The Revenue Restructuring Act of 1998 made significant changes to the IRS. One change is that IRS employees cannot be rewarded based on enforcement efforts. This has changed the nature of the relationship between IRS management and IRS employees.
For example, IRS auditors report to group managers. Group managers focus mostly on assigning audit cases to agents, checking to make sure agents are working cases, and making sure agents are closing cases. They have very little power to actually discipline employees who fail to apply our tax laws or ignore the facts in the case.
One would think this is a good thing. There are times when a taxpayer prefers an IRS agent who is not very diligent. But usually, this issue comes up with an IRS agent who takes the position that their job is to say “no.” If the taxpayer took a deduction, credit, etc., the answer is “no.” If the taxpayer shows that they qualify for the deduction, credit, etc., the answer is still “no.”
The mechanism for fixing this is to have the IRS Office of Appeals consider the case or pursue tax litigation. But what if there is no administrative appeal and the court refuses to hear the case? That is the U.S. Tax Court’s position for whistleblower audits. The court made this clear in Marino v. Commissioner, T.C. Memo. 2021-130.
Facts & Procedural History
This case involved an S corporation and its shareholders. The shareholders were a father and his wife and daughter.
The applicant submitted a whistleblower claim for a reward based on overstated costs of goods sold deductions and marketing rights payments made by the S corporation to the shareholder daughter.
The IRS assigned the case to IRS Agent Ari Grellas and IRS Agent Dianna Beers. As described below, the applicant in the court opinion argued that the IRS did not conduct an adequate audit.
The court’s opinion describes how the IRS glossed over this inadequate audit by having the IRS Whistleblower Office prepare the submission for court.
The IRS Whistleblower Office did this by arguing that the $500,000+ reduction in the S corporation’s net operating loss did not result in additional tax collected in the 2012 and 2013 years, as there were still sufficient NOLs remaining for those years. The IRS concluded that the tax returns for 2014 and 2015 as filed by the taxpayers did not report any tax due, so there was no award to pay the applicant.
The court opinion notes that there was a strong possibility that the 2014 and 2015 tax returns would have had taxable income had they factored in the reduction to the NOLs from 2012 and 2013. The IRS apparently did not bother to make the adjustments for the later years.
This begs the question as to whether a whistleblower is entitled to an award if there is an obvious adjustment, but the IRS agents who examine the tax returns are too inept to actually make the adjustments?
About IRS Whistleblower Claims
Congress authorized the IRS to make awards to those who report tax cheats. The rules for these whistleblower awards are set out in Section 7623.
Section 7623 provides for the payment of an:
award at least 15 percent but not more than 30 percent of the proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action (determined without regard to whether such proceeds are available to the Secretary).
The IRS has established a Whistleblower Office to review these claims and to make awards.
It issued Form 211 to allow applicants to submit these claims.
The IRS Whistleblower Office has received a lot of complaints about how it handles whistleblower claims. This includes numerous warnings from members of Congress. The gist of the complaints is that the IRS does not take advantage of the information provided to it by claimants, does not do thorough investigations, and does not make appropriate awards.
It has been argued that these failures by the IRS result in fewer claimants coming forward to submit information to the IRS.
This is concerning as whistleblower cases often involve important issues, such as tax evasion and tax fraud. The IRS goes to great lengths to find instances of tax fraud, but it isn’t always able to uncover evidence of fraud. The whistleblower program is key to uncovering evidence of tax fraud that is not otherwise available to the IRS.
IRS Agents Assigned to Whistleblower Claim Audits
This brings us back to this court case and the IRS agent who worked the case.
The IRS knows the track record for its IRS agents. It knows whether its IRS agents have a track record for diligently conducting audits and documenting their work. The IRS knows whether agents have a higher incident of cases being sent to the IRS Appeals Office. It also knows which agents are more likely to have their cases given away in Appeals.
While the IRS is not allowed to evaluate IRS agents based on this type of information, this does not mean that the IRS does not collect the information. The IRS gathers this information during the close case review process. The IRS gathers this information when group managers perform case reviews for their agents. The IRS gathers this information when Appeals cases are closed.
Can the IRS use this information to farm out whistleblower audits to the IRS’s worst agents in an effort to reduce the awards it has to pay? Even if the IRS does not do this intentionally, could the process the IRS uses to assign cases innately produce poor results? Perhaps the IRS group managers have low opinions of whistleblower cases so that, as a result, they assign their worst agents to work the claims?
The taxpayer, as with many other award claimants, is complaining about the inadequacy of the IRS audit. Could the assignment of inept IRS agents to work whistleblower claims be the cause of this?
Court Declines Oversight of the IRS”s Whistleblower Office
This raises the question as to who is to police the IRS’s audits for whistleblower claims? This would normally fall on the IRS review process. Whistleblower cases are not part of this review.
If the IRS chooses not to assess tax against the taxpayer who is the party to the audit, the IRS Office of Appeals and the courts will not see these cases. So there is no administrative review or judicial review of the actual audit results.
The only way these audits are reviewed is when whistleblowers file suit to force the IRS to make awards. This case is an example of this type of lawsuit. Thus, it would seem like the court would fill the gap to oversee these audits.
This court opinion makes the court’s position on this clear on its role in overseeing whistleblower audits:
We have consistently disclaimed any authority to oversee, and judge the adequacy of, any administrative actions undertaken in response to whistleblower information. As we explained in Cohen v. Commissioner, 139 T.C. at 302: “Our jurisdiction under section 7623(b) does not contemplate that we review the Commissioner’s determinations of the alleged tax liability to which the claim pertains.” See also Whistleblower 23711-15W v. Commissioner, T.C. Memo. 2018-34, at *21 (“Our authority [in whistleblower cases] is limited to determining whether the IRS in fact collected proceeds; it does not extend to speculating whether the IRS might have collected proceeds if it had chosen to pursue an examination or if prosecutorial discretion had been exercised differently.”). Although Lacey clarified that the absence of collected proceeds does not entitle the Commissioner to summary judgment in all cases, we nonetheless reaffirmed that “[t]he IRS and not the Tax Court decides whether and how to audit a taxpayer’s return, and section 7623(b)(4) confers on the Tax Court jurisdiction not to supervise audits but to review the acts of the WBO.” Lacey v. Commissioner, 153 T.C. at 167. And in Lewis v. Commissioner, 154 T.C. at 137, we wrote: “We do not have authority under section 7623(b)(4) to review the Commissioner’s determination of the target’s tax liability.”
Thus, the court will not function as an overseer of whistleblower audits. The court’s review is limited to reviewing the amount of the reward.
If the applicant’s assertion that assigned this audit, IRS Agent Diana Beers, performed an inadequate audit, the courts will not consider the adequacy of the agent’s work. The IRS agent is basically free to perform an inadequate audit for whistleblower claims. As long as they do some audit and documents its inadequate audit, that is all the court will require.
If the court is not going to oversee the audits conducted by the IRS Whistleblower Office, one is left wondering what check there is to ensure that these audits are being handled appropriately. The court’s review of the dollar amount of rewards is not enough.
This is a tough topic as one wants to give deference to the IRS and its agents, but one cannot ignore the realities of the complaints like the ones in this court case.
Those who have submitted claims know that it is common for the IRS Whistleblower Office to not even respond to claims submitted. Even when it does, the IRS goes to great lengths to deny or reduce whistleblower awards.
Something within the IRS is causing this. Could the cause be that the IRS is assigning its worst IRS agents to work these cases and these agents are just doing what they normally do on all of their cases?