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Stats Show Active Tax Whistleblower Caseload

On January 6, 2020, the IRS Whistleblower Office released its annual report to Congress. The Office reported that it collected $616.8 million in fiscal year 2019 as a result of information provided by whistleblowers, out of which $120.3 million was paid out as whistleblower awards, for net collections of $496.5 million. This is a decrease from the $1.13 billion in net collections in fiscal year 2018 (which has been described as an outlier year), but an increase from the $156.6 million in net collections in fiscal year 2017. A total of 3,640 whistleblowers filed claims in fiscal year 2019, including 282 whistleblowers from outside of the United States.

Practice Point:  Whistleblower actions are a good reminder to make sure that your privileged and confidential tax information remains in the hands and minds of only those employees and officers who have a need to know. A disgruntled or terminated employee may take the opportunity to play the “whistleblower lottery,” removing sensitive and privileged material and handing it over to the IRS. With the start of the new year, it’s a worthwhile investment of time and resources to make sure your sensitive tax strategies and information are stored and protected.




Tax Court Requires Specific Factual Showing of Harm for Whistleblower Anonymity

In two recent cases, the United States Tax Court (Tax Court) has explored the bounds of the anonymity protection afforded to potential whistleblowers under the court’s rules and other authorities. Tax Court Rule 345 relates to privacy protections for filings in whistleblower actions.  Under paragraph (a), a whistleblower may move the court for permission to proceed anonymously.  In order to proceed anonymously, the whistleblower must provide a sufficient, fact-specific basis for anonymity.  Specifically, the Tax Court has held that “[a] whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interest in knowing the whistleblower’s identity.”  (Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-94, at 5).  However, the balance of harm to societal interest may shift as the case progresses, thereby justifying disclosure after anonymity has been granted.  See Tax Court Rule 345(b). (more…)




IRS Guidance Says IRS Can Disclose Confidential Taxpayer Information to Whistleblower with Impunity

Every taxpayer should be aware of the real risk that its own employees could disclose the taxpayer’s confidential and privileged information to the Internal Revenue Service (IRS) for a whistleblower fee. Pursuant to Internal Revenue Code (Code) Section 7623, the IRS is permitted to pay a “whistleblower” who discloses information about a taxpayer who has violated the tax laws. The amount of the payment ranges from 15 to 30 percent of the recovery. We have previously reported about issues pertaining to whistleblowers.

While the flow of information is usually from the whistleblower to the IRS, there is also a risk that the IRS can disclose the taxpayer’s return information to the whistleblower. Code Section 6103(a) deems tax returns and return information as confidential and prohibits the disclosure absent an express statutory exception. Return information is broadly defined and includes the information received by the IRS, from any source, during the course of audit. There are several exceptions to this general rule. For example, Code Section 6103(n) authorizes that tax returns and return information may be shared with the IRS pursuant to a “tax administration contract.” The relevant regulations explain when the IRS may disclose information to a whistleblower and its representative.

A recent memo from the IRS’s Whistleblower Office provides the reasoning behind the IRS decision to enter into a whistleblower contract in order to share the taxpayer’s feeling empowered to share otherwise confidential protected information with whistleblowers. (more…)




BEWARE: Whistleblowers Can “Out” You to the IRS!

Not only should companies worry about the Internal Revenue Service (IRS) auditing their returns, but they also have to be aware of a potential assault from within. Indeed, current and former employees have an incentive to air all of your tax issues with the hope of being rewarded for the information.

Section 7623(b) was added to the Internal Revenue Code (IRC) in 2005, and pays potentially large monetary rewards for so-called tax whistleblowers. To qualify for remuneration, a whistleblower must meet several conditions to qualify for the Section 7623(b) award program: (1) submit the confidential information under penalties of perjury to the IRS’s Whistleblower Office; (2) the information must relate to a tax issue for which the taxpayer (if the IRS found out) would be liable for tax, penalties and/or interest of more than $2 million; and (3) involve a taxpayer whose gross income exceeds $200,000 the tax year at issue. If the information substantially contributes to an administrative or judicial action that results in the collection, the IRS will pay an award of at least 15 percent, but not more than 30 percent of the collected proceeds resulting from the administrative or judicial action (including related actions).

