This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.
How far can a whistleblower go?
We all know someone we think might be a tax cheat. One Florida resident was so convinced that he made a formal whistleblower complaint to the IRS, alleging that a taxpayer had understated assets on a federal estate tax return.
The IRS agreed. But the whistleblower claimed that the agency didn’t collect enough from the taxpayer, so he filed a case in Tax Court in an attempt to compel the IRS to dig a little deeper.
The case began with a whistleblower submission. On Sept. 16, 2011, the petitioner, Vincent J. Apruzzese, and a co-claimant submitted information to the Whistleblower Office (WO) using Form 211, Application for Award for Original Information.
The pair indicated that they were involved in a lawsuit against an estate and that as a result, they had reason to believe that assets were omitted and undervalued on the federal estate tax return. They suggested, among other things, that the estate had reduced its value on paper through a sale of assets for invalid installment notes.
The WO forwarded the information to the Estate & Gift Unit of the IRS, where the return was already under examination. The attorney assigned to the case had planned to issue a “No Change” letter before he received the whistleblower information. But when he followed up on the issues raised in the Form 211, he determined that the estate had used “tax affecting” business valuations. As a result, he pulled four of the decedent’s gift tax returns for examination.
After the examinations, the IRS adjusted the tax due on the estate tax and gift tax returns. It assessed tax and interest of $424,019, which the taxpayer paid.
The attorney reported the results, including that the whistleblower complaint had “substantially contributed to the examination of the estate tax return.” The WO subsequently issued Apruzzese a preliminary award of $43,424 (22% of one-half of the collected proceeds less a 6.9% sequestration reduction). The same amount was awarded to his co-claimant.
That’s how a successful whistleblower complaint typically works.
The IRS established the WO in 2007 to collect information about tax cheats. The information offered by a whistleblower must be specific and credible, and it must result in the collection of taxes, penalties, interest, or other amounts.
If that happens, the WO will award the whistleblower a percentage of the additional tax, penalty, and other costs it collects. The award is typically between 15% and 30%, depending on the type of tax and amount. And it adds up: For the last fiscal year, the WO awarded more than $312 million to whistleblowers and collected $1.441 billion from taxpayers as a result of whistleblower leads.
In this case, Apruzzese disagreed with the proposed award. He didn’t have a problem with the discretionary percentage awarded, but instead claimed that the IRS did not do enough to investigate the estate.
More scrutiny would have resulted in more tax and, of course, a more sizable award. In a letter dated March 22, 2017, Apruzzese claimed:
“With all due respect, I believe that the IRS has failed to fully comprehend the scope of the failure of the representatives of * * * [the estate] to accurately reflect the assets and liabilities of * * * [the estate] to the IRS, and accordingly has failed to properly determine the amount of additional taxes owed by * * * [the estate].”
The WO disagreed and advised that the award would remain $43,424.
By rule, in tax code Section 7623(b), awards can be appealed in Tax Court. That’s what Apruzzese did: He filed a petition alleging that tax adjustments were inadequate (his co-claimant was not a party to the lawsuit). Apruzzese, who represented himself, asked the court to either recalculate the tax or force the IRS to re-examine the taxpayer.
In response, the IRS filed a motion for summary judgment, meaning that it wanted the judge to decide the case without a full trial. Under the court’s rules, summary judgment is appropriate when “There is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law.” Since there were no real facts in dispute, the Tax Court granted the motion.
In his opinion, Judge Juan Vasquez noted that while the court had jurisdiction to review the award determination, it did not have the authority to review the underlying determinations regarding the alleged tax liability.
He also noted that he could not direct the IRS to proceed with an administrative or judicial action to re-examine the tax.
Citing a prior case, Cooper v. Commissioner, 136 T.C. 597, T.C., 6/20/11, the court suggested that the petitioner was asking the court to direct the IRS “to undertake a complete re-evaluation of the facts in this matter, begin an investigation, open a case file, and take whatever other steps are necessary to detect an underpayment of tax.” But, the court said, that’s beyond the scope of what Congress expected under the whistleblower statute.
Instead, the court focused solely on the award. In particular, it considered whether the WO had abused its discretion when making the award. Judge Vasquez found that Apruzzese did not show that he was entitled to a larger award under the facts of the case. Nor did he demonstrate the WO abused its discretion in making its determination. As a result, the award will stand as is, Vasquez concluded.
As part of the whistleblower program, the IRS seeks reliable information that can lead to the resolution of a significant federal tax issue. It’s not a program, the IRS emphasizes, for resolving personal problems or disputes about a business relationship. And this case also makes clear that it’s the WO—not the whistleblower and not the Tax Court—that has discretion over how to use the information, including which returns to examine and the amount of tax at issue.
The opinion is available as a Tax Court Memo—that’s the case for about 90% of Tax Court opinions. Tax Court Memos generally involve matters where the law is settled, and the result is dependent on circumstances. Tax Court Memos are not intended to be used as precedent, but taxpayers often cite them in their cases.
The case is Apruzzese v. Commissioner, T.C., No. 12151-17W, 10/21/19.