Taxing Lessons From Court Decisions

Decisions — Rejecting the boilerplate

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The whistleblower wanted a share of the $37.5 million the IRS collected. The IRS gave him boilerplate instead.

In Kasper (150 T.C. No. 2), the taxpayer told the IRS that his former employer failed to pay overtime wages to employees and therefore didn’t withhold or remit the taxes associated with the unpaid wages.

In the information report submitted to the IRS, the taxpayer claimed that the employer owed millions of dollars in overtime pay and told the IRS that if the employer were required to pay the overdue wages, the IRS would benefit because it would receive the payroll taxes withheld on that compensation.

The IRS sent a denial letter telling the taxpayer that “the information [he] furnished did not meet [the IRS’s] criteria for an award,” and that the IRS couldn’t give him specific reasons for rejecting his claim because of “federal disclosure and privacy laws.”

The letter instead recited a boilerplate list of common reasons, including:

— Your information was insufficient to begin an investigation.

— Your information did not cause an investigation or result in the recovery of taxes, penalties, or fines.

— The Internal Revenue Service already had the information you provided, or the information was available in accessible public records.

— The taxes recovered were too small to warrant a reward. [IRS] policy states we do not pay rewards less than $100.

The taxpayer said the information in the denial letter was insufficient, and the court agreed. The court found that the explanation letter alone was a completely inadequate explanation. The court said the letter had no reasoning specific to the whistleblower’s claim, recited only boilerplate, and then stated a conclusion. The letter therefore failed to “articulate a satisfactory explanation” for the refusal because it didn’t explain why the IRS decided the taxpayer’s claim was not eligible for a whistleblower award.

However, the question before the court in this case was whether the IRS collected the $37.5 million proceeds as the result of using the whistleblower’s information.

The taxpayer argued that the IRS used the information from his whistleblower report to file a claim in bankruptcy court, eventually leading to the $37.5 million settlement. He says that the forms he filed “alerted the IRS that a company in bankruptcy was failing to withhold the proper tax for its employees.”

In response, the IRS said it is routinely notified of bankruptcy filings, and routinely files claims and amended claims for tax liabilities. The IRS said none of the information provided by the whistleblower changed the IRS’s normal course of business in the bankruptcy case filings.

After reviewing the administrative record, the court determined that the IRS actions were the result of standard IRS procedure. The employer filed for bankruptcy, the IRS was notified, an original proof of claim was filed by the IRS including “unassessed” claims for FICA, FUTA, and excise taxes, and an amended proof of claim was later filed that corrected these claims to zero.

The court said none of the information provided by the taxpayer in his whistleblower report would have changed this. The court decided the record showed the IRS did not proceed with any action resulting in the collection of proceeds using the taxpayer’s information.

 

Based on the information above regarding the taxpayer’s claim, why do you think the IRS denied the whistleblower award?

Make your selection, then hover your mouse
over the link beneath “The Decision”

 

 

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

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The award claim was denied because the tip was about unpaid wages, which the IRS correctly determined was a Department of Labor issue, not an IRS issue because no tax is owed on unpaid wages.

The court said:

Although we may not accept any post hoc rationalizations for agency action provided by the IRS counsel, we may consider any “contemporaneous explanation of the agency decision” contained in the record.

Here, the records show that the award claim was denied because the tip was about unpaid wages, which the IRS correctly determined was a Department of Labor issue, not an IRS issue because no tax is owed on unpaid wages.

This rationale was neither arbitrary nor capricious nor an abuse of discretion. It was based on all of the information provided by the taxpayer in his Application for Award for Original Information, and we find no error in the rejection of a whistleblower award application that failed to assert an underpayment of tax.

The IRS therefore–as we view the administrative record–did not abuse its discretion in denying the claim.

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