Taxing Lessons From Court Decisions

Decisions — Worth the whistle

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A taxpayer thinks his information is worth the whistle. The IRS says the information is not worth the dust which the rude wind blows in the taxpayer’s face…or something along those Shakespearean lines. Who’s right?

In general, tax law provides for two levels of whistleblower awards. If the taxes, penalties, interest, and other amounts in dispute exceed $2 million, and the whistleblower’s information substantially contributed to the collection of the amounts in dispute, the payment ranges between 15-30% of the amount collected. (One other threshold: If the case deals with an individual, the individual’s annual gross income must be more than $200,000.)

In cases when the dollar thresholds of $2 million in dispute or less than $200,000 of gross income for individual taxpayers, the awards are discretionary, with a maximum award of 15%, up to $10 million.

In 148 T.C. No. 21 (Smith), the taxpayer gave the IRS information about a business that was exchanging products or services for gift certificates and not including the barter transactions as business income. The taxpayer also reported that customers’ gift certificates were given to employees as compensation and that the value of the gift certificates was not included on Forms W-2, Wage and Tax Statement.

Using the taxpayer’s whistleblower information, the IRS initiated both an employment tax audit and an income tax audit of the business the taxpayer had identified.

As a result of the employment tax audit, the business agreed to pay employment tax liabilities of approximately $3.1 million. On the same date, the business also agreed to pay employment tax penalties of $618,838. The IRS attributed $496,095 of the collected employment taxes directly to information provided by the taxpayer’s whistleblower claim.

As a result of the income tax audit, the total income tax deficiency ultimately agreed to and paid was approximately $14.6 million. The IRS noted that $1,593,024 was attributable to the information in the taxpayer’s whistleblower claim because the taxpayer’s information substantially contributed to the actions taken on several general ledger accounts that had been selected for scrutiny based on that information.

To determine the size of the taxpayer’s whistleblower award, the IRS reviewed the adjustments made in both audits. The IRS determined that collected proceeds subject to a whistleblower award for the employment taxes totaled $1,777,912 instead of $496,095. The increase arose because the review analysis included gift certificates and other items not specifically tied to the bartering but that generated employment tax liability.

However, the IRS said the taxpayer’s information did not substantially contribute to the income tax adjustments. According to the IRS, the only connection between the income tax adjustments and the whistleblower’s information was the IRS’s choice of general ledger accounts to examine. The IRS concluded that the $1,593,024 of income tax collected from the business in connection with barter accounts was not attributable to the taxpayer’s whistleblower claim.

Since, according to the IRS, the $1,771,912 collected that was directly attributable to the whistleblower’s information did not meet the $2 million threshold specified in the tax code, the allowed whistleblower award was a discretionary 10% ($177,191). In addition, the IRS said the remaining tax, penalties, and interest had no direct relationship to the whistleblower’s information and therefore resulted in a discretionary 1% award of $20,814, for a total award of $198,005 ($177,191 plus $20,814).

The taxpayer disagreed with the IRS calculation of the total reward. He said the IRS incorrectly determined the “amount in dispute.” The taxpayer says the amount in dispute totals in excess of $19.9 million, the combined amount of the employment and income tax deficiencies and penalties. Therefore, according to the taxpayer, the amount in dispute exceeded the $2 million threshold, and the award percentage should have been between 15% and 30%.

The IRS says “amounts in dispute” include only the amounts of collected proceeds for which the whistleblower provided direct or indirect information.


Here’s the relevant tax law.

From internal revenue code section 7623(b)(1). Provides that where the IRS proceeds with an action using information supplied by an individual, the award shall be at least 15% but not more than 30% of the collected proceeds, depending on the extent to which the information substantially contributed to the collection.

From internal revenue code section 7623(b)(2). Addresses circumstances where there is a less substantial contribution on the part of a whistleblower and provides the IRS with discretion to award an amount that does not exceed 10% of the collected proceeds (including penalties, interest, additions to tax, and additional amounts).

From internal revenue code section 7623(b)(5). Provides that section 7623(b) is available for whistleblower awards only if (in cases involving individuals) such individual’s gross income exceeds $200,000 for any taxable year subject to such action, and (for any taxpayer) if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2 million.

From internal revenue regulation section 301.7623-2(e). Defines “amount in dispute” for purposes of section 7623(b)(5), as follows: [T]he term amount in dispute means the greater of the maximum total of tax, penalties, interest, additions to tax, and additional amounts that resulted from the action(s) with which the IRS proceeded based on the information provided, or the maximum total of such amounts that were stated in formal positions taken by the IRS in the action(s). * * *



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Right answer!
Sorry, wrong answer :(

For the taxpayer.

In interpreting the term “amounts in dispute” as used in section 7623(b)(5)(B), we begin with the statute. The phrase “amounts in dispute” is not used in any other context in section 7623, and the parties have not contended that the phrase is a term of art and/or that the phrase had been used in other sections of the internal revenue code.

Section 7623(b)(5)(B) is plain and has a clear meaning in the context of section 7623 and its intended congressional purpose. The section 7623(b)(5)(B) phrase “amounts in dispute” is not specifically limited to only those amounts directly or indirectly attributable to the whistleblower information. Once the monetary thresholds are met and the government recovers “collected proceeds” resulting from the action, the mandatory provisions of subsection (b)(1) or (2) apply.

Paragraph (e)(2)(i) of regulation section 301.7623-2(e) does not support the IRS’s narrow view that the “amount in dispute” is limited to the portion to which award percentages are applied, as defined in section 7623(b)(1) and (2).

The regulation provides instead that the amounts in dispute are the amounts that resulted from the actions with which IRS proceeded based on the whistleblower’s information.

Accordingly, it does not follow that the limiting standards of section 7623(b)(1) and (2) providing for a percentage to be applied to the portion of “collected proceeds” to which the whistleblower’s information “substantially contributed” would also apply in determining whether the initial $2 million threshold has been met.

Conceptually, section 7623(b)(5) is a threshold to ensure that the less discretionary mandate of subsection (b)(1) is applied to taxpayers with a certain minimum amount of annual income or with a significant amount of tax liability. In effect, the IRS has backed into the subsection (b)(1) and (2) limitations to interpret the subsection (b)(5) threshold.

In the case before the court, the IRS proceeded using the taxpayer’s information, and the examination resulted in nearly $20 million of tax in dispute, of which almost $2 million was directly or indirectly attributable to the taxpayer’s information.

Accordingly, the “amount in dispute” for purposes of section 7623(b)(5)(B) in this case was in excess of $2 million, and the IRS’s use of the discretionary provisions of section 7623(a) to determine the amount of the whistleblower award was in error.

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