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Neal v. Commissioner (T.C. Memo. 2020-135)

On September 28, 2020, the Tax Court issued a Memorandum Opinion in the case of Neal v. Commissioner (T.C. Memo. 2020-135). The issues before the court in Neal were whether the IRS’s Whistleblower Office abused its discretion when it determined (a) that the petitioner’s claim should not be forwarded to Exam; (b) that the information provided did not result in the collection of any proceeds; and (c) as such, the petitioner was not entitled to a whistleblower award.

Background

The petitioner worked for corporation, which petitioner claimed took several inappropriate write-downs on its debt portfolios. The petitioner filed a Form 211 in May 2014, but he omitted certain important information. Unfortunately for the petitioner, someone had beat him to the punch and previously filed a Form 211 alleging tax issues concerning the target corporation. The IRS denied the petitioner’s claim because the issue had already been identified, and the IRS had denied such earlier claim. The IRS issued the petitioner a letter in March 2015 denying his claim and stating that the information it provided did not result in the collection of any proceeds.

In August 2015, the IRS issued the target a Form 5701 and Form 886-A informing the target corporation that it was under examination. The Notice of Proposed Adjustment reflected adjustments not only two items that the petitioner had mentioned in his Form 211, but also other issues regarding the target’s debt portfolios. The petitioner cried foul, asserting that the information which he provided directly led to the collection of $13 million in tax (the ultimately-agreed-upon amount from the taxpayer).

The IRS agent that investigated the target corporation stated that he had never received any information submitted by the petitioner, nor did he use any information submitted by the petitioner. The petitioner asserted that the statement was an “outright lie.” As proof of such lie, the petitioner provided the Tax Court with the precise room that he had “met” with the IRS agent at issue. Unfortunately, the petitioner had little else to go on.

The Evidentiary Hearing

Unless the petitioner was the victim of a vast IRS conspiracy, which found the agency coordinating stories and falsifying consistent testimony, the petitioner lived somewhere south of la-la-land.  The WBO testified that it had never sent the petitioner’s Form 211 to any other units of the IRS, and the agent in charge of the investigation of the target testified “credibly” that he had never seen nor spoken to the petitioner prior to trial. The petitioner was given an opportunity to put on rebuttal evidence, but he chose not to.

The Whistleblower Award Schema

IRC § 7623(b) provides an incentive for providing information on taxpayers’ noncompliance with tax laws, in return for which–if the IRS uses that information to collect proceeds–the whistleblower may become entitled to a percentage of the collected proceeds.  By its terms, a whistleblower will receive an award only if (1) the IRS proceeds with an action on the basis of the whistleblower’s information, and (2) the IRS collects proceeds as a result of that action.  The WBO will deny the claim if it determines that the IRS either did not proceed based on the information provided by the whistleblower or did not collect proceeds as a result of proceeding against the taxpayer on the basis of the whistleblower’s information. Treas. Reg. § 301.7623-3(c)(8).

In a whistleblower the Tax Court’s review is generally restricted to the administrative record, and we review the WBO’s determinations for abuse of discretion. Kasper v. Commissioner, 150 T.C. 8, 21 (2018).

Earlier in 2020, the Tax Court held noted that the Tax Court has no practical means for evaluating the IRS’s audit priorities, its allocation of its audit resources, or its judgments about the likelihood of collecting particular liabilities. Cline v. Commissioner, T.C. Memo. 2020-35, *15. Congress has given to the Tax Court not plenary oversight over the IRS but rather circumscribed jurisdiction to review certain actions in certain circumstances. In the award context, Congress has given the Tax Court jurisdiction to review the determinations of the WBO. Consequently, the Tax Court does not review the IRS’s decision whether to audit a target in response to a whistleblower’s claim, and it has no authority to require the IRS to explain a decision not to audit. Id.

The Administrative Record

The petitioner contends that the administrative record erroneously omitted information that he had submitted directly to the IRS agent and disclosure that the whistleblower office shared with the agent the petitioner’s Form 211. The Tax Court notes that these allegations, if true, could render the administrative record incomplete and warrants supplementation of the record.

Interestingly, in ruling on this challenge to the sufficiency of the administrative record, the Tax Court does not confine itself to the administrative record. Rather, in this instance it exercised its discretion to hold a hearing at which both parties were allowed to offer evidence. The Tax Court ultimately found that the petitioner’s testimony and allegations against the IRS were, in a sense, like a set of flippers on a pageant queen (which is to say, false).

(T.C. Memo. 2020-135) Neal v. Commissioner

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