Whistleblower’s Claim Limited by IRS’s Discretion

Published Categorized as IRS Whistleblower, Tax Relief
IRS whistleblower claimis-min, Austin Tax Attorney

If you turn in a tax cheat by filing a whistleblower claim with the IRS, what happens if the IRS does not realize the importance of the information received? Put another way, what if the IRS leaves money on the table by failing to assess the full amount for the taxpayer? Is the whistleblower entitled to an award based on a percentage of the higher amount? The court addresses this in Apruzzese v. Commissioner, T.C. Memo. 2019-141.

Facts & Procedural History

The petitioner was involved in a lawsuit with the taxpayer. The taxpayer was an estate. The petitioner submitted a whistleblower claim with the IRS for the estate. He asserted that the estate owed estate taxes.

The estate was already under IRS audit when the whistleblower claim was submitted. The IRS estate tax attorney was about to close the case with no change when he received the whistleblower information. The IRS estate tax attorney then changed course and made a tax adjustment for the estate and the estate paid the tax.

The IRS Whistleblower Office paid the petitioner $43,424, which was 22% of half of the amount of tax the IRS collected. The petitioner wrote a letter to the IRS Whistleblower Office to challenge the amount of tax the IRS collected. He believed the IRS did not fully understand the import of the information he provided, which resulted in less tax collected than should have been collected.

The IRS did not change the award amount and the taxpayer filed suit in U.S. Tax Court to challenge the award.

The IRS Whistleblower Office

The IRS Whistleblower Office is often derided for being inefficient and ineffective. Congress has even weighed in on this and changes have been made to the program over the years.

The purpose for the office is to handle whistleblower claims. Congress added Sec. 7623 to the code to allow the IRS to pay awards for these claims. The Whistleblower Office has in turn established procedures and guidelines for processing claims and making awards.

These rules and policies do not cover many aspects that one would think they should. They leave a lot of room for interpretation. That brings us to the instant case.

The Tax Court’s Jurisdiction Over Whistleblower Claims

Neither the Code nor the IRS procedures or policies address whether the IRS has to assess the full amount of tax. This is left to the IRS’s discretion.

As with any IRS audit, the IRS auditor and/or his manager has the ability to not pursue issues and compromise issues (i.e., resolve issues, not settle them). Taxpayers often hire experienced tax attorneys for this very reason. They have a better chance of convincing the IRS employee to pass on issues or negotiate resolutions.

If we assume the petitioner, in this case, was correct and the IRS estate tax attorney failed to assess the full amount of tax, is the petitioner’s award limited to the tax actually assessed?

The court considered its prior ruling in Cooper v. Commissioner, 136 T.C. 597 (2011). In that case, the IRS had decided to pass on the entire case and awarded the whistleblower nothing. In Cooper, the court concluded that it did not have jurisdiction over the IRS’s decision to not pursue taxes. The court’s jurisdiction was limited to reviewing the decision to make or not make an award.

In this case, the court reached a similar conclusion. It concluded that the U.S. Tax Court does not have jurisdiction to tell the IRS to collect more in tax. Only the IRS and its staff can do that.