Fines and Forfeitures Count as Whistleblower-Collected Proceeds

In an important win for whistleblowers, the Tax Court on August 3 determined that criminal fines and civil forfeitures are collected proceeds for purposes of whistleblower awards, refusing to narrow what it saw as the broad scope of the statutory language.

Dean Zerbe of Zerbe, Fingeret, Frank & Jadav PC, who worked the case as lead attorney for the petitioners along with Jeremy Fingeret, Felipe Bohnet-Gomez, Robert G. Amsel of Robbins Tunkey Ross Amsel Raben & Waxman PA, and Stephen M. Kohn of Kohn, Kohn and Colapinto LLP, called it a "red letter day" for the whistleblower program.

"The court's language . . .covers the waterfront," Zerbe said, arguing that the decision would serve to encourage more whistleblowers to come forward, particularly in the offshore and criminal worlds. He added that the decision also would make administrability within the program easier as well as make how much money was received more readily apparent, given that the program reports only amounts collected under title 26.

In Whistleblower 21276-13W v. Commissioner and Whistleblower 21277-13W v. Commissioner, 147 T.C. No. 4 (2016)  , the parties had previously agreed that the petitioners were award-eligible for 24 percent of the collected proceeds, but they could not agree on the amount of those proceeds. The targeted taxpayer had pleaded guilty to conspiracy to defraud the IRS, filing false tax returns, and evasion, and paid $74 million in tax restitution, criminal fines, and civil forfeitures under 18 U.S.C. 3571. The parties agreed that the restitution constituted proceeds for purposes of section 7623(b)(1) purposes but disagreed on the other payments. The IRS sought to limit collected proceeds to money collected under title 26.

"We are leery of arbitrarily limiting the meaning of an expansive and general term such as 'collected proceeds'. In drafting section 7623(b)(1), Congress could have provided that the whistleblower's award is to be based on taxes and other amounts assessed and collected by the IRS under title 26. But it did not. Instead, Congress chose to use a sweeping term 'collected proceeds' as the basis of the award," the Tax Court held. It added that the argument that Congress intended to create an expansive program was bolstered by other "sweeping terms" like "any administrative or judicial action," "any related actions," and "any settlement in response to such action."

The court also noted numerous instances in which internal revenue laws were found outside the code, such as "the most telling instance: the very provisions establishing the Whistleblower Office."

The Tax Court rejected the IRS's contention that the parenthetical following "collected proceeds" under section 7623(b)(1), which cites examples of the amount as penalties, interest, additions to tax, and additional amounts, shows that collected proceeds had specific meaning under title 26 that did not extend beyond the definition of tax. The court was not persuaded, holding that the term "including" indicated that the parenthetical was not exhaustive.

In holding that criminal fines were collected proceeds, the court noted that title 26 often treats fines as a subset of penalties, the latter being mentioned in the parenthetical.

"Respondent acknowledges that since the whistleblower statute was first enacted in 1867, almost a century and a half ago, whistleblowers could receive an award for information relating to criminal tax violations. Respondent's admission is at loggerheads with his fundamental position in these cases that criminal fines do not constitute collected proceeds because they were not assessed and collected under title 26," the court held.

The IRS had also argued that since criminal fines were to be deposited into the Crime Victims Fund, they would not be available for payment. The court, however, rejected this argument, stating that it was a "fundamental misinterpretation of the plain language of the statute." Availability of funds was not a requirement in making an award, the court held, and the IRS was attempting to impose some of the rules of the IRS's discretionary whistleblower award program under section 7623(a) on its mandatory award program under section 7623(b). The IRS made a similar assertion regarding the requirement to deposit civil forfeiture funds in the Treasury Forfeiture Fund, which the court also rejected.

Earlier Decisions and FBAR Implications

In an earlier related decision, the Tax Court held that the IRS Whistleblower Office did not have exclusive authority to investigate the taxpayer that is the subject of an application for a whistleblower award and that the petitioner couple was not ineligible for an award because the couple supplied information to other federal agencies before submitting an application to the Whistleblower Office. Although the targeted business was not named in the case, the fact pattern resembled that of Wegelin & Co., the Swiss bank that pleaded guilty to conspiracy to evade taxes after hiding more than $1.2 billion in secret accounts and paid the United States $74 million.

The court was also careful to point out that its August 3 holding did not conflict with its earlier decision in Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 (2016),that penalties assessed for failing to file foreign bank account reports did not count toward the $2 million threshold requirement for tax, penalties, interest, additions to tax, and additional amounts under section 7623(b)(5)(B) that must be met to apply the nondiscretionary award rules for whistleblowers. The court held that the phrase "additional amounts" was a term of art with a specific technical meaning.

Zerbe also said that he thought FBAR amounts would be included as collected proceeds, based on the breadth of the language used in the decision.

"I would expect that the government would fold its tent on the FBAR issue," Zerbe said. "This is really a win for everyone. IRS and Treasury have historically said that they are not against doing this, [they] just don't read the law that way," he said, adding that the court had now made it clear that the IRS and whistleblowers have a "four-lane highway to work with" when interpreting collected proceeds.

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