Don't Mess With Taxes

When is a tax whistleblower not a whistleblower, at least as far as getting rewarded for certain information?

When the Internal Revenue Service determines that added taxes didn't directly come from the whistleblower's, well, whistle blowing.

That's what recently happened to a man who altered the IRS to what he thought was unreported, and therefore untaxed, income. The IRS, acting on the tip, reviewed the reported individual's apparently questionable filing.

However, the IRS found that the suspect funds were indeed non-taxable.

But then the IRS took a longer look at the taxpayer's filing, and found what it determined were improper tax deductions. The result was an added $60 million adjustment to the account of the taxpayers at the center of the whistleblower report.

So the whistleblower gets a share of what the IRS collects due to the $60 million revision, right?

Wrong, says the U.S. Tax Court.

Whistleblower rules: Internal Revenue Code §301.7623-1 is at the heart of tax whistleblowing awards. Its parameters say, basically, that the IRS Whistleblower Office may pay an award when the agency "proceeds with any … administrative or judicial action … based on information" supplied by the whistleblower and collects taxes "as a result of the action."

In this case, it's true that the whistleblower alerted the IRS to a case where the agency ultimately determined that the reported taxpayer account should be adjusted by millions in the tax collector's favor.

But the IRS pointed to the "result of the action" portion of the Tax Code whistleblower section. That requires, argued the IRS, that whistleblower information "substantially" contribute to follow-up action against the person identified by the whistleblower.

Since the taxpayer did not direct the IRS to the deductions, but rather to income (where the IRS found no problem), the agency is not obligated to pay an award for the tax wrongdoing it found on its own.

Court agrees with IRS (and Chevron): In an opinion issued Aug. 17, the Tax Court disregarded the whistleblower's argument that the IRS would not have initiated, expanded the scope of, or continued to pursue, if it hadn't received the whistleblower's report.

Instead, the Tax Court agreed with the IRS that a whistleblower is rewarded only for providing information that substantially contributes to a distinct administrative action. The agency's added examination in this case of the whistleblower target, specifically the review of tax deductions, was a separate action unrelated to the whistleblower's unreported income issue.

In reaching that conclusion, the Tax Court deferred to the Chevron doctrine. This is an administrative law principle that compels federal courts to defer to a federal agency's interpretation of an ambiguous or unclear statute that Congress delegated to the agency to administer. The Chevron deference principle's name comes from the 1984 U.S. Supreme Court case Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.

No fishing expeditions: The Tax Court ruling also supported the IRS interpretation that the whistleblower specific report and the agency's subsequent additional investigation were not related.

"Otherwise whistleblowers would be incentivized to file innumerable claims as mere fishing expeditions, hoping that IRS will find something wrong with those taxpayers' returns (related to the information they supplied or not). There is no evidence that Congress wished to encourage this sort of behavior," according to the Tax Court ruling.

So sorry, whistleblower. Your tax information, at least in the eyes of the IRS and Tax Court, is not worthy of a reward.

But the $60 million adjustment does earn this week's By the Numbers recognition.

You also might find these items of interest:

• Congress creates tax cheats
• Tax whistleblower collects $11.5 million award
• Turning in U.S. tax cheats and getting paid for it

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