In a significant whistleblower win, the Tax Court on June 2 held that taxpayers are not required to file the Form 211, “Application for Award for Original Information,” before contacting IRS operating divisions to be eligible for a whistleblower award under section 7623(b).

“The court came up with the exact right answer that is very much in keeping with congressional intent . . . and the court’s role with protecting the whistleblower,” said Dean Zerbe of Zerbe, Fingeret, Frank & Jadav P.C. and lead counsel for the petitioners. “It’s a big, big case.”

The decision “goes to the court’s continuing recognition of how broad section 7623 was intended by Congress,” Gregory S. Lynam of Lynam Knott P.A. said. “This truly was intended to encourage whistleblowers to come forward and was not a hypertechnical statute intended to trip up potential whistleblowers.”

In the case, the petitioners, a husband and wife, filed separate Forms 211 with the IRS Whistleblower Office seeking awards under section 7623(b) after the target business pleaded guilty and paid $74 million. Because the petitioners sent the forms to the IRS after the U.S. collected the proceeds from the target business, the IRS rejected the award applications and did not “review, investigate, or evaluate” the merits of the taxpayers’ claims.

The government argued that although section 7623(b) doesn’t include a timing requirement about when a prospective whistleblower should file a form 211, the Tax Relief and Health Care Act of 2006 section 406 said that the Whistleblower Office is the “gatekeeper of information for purposes of discretionary awards under section 7623(b).”

The court held that section 406(b) of the act does not give the Whistleblower Office exclusive authority to investigate the subject of an application for an award. “The fact that the petitioners supplied their information to other federal agencies, including an IRS operating division, before submitting the information to the Whistleblower Office on Form 211 does not, as a matter of law, render the petitioners ineligible for an award under I.R.C. sec. 7623(b),” the court said.

Despite the government’s assertions, Form 211 anticipates that a whistleblower may contact an operating division before notifying the Whistleblower Office, the court said. This is evidenced by the form’s line 5, which instructs the whistleblower to provide the “name and title of the IRS employee to whom the violation was reported,” and line 6, which asks for the “date violation reported.” The form also includes space for the whistleblower to report information reported to other federal and state agencies.

The court also noted that the Whistleblower Office did not address the petitioner’s applications nor address the perceived timing issue.

Also, the court said that a requirement that a potential whistleblower notify the Whistleblower Office before cooperating with a field office would potentially alert the taxpayer that an informant was involved and subject the whistleblower to exposure and retaliation, “directly contravening the IRS policy of protecting the identities of informants. And we are loath to interpret a statute in a manner that leads to an absurd result,” the court said.

Wegelin the ‘Targeted Business’?

After the petitioner husband was arrested for conspiring to launder money related to the sale of pirated music, he agreed to cooperate with federal authorities in tracking down the targeted business. Although the husband did not have any documents that would inculpate the targeted business, he did know a senior official of the business that would likely provide information.

The FBI and petitioner husband engaged in a sting operation to catch the senior officer in an embezzlement crime. As part of the sting, the petitioner wife traveled to England to meet with the senior officer to discuss the plan.

Ultimately, the petitioners were able to get the senior officer to come to the U.S., where he was arrested for embezzlement. He then agreed to cooperate with law enforcement officials, which led to the $74 million payment by the targeted business.

Although the decision does not explicitly name Wegelin & Co., referring only to the indictment and guilty plea of the “Targeted Business,” the facts outlined in the opinion match those of the Swiss bank, which previously pleaded guilty to conspiracy to evade taxes. According to a Justice Department release from January 2013, Wegelin hid more than $1.2 billion in secret accounts and paid the U.S. $74 million, facts that the opinion also cites.

 

Aggressive Position by Chief Counsel

“The court really narrowed the opinion here to [ask] ‘Do you have to file with the whistleblower office first?'” Scott A. Knott of Lynam Knott P.A. said, and the court’s answer was a resounding no. Knott noted that best practices would dictate that a whistleblower should submit a Form 211 as early as possible.

Lynam said that the court’s holding was consistent with what most practitioners previously thought and what had been evidenced by past IRS practice.

“The IRS created their own form from scratch,” Lynam said. “The IRS’s Form 211 itself asks you who did you first provide the information to and when,” Lynam noted, a fact that was not lost on the Tax Court.

“If respondent’s position were correct, these lines would be superfluous; in fact, they would be misleading to an unwary whistleblower,” the court held.

Lynam argued that the case represents another attempt by the IRS Office of Chief Counsel to take aggressive litigation positions with whistleblowers. Knott said that in this case the IRS was taking the language of section 7623(b)(6)(C) which states that no award may be made under the subsection based on information submitted to the secretary unless that information is submitted under penalty of perjury –“a step further” in an apparent stretch of the statutory language. That the chief counsel may be undermining the whistleblower program has been previously suggested by Senate Finance Committee member Chuck Grassley, R-Iowa.

“If [the IRS] had won here, you would have had scores of people who have done wonderful work, really helped the IRS . . . [losing] their reward because you didn’t say ‘Mother may I?'” Zerbe said. “That is just an absurd result that would discourage the program,” he added, urging a fundamental rethinking of the whistleblower program.

“It’s interesting how the [Criminal Investigation] world uses whistleblowers hand over fist,” Zerbe said. “But for some reason, culturally, they still think that is crazy talk in the civil [investigations] world.”

De Novo Review

Lynam said that one issue not addressed in the court’s opinion is how late is too late for filing Form 211.

“What happens when somebody files 10 years later, 20 years later?” Lynam asked. Knott said that the Whistleblower Office’s concerns were understandable to some extent, since if a Form 211 is not filed, they are not building the case file that would later be needed to make an award determination.

Although the court states that it is not addressing the standard of review, the court does address this issue, at least indirectly, Lynam noted.

The government’s position had been that the court should limit its review to the items in the whistleblower file, which included the forms submitted and the rejection letters.

“There is no way that the whistleblower file will ever be adequate for determining any dispute before the Tax Court,” Lynam said. He noted that all of the factual analysis in the court’s opinion holding for the petitioners came from the hearing, and none from the whistleblower file. Zerbe said that this case would serve as a testament for de novo review for whistleblower cases, rather than an abuse of discretion, also noting that the administrative file was lacking.

“You go a little further. What was the truth? The two whistleblowers were the sun, the moon, and the stars in making this case happen. None of that was in the file,” Zerbe said. “If you hadn’t had de novo review, these whistleblowers would have gotten hornswoggled.”