IRS Tax Whistleblower Articles

IRS Formally Denies Whistleblower Award in Insinga Challenge

by Jeremiah Coder

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The IRS on April 15 finally issued a formal award denial to a tax whistleblower who had waited since 2007 for a determination, and practitioners told Tax Analysts that the move may have spared the Service an unfavorable outcome in the whistleblower's lawsuit seeking to force the agency to make a decision on whether to pay an award.

Joseph Insinga sued the IRS last year in Tax Court for refusing to decide whether the information he provided on Dutch bank Rabobank's participation in several corporate tax avoidance transactions merited an award. Insinga claimed that by dragging its feet in making an award payment, the IRS was in violation of the section 7623(b) requirement that the agency make an award determination that would give him judicial appeal rights. (Petition in Insinga v. Commissioner, No. 4609-12W . Prior coverage .)

Despite the IRS's efforts to have Insinga's challenge dismissed, the Tax Court on March 13 ordered that the case move forward. The order stated, "If the IRS has in fact finished its consideration of an award claim and has not made an award, then evidently it has 'determined' to conclude the matter administratively without granting an award." The court added that "if there has been a cessation of administrative action, then a reviewable determination may have been effectively made thereby." The court held that an evidentiary hearing was necessary to investigate whether a de facto determination had occurred, and it ordered the parties to proceed with discovery before the hearing.

In its denial letter , the IRS said that with the exception of one taxpayer for whom the award claim would remain open for now, Insinga's information did not result in collected proceeds that would be a basis for an award. However, the letter now gives the Tax Court clear jurisdiction under section 7623(b)(4) to hear an appeal by Insinga of the denied award.

The agency's move leaves unresolved for now the question whether the Administrative Procedure Act (APA) or other non-tax-code procedural provisions might require the IRS to take affirmative action in whistleblower cases.The Tax Court's March 13 order noted that the APA and the All Writs Act (28 U.S.C. section 1651) have been held by the D.C. Circuit -- likely the circuit that would hear any appeal in Insinga -- to apply to all congressionally established courts. In Telecommunications Research and Action Center v. FCC, 750 F.2d 70 (1984), the D.C. Circuit held that when a statute "confers on a court exclusive jurisdiction to review a final agency order, then even before the final order has been issued, the court has 'jurisdiction over claims of unreasonable [agency] delay,'" the order stated.

Dean A. Zerbe of Zerbe, Fingeret, Frank & Jadav PC told Tax Analysts that with the denial letter in hand, Insinga should ask the court to "allow discovery to determine whether or not the IRS did or did not rely on his submitted information in its actions." He added that the IRS "takes a tighter view . . . on whether they proceeded based on a whistleblower's information than the law provides. For example, the IRS saying no doesn't mean it's no under the law." Although any outcome will depend on the facts of the case, Zerbe said, the Tax Court has demonstrated that it takes seriously its responsibility to protect the whistleblower's rights and "will not rubber-stamp the IRS's decisions."

Zerbe said that regardless of the outcome in Insinga, the Tax Court has already established significant favorable prior precedent on section 7623(b) in the case. For example, the court's decision to move to discovery over the question of a de facto denial "is a big win for taxpayers, and the court also suggested positive reception to the APA claims," he said, adding, "Clearly, the court is signaling that time waits for no man -- or the IRS."

Gregory S. Lynam of the Ferraro Law Firm said the IRS probably denied the award because it "saw the writing on the wall and did not want to set unfavorable precedent." However, getting rid of the de facto determination issue in Insinga just leaves the question to perhaps be resolved by a court at a later date, he said. Lyman said that the next taxpayer in a situation similar to Insinga's may have a difficult time because it is unclear whether his showing that he paid tax will be enough to initiate an award challenge. Instead, there may need to be evidence to suggest that the IRS intends to not pay the tax whistleblower. "In the Insinga case, you have the suggestion that the IRS had already decided they were not going to pay and just had not issued the formal denial," he said. "It turns out that was true."

Lynam said that the next step for Insinga will be to appeal the now-formal award determination. "If the taxpayers really have paid on the issues reported by Insinga, I suspect the fight will be over whether the IRS 'proceeds based upon' the tax whistleblower's information," he said. He noted that the agency's proposed regulations (REG-141066-09 ) suggest that the IRS will pay only when it proceeds based solely on an informant's information.

"We believe the proposed regulations are invalid on their face," Lynam said. "Insinga's filings suggest that he met directly with field exam team members on at least some of the taxpayers, so how this plays out may still be of interest."