Section 7623(b) has spawned a collection of law firms around the country dedicated to signing up scores of whistleblowers who are hoping to cash in big! Our clients routinely ask us how to best protect themselves. We typically tell our clients that the best defense is a good offense. Consider the following:

  1. Use of non-disclosure agreements with employees who work on sensitive projects like mergers and acquisitions;
  2. Limit employee access to the companies tax accrual workpapers and other documents that indicate the tax savings involved in a transaction or a position claimed on a return;
  3. Review your procedures to ensure that privilege and confidentiality is maintained (this would include training employees and managers);
  4. Review company’s internal procedures for employee complaints to ensure that you have robust procedures in place that offer an independent review and allow for anonymous submissions; and
  5. Be vigilant, and look for signs that an employee is “disgruntled.”

Practice Point: If you are under examination by the IRS, you may be able to discern a whistleblower issue based on the questions being asked by the IRS and whether those questions could only be formed based on information provided by a whistleblower. If this situation exists, it is important to determine whether you should raise the issue with the IRS, particularly if you believe that any confidential and/or privileged information has been provided to the IRS without your consent. To make sure you are protected and adequately prepared, consult with your tax controversy lawyer.




Retaliation Claims By Corporate Whistleblowers – What Is Too Far?

This week, a French court announced an indictment against UBS related to its alleged treatment of Nicholas Forissier, a former audit manager who provided information to French authorities a decade ago in a tax evasion investigation of UBS.  According to at least one press account, the indictment alleges that Forissier was “forced to work under difficult conditions, including internal criticism and eventual dismissal for gross misconduct in 2009” in retaliation for his cooperation with French authorities. Forissier’s case is apparently one of several whistleblower retaliation claims percolating in the French courts against UBS regarding non-disclosure of offshore accounts for tax purposes.

US law provides significant protections of potential whistleblowers for alleged tax violations. Revisions to IRC section 7623, effective from December 20, 2006, make whistleblower awards mandatory in some cases. The revised law has resulted in several large, public awards (the $104 million award given to Bradley Birkenfeld, for example, also related to UBS disclosures).

Protection for IRS whistleblower claimants is found under a number of statutes and rules.  IRC section 6103(i)(6) provides stringent confidentiality rules (including personal liability for government violators) regarding the government’s disclosure of information tending to reveal the existence of a whistleblower or confidential informant.  Also, the grand jury secrecy rule, Fed. R. Crim. P. 6(e), may provide an additional protection in an ongoing grand jury investigation. Further, OSHA, the False Claims Act and the Fair Labor Standards Act may provide protections against termination of whistleblowers and against adverse employment decisions related to a current employee’s status as a whistleblower, in an appropriate case.

Practice point:  It is also worth noting that these protections are not absolute. In fact, because an IRS whistleblower claimant may be in a privileged relationship with the target of an investigation, the IRS has more recently been called upon to clarify that the agency cannot and should not gather or use privileged information to develop a case, or else undermine the entire case as a violation of that privilege, i.e., the “fruit of the poisonous tree”. See our prior coverage on this issue here.




IRS Appeals Will Not Consider Regulatory Invalidity and Subregulatory Procedural Invalidity Challenges

In Mayo Found. for Med. Educ. & Rsch. v. United States, 131 S.Ct. 704 (2011), the Supreme Court of the United States made clear that administrative law rules apply to tax guidance like they do to other federal agency guidance. Since Mayo, the Supreme Court and other courts have provided further guidance—both in the tax and non-tax contexts—regarding the proper analysis in determining the validity of, and deference to, regulatory guidance.

Over the past decade, the number of taxpayer challenges to guidance issued by the Internal Revenue Service (IRS), whether in the form of regulations or subregulatory guidance (i.e., revenue rulings, revenue procedures, notices and announcements), has increased significantly. These challenges have taken a variety of forms, such as regulatory invalidity under Chevron USA, Inc. v. NRDC, 467 U.S. 837 (1984) and procedural invalidity under the Administrative Procedure Act (APA). Some successful challenges to the validity of IRS guidance and the ability to challenge such guidance in a pre-enforcement context include CIC Servs., LLC v. IRS, 141 S.Ct. 1582 (2021); United States v. Home Concrete & Supply, LLC, 132 S.Ct. 1836 (2012); Mann Construction, Inc. v. Commissioner, 27 F. 4th 1138 (6th Cir. 2022); Good Fortune Shipping SA v. Commissioner, 897 F.3d 256 (2018) and Liberty Global, Inc. v. United States, No. 1:20-cv-03501-RBJ (D. Colo. 2022). Many other challenges are pending both at the administrative level and in court.

The IRS and the US Department of the Treasury (Treasury) have noticed the increase in challenges to its published guidance. One important change is the more detailed discussions in preambles to final regulations regarding comments received and how the IRS views and incorporates said comments. This is a welcome development, although sometimes a tortuous one for taxpayers who must wade through hundreds of pages of preambles in some regulation packages. Another change, and the subject of this post, is the IRS’s views on how to deal with such challenges during the administrative process.

