On June 4, 2020, the Tax Court issued a Memorandum Opinion in the case of Waszczuk v. Commissioner (T.C. Memo. 2020-75). The issue before the court in Waszczuk v. Commissioner was whether the IRS Whistleblower Office (WBO) abused its discretion by rejecting the petitioner’s whistleblower claim (which the WBO treated as two claims, when in reality it was one claim with an amendment by subsequent letter, which letter the WBO treated as a separate, but equally insufficient, claim).
The Futility of Challenging the WBO’s Discretionary Authority in Waszczuk v. Commissioner
There are few things that are certain in life. Death, taxes, that the Red Sox will rip out your freakin’ heart in the post season (pre-2004, and even now, I just wait for the bottom to drop out), and that the Tax Court will not overturn a decision that the IRS Whistleblower Office (WBO) makes. The WBO, if the Tax Court’s 2020 opinions heretofore are any indication, have nearly unlimited discretion to deny or summarily reject a claim submitted by the peasantry in regard to a taxpayer, whom said prole believes is derelict in its duties to file or pay appropriate taxes.
The 2016 claim in Waszczuk stated that an IRS § 501(c)(3) organization had failed to report unrelated business income (UBI) of $50m over 10 years. From a purely economic standpoint, one would think that a $50m claim bears a bit more scrutiny than Joe Bob Whistleblower’s $12,000 claim against a former employer, who fired Joe Bob for drinking apple moonshine on the job, the very same employer with whom Joe Bob (in the written claim) wants to “get even” and “punish one way or another.” Nevertheless, Waszczuk is a cautionary tale that no matter how much money a whistleblower claims is due to the IRS, the WBO will not act unless there is a modicum of credible, non-speculative evidence against said ne’er-do-well taxpayer.
The WBO was apparently busy between the months of August 2016 and August 2018, and either the petitioner was extraordinarily patient or forgot that he had submitted his claim, but in any event, no communication was made between the WBO and the petitioner until August 2018, when the petitioner mailed the WBO a second Form 211 (Whistleblower Claim), which “the petitioner clearly intended” to be “an update to the 2016 Form 211 rather than a new claim.” The 2018 claim upped the ante significantly, raising the claimed defalcation of unreported income to $85m.
To be clear, the petitioner wasn’t coy or utterly ambiguous about his new submission being a supplemental submission, as evidenced by the fact that he checked the box marked “Is this a supplemental submission?” and further indicated that the supplemental submission was supplemental to the 2016 Form 211 he had previously submitted. Apparently, Felicia (who you might remember from the McCarthy penalty approval debacle) had been reassigned from appeals to the WBO, because she stamped the claim as received (four days after it was received, as evidenced by the return receipt Felicia signed, putting little hearts above both of the i’s in her name, making it really easy to tell who screwed this on up) and stamped it as a new claim. Once again, Felicia had one job. Stupid Felicia…
Although Felicia had stamped the claim as received on August 10th, the Tax Court was disinclined to believe her. The return receipt was marked as August 6th, which made substantially more sense to the court, seeing as the WBO sent petitioner a letter titled “Final Decision Letter Under IRC § 7623(a),” dated August 7th with regard to the 2016 claim. Having not communicated with the petitioner in over two years, the Tax Court found the timing a bit too coincidental.
The August 7th letter stated that the WBO had considered the 2016 Form and rejected the whistleblower claim because the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws. The petitioner failed to petition the court within the 30-day period subsequent to receipt of the August 7th letter. On August 24th, the WBO mailed the petitioner a second letter stating that it had received the 2018 Form 211 and would evaluate it.
The WBO (based on the same information contained in the summarily rejected 2016 Form 211) forwarded the 2018 Form to the IRS’s Tax Exempt and Government Entities (TEGE) Division for review. TEGE reviewed petitioner’s whistleblower information, the three targets’ tax records, IRS transcribed data, tax and financial records of two of the targets, as well as additional information the petitioner had submitted to the WBO and the IRS Office of Criminal Investigation.
TEGE ultimately found that the targets “appeared” to be filing and reporting unrelated business income appropriately, the periods of limitations for the years before 2016 were short or expired, and the IRS records reflected amounts reported as unrelated business income tax. TEGE further concluded there was no specific or credible documentation to establish that the targets had unreported business income for 2016.
TEGE’s findings were sent back to the WBO, and the WBO issued a second rejection letter to the petitioner in October 2018 on the basis that the WBO found that the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws. The petitioner timely filed a petition for review this time, and here we are.
