Criminal fines and civil forfeitures are collected proceeds under Internal Revenue Code section 7623(b), the mandatory tax whistleblower program, according to a recent decision by the U.S. Tax Court. The opinion paved the way for an award of $17.8 million to a pair of whistleblowers.
In the rules for the IRS whistleblower program, the tax agency took the position that Congress meant to exclude funds received from outside of Title 26 when it used the term “collected proceeds” in the law. This decision overrules those regulations.
The case centered around a $74 million fine consisting of a tax resolution, a criminal fine, a civi forfeiture of fees received for its services, and the relinquishment of claims to money previously forfeited. The parties agreed that an award of 24% of the collected proceeds was warranted. However, the IRS and the whistleblowers disagreed as to whether a reward was owed for the money collected as part of the criminal fine and civil forfeiture. The IRS took the position that only the fines received pursuant to Title 26 were “collected proceeds” eligible to be the basis for a monetary incentive payment.
The Tax Court refused to “arbitrarily limit the meaning of an expansive and general term”, holding that “collected proceeds” is “sweeping in scope” and not limited to Title 26 collections. In doing so, it distinguished its earlier decision that FBAR penalties are not part of the “additional amounts in dispute” in order to reach the law’s $2 million threshold. The Tax Court also dismissed the argument that Congress had otherwise allocated the funds so they were not available for an award.
It is a sweeping victory for current and future tax whistleblowers, who have struggled with a program that Senators Grassley and Wyden criticized for its long backlog and “few and far between” payouts in a 2014 Politico article. We’re very pleased at the outcome and hope it opens the way for more whistleblowers and a better public-private partnership to fight tax fraud and evasion.
If you have questions about the implications of this decision, please call 1-800-590-4116 to speak to one of our IRS whistleblower attorneys.