in effect, that the petitioner’s “John claim” had been denied. The petitioner filed a petition from that determination, which is currently pending before the Tax Court.
In summary, the Court held that it lacked jurisdiction because the Office did not make a “determination” within the meaning of section 7623(b)(4) sufficient to confer upon it jurisdiction. Because the Court did not have jurisdiction, it never decided the ultimate issue: whether FBAR payments are “additional amounts” for purposes of ascertaining whether the monetary threshold in section 7623(b)(5) has been met.