A federal tax controversy can involve three levels of review: Examination, Appeals and litigation. At the Examination stage, revenue agents and other IRS personnel develop the facts and determine whether an adjustment is warranted. Importantly, “hazards of litigation” are not considered at the Examination level, meaning, issues are viewed as binary—in favor of the IRS or the taxpayer—and not negotiated as a percentage of the item. However, at the Appeals level, the Appeals team weighs “hazards of litigation” to determine whether a case can be settled by the parties. Hazards of litigation are also considered at the litigation level.

Validly promulgated tax regulations are approved at the highest levels of the IRS, Treasury generally carry the force and effect of law and are binding on taxpayers and the IRS. Subregulatory guidance is also approved at senior levels of the IRS and the Treasury. At the Examination level, the IRS will not entertain challenges to the validity of [...]

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Weekly IRS Roundup July 18 – July 22, 2022

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of July 18, 2022 – July 22, 2022. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

July 18, 2022: The IRS issued Tax Tip 2022-108, reminding people that they can get the latest IRS news through the agency’s verified social media accounts and by subscribing to e-news services.

July 18, 2022: The Treasury Inspector General for Tax Administration (TIGTA) released its Fiscal Year 2022 IRS Federal Information Security Modernization Act Evaluation report. In the report, TIGTA determined that the Cybersecurity Program was not effective in 17 out of 20 metrics. (TIGTA does not make recommendations as part of its evaluation.)

July 19, 2022: The IRS announced that the Security Summit partners are encouraging tax professionals to inform clients about the IRS Identity Protection PIN Opt-In Program to help protect people against tax-related identity theft. This announcement came during the first of the five-part summer series to highlight the critical steps tax professionals can take to protect client data and their businesses.

July 19, 2022: The IRS reminded 2021 tax extension filers not to wait until October to file their returns. (The IRS estimated that 19 million taxpayers requested an extension to file their 2021 tax return.) The announcement urges taxpayers to file their returns as soon as they have all the necessary information and to avoid the October 17 deadline and last-minute rush.

July 19, 2022: The IRS issued Tax Tip 2022-110, which contains information on reporting independent contractor compensation of $600 or more. This is completed using Form 1099-NEC, Nonemployee Compensation.

July 20, 2022: The IRS announced a new five-year strategic plan that outlines its goals to improve taxpayer service and tax administration. The IRS Strategic Plan FY 2022-2026 will serve as a roadmap to help guide the agency’s programs and operations and to meet the changing needs of taxpayers and members of the tax community. The plan also focuses on four goals to improve customer service: (1) Service; (2) Enforcement; (3) People and (4) Transformation. We will be posting more information about the plan on the blog in the coming days.

July 20, 2022: The IRS issued Tax Tip 2022-110, reminding taxpayers of the Taxpayer Advocate Service (TAS), an independent organization within the IRS that helps to protect taxpayer rights. The tax tip also includes information on the Taxpayer Bill of Rights (TBOR). We previously wrote an article explaining what TAS does and how it can be utilized by all types of taxpayers, as well as a post about how taxpayers can utilize the TBOR.

July 20, 2022: The IRS issued a notice and request for comments for [...]

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An Overview of IRS Organization and Operations

McDermott’s Federal Tax Controversy Practice Group focuses on representing taxpayers in tax disputes with the Internal Revenue Service (IRS) in IRS examinations and IRS administrative appeals as well as litigation in federal trial and appellate courts. In resolving such disputes, it is helpful for taxpayers (and tax practitioners) to understand how the IRS operates as an organization in addition to its chain of command. To that end, below, we set forth some basic information regarding the organization and operations of the IRS.

Many of our clients are audited by the IRS’s Large Business & International (LB&I) division. On our Resources page, we added an LB&I Resources document that details its organization, including the roles and responsibilities of an LB&I examination team.

OVERVIEW OF THE IRS’S ORGANIZATION AND OPERATIONS

The IRS is organized to carry out the responsibilities of the US Secretary of the Treasury under Internal Revenue Code Section 7801. The Secretary has the authority to administer and enforce the internal revenue laws and the power to create an agency to enforce said laws. The IRS was created based on this grant of authority. The IRS Commissioner administers and supervises the execution and application of the internal revenue laws.

The IRS is organized into two primary organizations—the Deputy Commissioner for Services and Enforcement (DCSE) and the Deputy Commissioner for Operations Support (DCOS).

