Originally posted at Forbes.com on December 10, 2013.
After teeth gnashing and working through conspiracy theories, you have 30 days to appeal to Tax Court. A good starting point is to call your assigned case manager at the IRS whistleblower office. The IRS has been moving to be better about illuminating to whistleblowers about their rejection letter – although it’s still a tea leaf reading exercise to a large extent. The current policy of the IRS is not to disclose in either the rejection letter or any other discussions the reason why a rejection letter was issued. In order to obtain the background and the processing of the claim, the whistleblower will have to petition the Tax Court and seek the award evaluation material through formal discovery. In the current proposed regulations which as of this date have neither been published or adopted there maybe relief for the whistleblower to obtain such information through an administrative process rather than the formal method of Tax Court. There are usually three general reasons why your submission to the IRS may have been rejected:
1) POOR PRESENTATION. The material and information you have wasn’t presented in the best way possible to the IRS (see — 5 Keys to success for whistleblower awards)(shockingly one of the biggest problems I still see is people holding back key information or documents – don’t do that; ANSWER – consider resubmitting (particularly if you have significant information that wasn’t previously provided) or if you believe you badly misfired on the first filing;
2) ISSUE NOT OF INTEREST – NOT WORKED. In a recent panel I was on with the Director of the Whistleblower Office, Stephen Whitlock, he reminded everyone that there are issues of strong interest to the IRS (ex. offshore banking and accounts) and some issues of less interest (the fact that you believe your neighbor can’t afford the giant RV sitting in his driveway).
The IRS has limited resources – it has to pick and choose cases. Unfortunately, with the IRS staffing reduced from 107,000 to 87,000 and the burden of the Affordable Care Act and out-of-control identity theft – now even good whistleblower submissions sometimes have trouble getting the attention they deserve. Also, your filing may have other troubles with it — such as an old case; limited dollars at issue; uncertain legal matter; difficulty in recovering from the taxpayer, etc –see 5 Keys cited above.
ANSWER – you need to take a hard look at your case – if you think that it has the elements of a strong case then perhaps refile if there is justification (one above), otherwise maybe time to stop cursing the darkness and move on.
BAD ANSWER – file with the tax court asking the court to direct the IRS to investigate the taxpayer you blew the whistle on. The tax court will say “no, no, no . . . oh let me think — no” – they do not have the authority to direct the IRS to conduct an investigation.
A number of whistleblowers have made this filing with the Tax Court – they have all been rejected.
3) ISSUE OF INTEREST TO IRS – WORKED BUT NO RECOVERY. Ah this is the tricky one. The questions you are trying to smoke out of the IRS are two: 1) Did the IRS pick up the ball on the issues the whistleblower raised regarding the taxpayer (in some cases the whistleblower will have a sense of what has happened to their case because of contacts with the taxpayer; working with the IRS; public records; or other indications or discussions. If the issue or issues that the submission were in fact examined by the IRS and there was no adjustment made to the issue, the Tax Court does not have the authority under the whistleblower statute to make a redetermination of the findings.
– Did the IRS/US Government a) take action against the taxpayer but collected other proceeds against the taxpayer — other payments – ex. penalties under title 18 or 31 (as opposed to title 26 – the tax code) b) take action on the issue you raised but are not giving you credit for what you brought to the table; c) take other action on the taxpayer (ie on an issue different than the one you raised?); or, d) take action against a related party?
If you suspect (or even better — have evidence) that the above may be the case – you need to think hard about protecting your rights and filing with the Tax Court. The IRS Chief Counsel has been putting forward proposed regulations that give an extremely narrow reading of the IRS whistleblower law – and in doing so is inappropriately barring whistleblowers from awards or full awards in some cases. I will only touch on these issues briefly here – but to get a fuller understanding – read the National Whistleblower Center’s submission on the proposed regulations.
Here is a thumbnail of some of the key issues that could be gumming up the works for a whistleblower receiving an award:
A) Collected proceeds – the law is broad saying that the whistleblower can collect from any proceeds but the IRS is seeking to interpret “proceeds” to mean only for tax, (tax) penalties and interest (on the tax). For example, if a whistleblower blows the whistle on a taxpayer with an offshore account and the IRS subjects the taxpayer to title 31 penalties (not title 26 tax penalties) – the IRS is saying the whistleblower is out of luck. The scope of “collected proceeds is being actively litigated in Tax Court now (full disclosure – I have two cases on this issue now before the Court).
B) Proceeds based on – the IRS may view that they already had (or were going to have) the information you provided. For example, that they were already aware of the issue or were planning to raise the issue. The law requires that for a whistleblower to get an award the IRS must “proceed based on” the information provided by the whistleblower. However, again this has been interpreted by IRS Chief Counsel against the whistleblowers and is setting an inappropriately high bar. If you believe the IRS has used your information to proceed with an action (or to assist an ongoing action) against a taxpayer and that has resulted in collected proceeds then again you may want to consider going to Tax Court.
C) Related action – if the whistleblower raised an issue and the IRS proceeds against the taxpayer, the whistleblower should get credit for the action raised and any related action against the taxpayer (for example, the whistleblower files a Form211 stating that taxpayer A is failing to report income, and in the audit the IRS finds out that taxpayer A also had an unreported offshore account – and takes only action on the unreported account – that is a related action). However, a caution on attenuation – particularly with a major company – if you tell the IRS that a Fortune 500 company is engaged in a tax shelter don’t look for a recovery for a wholly separate transfer pricing issue at the same company’s subsidiary.
D) Related party – The whistleblower tells the IRS about individual B engaged in a tax shelter and tax lawyer C assisting the individual. The IRS doesn’t take action against individual B the whistleblower named – but does take action against tax lawyer C’s other clients who engaged in the tax shelter – that is a related party action and the whistleblower should get credit for any collected proceeds.
NOTE: The taxpayer may have agreed with the initial findings of the Service and made full payment. This fact might be discerned from various SEC reports when looking at publicly traded corporations. Thus the whistleblower assumes that there is strong likelihood of an award. However, the taxpayer generally has two years in which to file a claim for refund especially if the dollar adjustments are large. The Service will not inform a whistleblower that this is the reason no award letter has been issued and generally these types of cases can be tied up in litigation for years.
I don’t encourage you to just run to the Tax Court because you got a rejection letter. While the Tax Court has been friendly to whistleblowers in general – it is a time-consuming effort and suggest it’s important to discuss closely with legal counsel the reasons for going to court and whether it makes sense – and what relief you are seeking (and whether the Tax Court can grant it). However, you can’t think deep thoughts forever – you do need to giddy up – you have 30 days from the day the letter was MAILED (not when you got it – so hold on to that envelope and letter) to file in Tax Court – whether you live in the U.S. or abroad. The Tax Court is very strict on their jurisdiction and arguments about dentist appointments, weddings as for why you missed the 30 day deadline are of zero interest to the judges.
Confidentiality. I recognize from working with whistleblowers for years that anonymity is important to many whistleblowers. The Tax Court has been quite understanding of these concerns for whistleblowers and has granted in a number of cases that the whistleblower can proceed anonymously and even under seal.
Lastly, the best defense against getting a rejection letter is to ensure that you’ve done all you can to make a good filing and also to consider other issues/problems with your filing while it is still being considered – which I discussed in a previous column. Best to keep that rejection letter from being sent in the first place.