One of the happier problems for a tax whistleblower is turning to think about the percentage they may receive as an award from the IRS. Under the statute – 26 USC 7623(b)(1) – a tax whistleblower may receive 15 – 30% of the collected proceeds. For tax whistleblowers the challenge is how do they get their award closer to 30%? A recent Tax Court case: Luu v. CIR TC Memo. 2022-126 (2022) provides some useful guidance and builds on what I’ve found in practice.
Getting A Higher Percentage – Let’s Start At The Very Beginning
Before turning to Luu, a reminder of the basics when it comes to award percentages for tax whistleblowers. From what I’ve seen working with my clients who have received awards over the years, the IRS Whistleblower Office (WBO) in general tries in good faith to follow the relevant Treasury Regulations (301.7623-4) in making award percentage determinations. The difficulty is that the IRS starts you at 15% and you have to build the case for a higher award by meeting one or more of the eight positive factors cited in the regulations and avoiding any negative factors that would knock your percentage back down (but not below the statutory floor of 15%).
In short, the eight positive factors for an increase in the award percentage that are cited in the regulations are rough and ready looking at how much did the whistleblower make the IRS’s work easier – identifying, documenting (essentially putting the issue on a T-ball) the tax issue – vs. how much did the IRS have to pull oars to come to the end result (examples of positive factors include: whistleblower acted promptly to inform the IRS; identified transaction unknown to IRS; identified transaction the IRS would have difficulty denying; presented factual details of tax noncompliance in a clear and organized manner; provided exception cooperation; identified connections between transactions or parties to transactions).
Thus, I find in practice that the starting point for getting a higher percentage actually begins with a good Form 211 filing with the whistleblower office– putting together a well-organized; detailed; documented filing is the best starting point to later having a strong argument for a higher percentage (with the happy add-on benefit of making it more likely the IRS will take-up your filing). Key also: identifying all the tax issues; all the related parties; etc. in your 211 and fully cooperating with the IRS.
What To Do Prior To Receiving A Preliminary Award Letter
When you believe that white smoke is in the offing from the Whistleblower Office – that a preliminary award letter may be coming your way – I find it a useful practice in most cases to send a brief (emphasize brief) memorandum to the WBO outlining the eight positive factors and eight negative factors in the regulations and how you meet them (or don’t meet them or they aren’t relevant). It isn’t necessary to meet all eight positive factors to get a high percentage award – performing strongly in one or two criteria can be just as important. The most common negative factor that trips up whistleblowers is delaying in reporting to the IRS the tax violation – so important to address.
If your case is in the public – example subject to Department of Justice action and a press release – it is a bit more of a challenge/opportunity for the whistleblower – given that there will often be a detailed discussion of the relevant facts/documents etc. that the government on which the government relied in bringing the case. In such a situation, you have an opportunity to potentially provide a more robust discussion about how you gave key facts, documents, identified witnesses, etc. – essentially looking to tie closely your submission to the work of the government.
Two additional benefits of providing the WBO your take as to how you meet the factors for an increased award percentage prior to a PARL being issued are: 1) the WBO will review and consider your submission; and, 2) even if the result is not all you hoped – at least you will go to sleep knowing you put forward your arguments. By contrast, waiting until the PARL comes – and potentially being disappointed – and only then making your arguments on percentage could result in a delay in an award check being processed; and, human nature being what it is, always difficult to get someone to reverse a position they have taken. Better to try and get in early. Note: you can of course always make your arguments again after receiving the PARL – highlighting a position/fact that you think is in error or there hasn’t been a full consideration (the PARL will provide the award percentage and the overall reasoning) – but again, better if you can do so prior to receiving the PARL.
Luu Illuminates – Tax Court Is Where Fights On Award Percentages Go To Die
The basic facts in Luu are that the whistleblower filed a Form 211 with the IRS about tax evasion at a family-owned company of which he was a minority shareholder (other shareholders were his siblings). Several months after the whistleblower filed the Form 211 the shareholders filed voluntary disclosures with the IRS – which the IRS preliminarily accepted. A year later the IRS audited the company and ultimately assessed an additional $2 million dollars. The whistleblower got a 15% award from the IRS Whistleblower Office.
