The Tax Court recently dismissed a whistleblower’s complaint, arguing that the IRS erroneously rejected his whistleblower claim for “failing to include specific and credible information to support a potential tax violation * * * as well as documentation to support the claim.” The case underscores the pitfalls of the whistleblower process and the need to hire a competent tax attorney to increase a whistleblower’s chance of success.
The case arose from the IRS’s denial of the petitioner’s whistleblower claim. In United States Tax Court v. Kansky, No. 21684-18W (T.C. April 13, 2020), the petitioner had filed a whistleblower application, purporting to identify two taxpayers who had misclassified their employees as independent contractors. In addition to asserting that he received some information from his girlfriend, who ran a competitor agency, and providing information about “target taxpayers” who were allegedly in violation of the tax laws, the petitioner attempted to support his claims by providing: “(1) a letter setting forth his allegations, (2) a description of the target corporation, copied from the website of the Massachusetts Secretary of the Commonwealth, and (3) ‘the company’s terms of service’ as set forth on its website.”
After an investigation into the claims, the IRS determined the petitioner’s claims were unsubstantiated and inadequate. Particularly, the IRS “concluded that petitioner’s allegations lacked credibility, noting his failure to supply any source documents (such as bank statements or financial records) to support his claims,” and rejected the claim. The whistleblower appealed the Office’s determination. The IRS, in turn, filed a motion for summary judgment under Rule 121.
The court, in its analysis, sought to determine whether the IRS had committed an abuse of discretion in determining that the whistleblower was not entitled to a whistleblower award. The court stated that part of its determination into whether the Secretary abused his discretion included confinement of its review to the administrative record.
The court noted the requirement under § 7623(b)(1) of an “administrative or judicial action” before proceeding with collection. The court concluded it had “no authority to direct the IRS to commence an administrative or judicial action” (citing Cooper v. Commission, 136 T.C. 597, 600–601 (2011), further stating that “[i]f the IRS proceeds with no administrative or judicial action, there can be no whistleblower award.” (citations omitted)).
The court found that the record reflected that the IRS employee who investigated the claims found no evidence to support Petitioner’s claims in the supplied documents, the tax return of an individual Petitioner had named, or in IRS account transcripts. The court emphasized the employee’s expertise and her claims that there was a lack of evidence to support the petitioner’s claims. In addition, the court noted the grounds for rejection stated in the IRS Whistleblower Office’s determination letter to the applicant, which stated “[t]here is no evidence that the IRS ever commenced an action against, or collected proceeds from, any taxpayer as a result of the information petitioner supplied.”
Accordingly, based on the record, the court upheld the decision of the IRS, finding that “[t]he record . . . is more than adequate to enable us to perform judicial review, and the record shows that the Office did not abuse its discretion in rejecting petitioner’s claims.”
This case demonstrates the pitfalls of an inadequate IRS whistleblower submission. For more resources on the topic of IRS Whistleblowers, see:
Whistleblower Defense
Whistleblowers should strongly consider engaging experienced tax counsel to assist with the whistleblower process and to navigate the procedural and substantive pitfalls. Freeman Law’s tax attorneys are available to assist with defending and submitting IRS whistleblower claims. Call today at (214) 984-3000 or contact us online for a consultation.
