There has been good news on a number of fronts for tax whistleblowers – with major awards being announced in recent weeks; helpful reforms in the whistleblower program put in place that should encourage more awards (and as important, reforms that will ensure that whistleblower submissions get a strong look); and, recent Supreme Court decisions that may be helpful for whistleblowers in litigation.
Awards
The IRS Whistleblower Office (WBO) has in recent weeks taken the best step it can to encourage whistleblowers to come forward – issue awards. This has been the season for awards to tax whistleblowers, with major awards being announced. I am very pleased that whistleblowers I represent recently received awards of over $14.3 million – based on over $56 million in taxes being returned to the Treasury– details on these two awards are here – with the Tax Court victory discussed further below. I should note that Stephen Kohn of Kohn, Kohn and Colapinto was cocounsel for one of the awards).
There is no question that for FY 2024 the WBO has lapped the FY 2022 awards ($37 million) and are at least on pace with the FY 2023 award numbers ($88 million). Whistleblowers should be heartened. These recent awards reinforce and are tangible proof of the IRS’ commitment to the whistleblower award program. Good news.
Reforms To Whistleblower Program
The Director of the WBO, John Hinman, has been active and engaged in moving the IRS whistleblower program forward – and has benefitted from strong support from then-IRS Commissioner Charles Rettig and current Commissioner Danny Werfel. Director Hinman has pushed forward a number of reforms to improve the whistleblower program. You can hear Director Hinman first-hand outlining his reforms for the WBO in recent speeches at the National Whistleblower Conference here and at the NYU Tax Controversy forum here.
Director Hinman is focused on seven overall areas of reform – including improving the initial intake of whistleblower filings, having the IRS use whistleblower information more effectively; and award whistleblowers fairly and as soon as possible. As to improving initial intake and using whistleblower information effective, there are been strong indications of the WBO and the work of whistleblowers being more incorporated into the overall work of the IRS – with the WBO now sitting on several key committees at the IRS and the IRS more and more noting in announcements of its exam priorities that it welcomes whistleblowers (if you want to know what the IRS wants to hear about from whistleblowers – they’ve repeatedly stated: detailed, knowledgeable information about high-wealth individuals; overseas; large partnerships; and, tax evasion/shelters with large business).
As to the WBO striving to be fair with its awards, I’ve seen first-hand the WBO being reasonable and open-minded in its award determinations. Moreover, the overall numbers reflect that – with the reported awards averaging 26% of collected revenues (the statute allows for an award between 15-30%).
A new key reform though is that in an effort to be responsive to expediting awards, the WBO recently revised its Internal Revenue Manual and has provided for the first-time guidance on when the WBO will “disaggregate” claims – ie making partial awards. This issue of partial awards has been a significant grind for whistleblowers – where an award is held up in some cases for years as the IRS waits for the other shoe(s) to drop. A classic example of where an award is being delayed for years — a criminal tax case that has been settled and all dollars collected, but there is an open civil tax matter. The WBO has historically waited for the civil matter to resolve before paying – translating into the whistleblower waiting years and years potentially for an award (even though the IRS already has in hand millions of dollars from the closed criminal case for years and years). Whistleblowers have been in mudville – with no joy.
The new guidance in the IRM – found at 25.2.2.6.1.1 (issued 9-13-2024) provides for factors for disaggregation – with factors including whether the proceeds resulting from the action are collected and finalized and whether the resolution of the related actions will have a final determination within the next 12 months. Also considered are administrative burden and whether it is over $2 million dollars. I’m hopeful that in application, this commonsense change will release a number of pending awards. Thanks to Senators Grassley (R-IA) and Chairman Wyden (D-OR) who pressed and encouraged the IRS to revisit the delays on “partial awards” in hearing questions to the IRS Commissioner this Summer.
These reforms are going in the right direction for whistleblowers.
Litigation and Supreme Court
I was particularly heartened that we were successful in case Whistleblower 18152-17W v. CIR resulting in an award of $1.9 million for the whistleblower from collected proceeds of $6.3 million. Given the standard of review for whistleblower cases in Tax Court – arbitrary and capricious as to the facts; de novo as to the law – it is not an easy run for tax whistleblowers to prevail in court (especially if it is a dispute on the facts). Here, we were able to convince the IRS and Chief Counsel to revisit the matter on remand and thanks to their good faith efforts, we were successful. The whistleblower went from being denied (0%) to getting 30%. Happy day. Still, it’s a hard road. Key for any whistleblower looking at going to Tax Court is to reflect on whether the facts support a finding that the information was sent to the field, and that the IRS took action based on the whistleblower’s information and the action resulted in collected proceeds. In some cases, the denial letter itself can provide some illumination that may be helpful.
Separately, the recent Supreme Court case Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024) – putting an end to Chevron deference – as well as two other cases dealing with the Administrative Procedures Act (APA) — Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., 144 S. Ct. 2440 (2024)(statutes of limitation) and Ohio v. Environmental Protection Agency, 144 S. Ct. 2040 (2024)(defining arbitrary and capricious actions) has provided whistleblowers significant new arrows to attack the Treasury Regulations for whistleblowers as being improperly narrow and limited in scope. Eyes will be on the D.C. Circuit as it revisits its earlier determination in the Lissack case (remanded by the Supreme Court after the decision in Loper Bright) – a tax whistleblower case where the issues include the definitions of “any related action” and “any administrative action.” The case could have significant implications for the whistleblower program.
In addition to the Treasury regulations for the whistleblower program, whistleblowers are also looking harder at challenges to the IRM governing the whistleblower program – particularly where the IRM is contrary to the whistleblower statute and related Treasury regulations. APA challenges to IRS subregulatory guidance is a growing wave in the courts. For a good overview on this, see Professor Kristin Hickman’s article, “Counterpoint: Tax Exceptionalism from Notice-and-Comment Rulemaking Procedures Is Bad Policy and Bad Law,” ABA Tax Times, June 2024, (observing that litigation challenging IRS actions under the APA “has shifted to evaluating the proper characterization of at least some IRS subregulatory guidance,” citing Mann Construction v, United States, 27 F.4th 1138 (6th Cir. 2022); Green Rock, LLC v. Internal Revenue Service, 654 F.Supp.3d 1249 (N.D. Ala. 2023); GBX Assoc., LLC v. United States, 2022 WL 16923886, 130 A.F.T.R. 2d 2022-6440 (N.D. Ohio Nov. 14, 2022); CIC Services, LLC v. Internal Revenue Service, 592 F.Supp.3d 677 (E.D. Tenn. 2022)).
Still – I strongly encourage whistleblowers that they should first look to working with the WBO to resolve concerns and issues (for example, a dispute about award percentage). As shown above, the WBO has been taking good steps favorable to whistleblowers. Court is a long journey.
Much good news for tax whistleblowers.
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