More Cheese for the Rats: Tax Court and Congress Give Big Win to Whistleblowers with Broad Definition of "Proceeds": Whistleblower 21276-13W V. Commissioner of Internal Revenue

By Carman, Stephen W. | Missouri Law Review, Winter 2018 | Go to article overview

More Cheese for the Rats: Tax Court and Congress Give Big Win to Whistleblowers with Broad Definition of "Proceeds": Whistleblower 21276-13W V. Commissioner of Internal Revenue


Carman, Stephen W., Missouri Law Review


I. INTRODUCTION

The United States has a voluntary tax compliance system, whereby the burden to report income and take appropriate deductions is on the taxpayer. (1) This self-reporting system encourages some taxpayers to underreport their taxes owed, as a result of fraud or simply a misunderstanding of the Tax Code. (2) This underreporting has created a tax gap, the difference between what the Internal Revenue Service ("IRS" or "the Service") receives and what is actually owed. (3) One avenue for the IRS to combat this tax gap is through a program that rewards those who provide leads to the Service that result in recovering significant revenue for the federal government. (4) The Service has this option through section 7623 of the Internal Revenue Code ("IRC" or "the Code"), which created a whistleblower program to reward informants for information leading to "detecting underpayments of tax" or "detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same." (5)

To be successful, the whistleblower program should provide an adequate incentive for whistleblowers to risk their reputations and careers and come forward with information, while also maintaining its ability to collect sufficient revenue to close the tax gap. (6) This balancing was at issue in Whistleblower 21276-13W v. Commissioner, where the Tax Court evaluated whether proceeds collected under provisions not located in the IRC, including the criminal fines and civil forfeitures at issue in the case, should be considered in the payment of a whistleblower award. (7) The Tax Court ruled in favor of a broad interpretation of the statute, giving a win to whistleblowers by increasing their potential rewards. (8) After the Tax Court's decision, Congress cemented this whistleblower victory by amending section 7623 to explicitly include criminal fines, civil forfeitures, and other reporting penalties. (9) While the broad holding and statutory amendment certainly increase the incentive for whistleblowers to come forward with information, (10) the new law partially hinders the ability of the whistleblower program to make a dent in the tax gap. This note examines the impact of this decision and the subsequent statutory amendment on the whistleblower program and suggests changes to make the program most capable of rewarding whistleblowers while also closing the tax gap.

II. FACTS AND HOLDING

Section 7623(b) of the Code mandates the Commissioner of the IRS to provide whistleblowers with awards for information that results in the Service's detection of underpayment of taxes or its ability to bring to justice individuals guilty of violating the internal revenue laws of the United States, provided that the qualifications of section 7623(b)(5) are met, which require the taxpayer have a gross income greater than $200,000 and "the proceeds in dispute exceed $2,000,000." (11) In hopes of an award under these provisions, the petitioners in Whistleblower 21276-13W v. Commissioner of Internal Revenue, a husband and wife, filed an Application for Award for Original Information with the IRS Whistleblower Office. (12)

The involvement of the petitioners in the tax recovery consisted of them working with the federal government to tackle a large, targeted business for tax evasion. (13) The husband worked with clients engaged in illegal activity, and his involvement in the case began when he entered into a plea agreement with the Department of Justice to testify to the entity structure used by his clients for illegal activity, which consisted of a large foreign business. (14) In his testimony, he informed the government that a foreign business assisted U.S. taxpayers with tax evasion. (15) While he did not have the necessary documentation to incriminate the targeted business, he knew a senior officer who did, and the petitioner husband developed a plan with the government to bring this officer to the United States, where the government could arrest him, question him, and ask him to incriminate the targeted business. …

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