Of interest, the Tax Court opinion note the Revenue Agent’s report stating that if the whistleblower “. . . had not filed a 211 claim his siblings would have not filed a voluntary disclosure and provided the documents and cooperation necessary determine the correct adjustments. Therefore, I believe [the whistleblower] took the first step that led to this examination that allowed the government to collect more than $2 million dollars in taxes, penalties and interest.” It is helpful to see the Tax Court highlighting the Revenue Agent’s statement that a whistleblower can play a key role just by filing the Form 211 – and forcing the hand of the taxpayer to file/disclose a position to the IRS – which in this case led to the IRS action of an examination (and hat’s off to the Revenue Agent for noting the importance of the initial filing of the Form 211 in influencing the behavior of the taxpayer). NOTE: A whistleblower promptly notifying the IRS or the taxpayer of tax noncompliance is a positive factor for an award – 301.7623-4(b)(i).
Luu makes clear that the IRS WBO makes its determination on an award (and award percentage) to a large extent based on the Form 11369 completed by the Revenue Agent (The Form 11369 essentially is providing the WBO the IRS examiner’s take on the value of the whistleblower’s information). In Luu, the Revenue Agent noted the documents and cooperation provided by the whistleblower necessary for the government to make adjustments. But the Agent makes clear the whistleblower didn’t provide the information on a T-ball: “[T]he WB didn’t hand the adjustment to the Service. The Service still had to take the appropriate audit steps to calculate the correct unreported income and unreported payroll.” However, as discussed above, the delay in reporting by the whistleblower is a critical negative factor. In addition, how much the whistleblower participated in the fraudulent activities and benefitted from them (not a shock – the siblings had a different take then the whistleblower) – also was problematic.
The WBO in its own memorandum applies these facts to the specific positive and negative factors from the regulations cited above and found that at the end of the day the good – which the office determined raised the award to 22% — didn’t outweigh the bad, which reduced the award — and provided a 15% award. The whistleblower contested this in Tax Court. The Tax Court reviewed the Whistleblower Office procedures for determining an award percentage and listed the Treasury Regulation factors. At the end of the day the Tax Court found that the WBO had not been arbitrary and capricious in its award determination (the standard of review — and difficult to overcome) – and upheld the award determination.
Two points: First, the amount of time, care and consideration taken by the IRS Whistleblower Office and the Revenue Agent in this award determination of $368k is reassuring – the IRS didn’t just mail it in (and this reflects what I’ve seen with my own clients in reviewing awards – not to say the IRS is perfect); and, Second, the decision in Luu – only reinforces that challenging an award percentage determination in Tax Court is a very high order – and far better to make your arguments on award percentage before the WBO.
“Substantially” Test (There Is No Substantially Test) – Tax Court Gets It Right
One final point from Luu that has a bearing on the overall whistleblower program. The Tax Court in its discussion of Luu notes:
“While congress provides for a mandatory award for information brought by a whistleblower, ultimately, the award amount is left to the IRS since Congress has provided an award range of 15% to 30% dependent upon the level to which the whistleblower “substantially contributed” to the actions by the IRS.” (P. 12)
The Tax Court has it exactly right – the language from Section 7623(b)(1) in the last sentence cited by the Tax Court speaks to “The determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action.” The IRS has improperly interpreted this statutory language as imposing a “substantial” requirement on the whistleblower getting any award: [T]he IRS proceeds based on information provided by a whistleblower when the information provided substantially contributes to an action against a person identified by the whistleblower.” Treas. Reg. 301.7623-2(b)(1).
The regulatory creation of a substantial test is at odds with the plain language of the statute (as well as the long practice of the False Claims Act – on which the IRS Whistleblower Award program is based). There is not a “substantial” bar or test to a 7623(b)(1) award. As the Tax Court rightly states, the issue of substantiality goes to the percentage of the award – not to the threshold question of the whistleblower receiving an award. Hopefully, with the new leadership at the IRS WBO they will take the opportunity to revisit this matter – which has barred many whistleblowers from receiving an award even though they have provided information to the IRS; on which the IRS acted and that resulted in collected proceeds.
Conclusion
Getting a higher award percentage for a tax whistleblower award starts with making a good initial filing, cooperation as the IRS continues its investigation and making your case (as applying the factors in the Treasury regulations) prior to the IRS making an award determination. Going to Tax Court to fight for a higher award percentage is a long grind that is unlikely to lead to a better result.