Dealing with the “Supplementation” Row
The Tax Court disposes of Felicia’s cockup by noting that the WBO may issue multiple appealable determinations with respect to a single whistleblower claim that confer jurisdiction to the Tax Court. See Comparini v. Commissioner, 143 T.C. 274, 281-283 (2014).
The Whistleblower Process and the Role of the Tax Court
The Code provides for mandatory whistleblower awards of a percentage of the proceeds collected where the IRS proceeds with an administrative or judicial action and collects proceeds from the target taxpayer as a result of the whistleblower information. The Tax Court has jurisdiction to review the WBO’s award determination. IRC § 7623(b)(4). The payment of any award requires that the IRS first proceed with an “administrative or judicial action” and then collect proceeds from the target taxpayer. See Cohen v. Commissioner, 139 T.C. 299, 302 (2012), aff’d, 550 F. App’x 10 (D.C. Cir. 2014).
The Tax Court has jurisdiction (but little discretion in practice) to review the WBO’s award determination for an abuse of discretion. Kasper v. Commissioner, 150 T.C. 8, 22 (2018). Abuse of discretion occurs when a determination is arbitrary, capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). In ascertaining whether the WBO abused its discretion, the Tax Court generally limits its review to the administrative record. Kasper, 150 T.C. at 20.
The WBO’s determination to reject a claim may be found to be an abuse of discretion if the determination demonstrates that the WBO failed to meet certain basic criteria without referring the claim to an IRS operating division for further review. Kansky v. Commissioner, T.C. Memo. 2020-43, *6; Lacey v. Commissioner, 153 T.C. No. 8, *33-*34) (Nov. 25, 2019).
The Tax Court does not have jurisdiction, however, to review the IRS’ decision not to proceed with an administrative action against a target, nor does the Tax Court have the authority to direct the IRS to commence an administrative or judicial action. Cooper v. Commissioner, 136 T.C. 597, 600-601 (2011). Further, the Tax Court has no authority to order the IRS to explain its decision not to audit a target. Lacey, 153 T.C. No. 8 at *30. If the IRS does not proceed with an administrative or judicial action, no whistleblower award can be awarded. Cooper, 136 T.C. at 601.
Evaluation and Decision not to Pursue
The WBO has authority to perform an initial evaluation of a whistleblower claim to determine whether it meets minimum threshold criteria for an award and may summarily reject a claim on its face if it does not. Cline v. Commissioner, T.C. Memo. 2020-35, *12. In the present matter (as to the 2018 claim), the WBO forwarded the claim to TEGE, who then determined that it was meritless and sent the claim and a recommendation to deny the claim to the WBO.
The Tax Court found that the “rejection” letter sent to the petitioner “invoked the minimum threshold criteria” the WBO must use to evaluate a whistleblower claim. See Treas. Reg. § 301.7623-1(c)(1); Treas. Reg. § 301.7623-1(c)(4). Such evaluation involves a determination of whether the claim provides specific and credible information or speculative or substantive information, whether the claim reports a violation of internal revenue laws and identifies the target taxpayer, and whether the claim provides information that the whistleblower believes will lead to the collection of tax proceeds. Id. Because the WBO forwarded petitioner’s whistleblower information to the correct operating division for review, the operating division found there was not sufficient information to audit the targets’ returns, and the WBO based its decision not to pursue the claim based on TEGE’s determination, there was no abuse of discretion.
An Aside on Rejection versus Denial of WBO Claim
The Waszczuk opinion uses the word “reject” throughout, though other opinions differentiate between the term “reject” (dispose of summarily without review) and “deny” (dispose of after some review and potentially some IRS involvement). As I noted in the post on Cline, there is a technical difference between “denial” and “rejection,” though in practice it has little relevance, as both are reviewed under the same standards.
A “rejection” is a determination that relates solely to the whistleblower and the information on the face of the claim that pertains to the whistleblower. Treas. Reg. § 301.7623-3(c)(7). Such a threshold rejection by the WBO will necessarily preclude any subsequent administrative or judicial action against any taxpayer and any subsequent collection of proceeds from the taxpayer on the basis of the information provided. See Lacey, 153 T.C. No. 8 at *37. A “denial,” on the other hand, relates to a determination made after the WBO engages in some substantive consideration of the claim. Treas. Reg. § 301.7623-3(c)(8); Lacey, 153 T.C. No. 8 at *26.
(T.C. Memo. 2020-75) Waszczuk v. Commissioner
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