DCSE oversees the following operating divisions:

  • Wage and Investment (W&I)
  • Small Business/Self-Employed (SB/SE)
  • Large Business and International (LB&I)
  • Tax Exempt and Government Entities (TE/GE)
  • Criminal Investigation (CI)
  • Office of Professional Responsibility (OPR)
  • Whistleblower Office
  • Return Preparer Office (RPO)
  • Online Services

DCOS oversees the following integrated support functions:

  • Information Technology (IT)
  • Chief Financial Office (CFO)
  • Facilities Management and Security Services (FMSS)
  • Human Capital Office (HCO)
  • Private, Government Liaison and Disclosure (PGLD)
  • Equity, Diversity and Inclusion (EDI)
  • Office of the Chief Risk Office (CRO)
  • Procurement
  • Research Applied Analytics and Statistics (RAAS)

Certain key functions report directly to the IRS Commissioner. Those include:

  • Chief Counsel (Counsel)
  • Communications and Liaison (C&L)
  • IRS Independent Office of Appeals (Appeals)
  • National Taxpayer Advocate

Practice Point: IRS examinations are a fact of life, especially for large corporate taxpayers. The above overview and the LB&I Resources guide provide more information on how the IRS is organized and operated. The more taxpayers and tax practitioners know, the better the odds of a smooth and efficient examination process.




Cryptocurrency Global Tax Enforcement: What Investors and Companies in the Industry Need to Know NOW

On June 28, 2021, McDermott held a webinar presentation titled “Cryptocurrency Global Tax Enforcement: What Investors and Companies in the Industry Need to Know NOW.”

Topics during this webinar included:

  • How to address the tax consequences of past virtual currency transactions, including potential voluntary disclosure considerations.
  • How to protect your business from a US Department of Justice (DOJ) or UK investigation, including compliance updates to address this risk.
  • Law enforcement perspectives and updates from the IRS, DOJ and a former high-level director at HM Revenue & Customs.
  • How to respond to an IRS letter, including potential civil resolutions.
  • How to respond to a DOJ or a UK Serious Fraud Office (SFO) inquiry, summons, subpoena, search warrant or a whistleblower complaint.

A link to the webinar is available here. A link to the webinar’s slides is available here.




A 360-Degree View: August & September 2018

Wrapping Up August – and Looking Forward to September

Top August Posts You Might Have Missed

Alta Wind: Federal Circuit Reverses Trial Court and Kicks Case Back to Answer Primary Issue

IRS Announces That CAP Will Continue

IRS Issues Long-Awaited Initial Guidance under Section 162(m)

 Upcoming Tax Controversy Activities in September

Our lawyers will present on key tax topics during the month of September. We hope to see you.

September 12, 2018: Elizabeth Chao, Britt Haxton, Kristen Hazel, Sandra McGill, Nina Siewert and Diann Smith are presenting on various state and local, US and international tax topics at the Tax in the City® event in Seattle, WA, including a presentation about Post-Wayfair. Please click here to register.

September 19, 2018: Linda Doyle, Kristen Hazel, Becky Martin and Jane May are presenting “Anatomy of a Whistleblower Case” at the inaugural Dallas Tax in the City® event in Dallas, TX. Please click here to register.

September 19, 2018: Laura Gavioli, Kristen Hazel, Alysse McLoughlin, Denise Mudigere and Marty Pugh are presenting are presenting on various state and local, US and international tax topics, including a presentation about Partnership Audit Rules and a presentation about Post-Wayfair, at the inaugural Dallas Tax in the City® event in Dallas, TX. Please click here to register.

September 19, 2018:  Steve Kranz and Eric Carstens are speaking at the Tax Executives Institute Seattle Chapter Meeting regarding the South Dakota v. Wayfair Supreme Court decision in Seattle, WA.

September 20, 2018: Mary Kay Martire is presenting “Audits and Beyond—Tips, Traps, and War Stories” at the Taxpayers’ Federation of Illinois’ Annual Conference in Rolling Meadows, IL.

September 20, 2018: Catherine Battin is presenting “So Wayfair Happened—What’s Next?” at the Taxpayers’ Federation of Illinois’ Annual Conference in Rolling Meadows, IL.

September 24, 2018: Tom Jones is presenting “Tax Law Developments Affecting Middle Market Captives” at the Self Insurance Institute of America in Austin, TX.

September 27, 2018: Andrew Roberson, Mark Thomas and Todd Welty are presenting on “Common Issues in Trusts and Estate Tax Controversies” at McDermott’s 2018 Trusts and Estates Controversy Forum in Chicago, IL.




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