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Suits for an informer's fee have a long history, as explained in Vermont Agency of Natural Resources v. U.S. ex rel. Stevens, 529 U.S. 765 (2000). These qui tam actions originated in England around the end of the 13^th century and starting in the 14^th century Parliament began enacting statutes that explicitly provided for qui tam suits. Currently, the False Claims Act, 31 U.S.C. §§3729 and 3730, authorizes qui tam suits on behalf of the United States for false claims made to the U.S., but it does not authorize suits based on false tax claims. Instead, under §7623(b) of the Internal Revenue Code, as added by §406 of the 2006 Tax Relief and Health Care Act (P.L. 109-432), an individual who applies for a Whistleblower Award and is dissatisfied with the determination regarding his application can appeal to the Tax Court.

Whistleblower Substantial Contribution Awards

Code §7623(b)(1) mandates an award of 15 to 30% of the proceeds collected by the IRS (including penalties, interest, additions to tax, and additional amounts) to an individual who brings to the attention of the IRS after December 20, 2006, information regarding a taxpayer and the IRS proceeds with an administrative or judicial action (described in §7623(a)) based on that information. The action must involve detecting underpayments of tax (a civil matter) or detecting and bringing to trial and punishment persons guilty of violating the revenue laws or conniving to do the same (a criminal matter); in addition, if the action is against an individual, his gross income must exceed $200,000, and in any event, the amounts in dispute must exceed $2 million. The Whistleblower Office must determine the amount of the reward based on the extent to which the individual substantially contributed to the action. The IRS reads this statutory rule (the last sentence of §7623(b)(1)) to mean that an award of 15 to 30% can be made only where the information submitted by the claimant substantially contributed to the IRS's detection and recovery of tax. Notice 2008-4, Section 3.09, 2008-2 I.R.B. 253, 255.

Other Whistleblower Awards

In the case of an IRS action against a taxpayer described above (and in §7623(b)(1)) where the Whistleblower Office determines that it was based principally on certain disclosures of specific allegations other than the information provided by the claimant, the Whistleblower Office may make an award of no more than 10% of the collected proceeds for information provided after December 20, 2006. These disclosures of specific allegations are ones resulting from a judicial or administrative hearing, from a governmental report, hearing, audit, or investigation or from the news media. In determining the amount of the reward, the Whistleblower Office must take into account the significance of the claimant's information and his role and that of any legal representative of the claimant in contributing to the action.¹

Code §7623(b)(2)(B) provides that the claimant is precluded from receiving a (b)(2)(A) award if his information resulted in the initiation of the action; presumably, he could qualify for a (b)(1) award of 15 to 30%. The IRS reads this rule to mean the reduction in award percentage (from 15 to 30 down to 10) “does not apply if the Service determines that the claimant was the initial source of the information that resulted in the judicial or administrative proceedings, government reports, hearing, audit, or investigation, or the media's report on the allegations.” Notice 2008-4, Section 3.09.

The Planning and Initiation Disqualification

Any Whistleblower Award will be reduced where the individual claimant planned and initiated the actions leading to the underpayment or criminal violation. Any Whistleblower Award claim will be denied where the claimant is convicted of criminal conduct arising from planning and initiating the taxpayer actions. §7623(B)(3).

IRS Form 211 Application for Award

Individuals wishing to submit information and claim a Whistleblower Award must submit to the Whistleblower Office a Form 211 setting forth information about the claimant and the information the claimant believes will lead to the collection of unpaid taxes or the information regarding violation of the revenue laws. Notice 2008-4, Section 3.02.

Other Informers’ Fees

Code §7623(a) and Regs. §301.7623-1 authorize an Area Director to pay such sums as he deems necessary for information leading to either the detection of underpayments or the detection and bringing to trial and punishment persons guilty of a tax crime. Claims for this class of fees are governed by IRS Publication 733. Fees may be 15, 10, or 1% of the amounts the IRS recovers, not to exceed $10 million, depending on the usefulness of the information supplied. It is likely that the authority to act on these claims will be given to the Whistleblower Office. The §7623(b)(4) right to appeal to the Tax Court does not apply to claims under §7623(a).

Claims based on information supplied prior to December 20, 2006, as well as others that fail to qualify for a Whistleblower Award, are governed by §7623(a). For instance, a claim for an award or fee based on information provided after December 20, 2006, as to an individual taxpayer whose gross income for the year in question was less than $200,000 would not qualify under subsection (b) (because of §7623(b)(5)(A)) and would, instead, qualify under subsection (a).

Appeals to the Tax Court

A claimant can appeal to the Tax Court any determination by the Whistleblower Office regarding a Whistleblower Substantial Contribution Award, Other Whistleblower Awards, or the Planning and Initiation Disqualification. He has 30 days from the determination to file his appeal. §7623(b)(4).

On June 2, 2008, the Tax Court announced proposed amendments to its rules applicable to whistleblower appeals. Proposed Rule 341 sets forth the requirements for a petition for a Whistleblower Award action. In addition to the petitioner's name, mailing address, state of legal residence, and date the petition is filed, the petition must provide the date (as well as a copy) of the challenged determination by the Whistleblower Office, lettered statements explaining the petitioner's disagreement with the determination, lettered statements setting forth the facts upon which petitioner relies, a prayer setting forth the relief sought, and information regarding each petitioner's counsel.

Code §7443A(b)(6) and (c) permits the Chief Judge to assign a Whistleblower Award action to be heard by a Special Trial Judge and to authorize the Special Trial Judge to make the decision of the court. The Tax Court proposed amendments to Rule 182 to reflect these possible actions by the Chief Judge.

In the portion of its June 2, 2008, notice of proposed amendments relating to the new rules governing Whistleblower Award actions, the Tax Court explained that, without statutory authority or evidence of legislative intent establishing whether these actions are to be decided on the administrative record, the applicable rules will follow the general procedures for deficiency and other actions. By reference to the issue of whether these cases should or should not be decided on the administrative record, the Court has signaled its intention to review the determinations by the Whistleblower Office for abuse of discretion. The Court has also indicated that the record will not be limited to the administrative record.

There is some question as to whether the Tax Court's review of a determination under §7623(b)(1) should be on the basis of abuse of discretion. If the claimant qualifies for an award under this provision, the statute says, “such individual shall, subject to paragraph 2, receive as an award at least 15 percent but not more than 30 percent of the collected proceeds.” This sounds like a right, not something within the discretion of the Whistleblower Office.

Assuming the Office's determination is to be reviewed for abuse of discretion, the IRS may challenge the position that the Tax Court can consider evidence not in the administrative record. n a collection due process appeal, the Tax Court reviewed for abuse of discretion and held that it could consider evidence presented at trial which was not included in the administrative record. Robinette v. Comr., 123 T.C. 85 (2004). This decision was, however, reversed on appeal, the Eighth Circuit holding that the Tax Court erred in considering evidence not in the administrative record. Robinette v. Comr., 439 F.3d 455 (8^th Cir. 2006). Recently, in Porter v. Comr., 130 T.C. No. 10 (2008), the Tax Court held that, where the petitioner was seeking innocent spouse relief under §6015(f) and it was reviewing for abuse of discretion, it was not restricted to the administrative record. It explained that it was the court's longstanding practice to hold trials de novo in many situations where an abuse of discretion standard applies. The Court distinguished the Eighth Circuit's Robinette decision on the ground that the §6015 authorizes the Tax Court to “determine” whether petitioner is entitled to relief, but §6330(d) merely provides for an appeal of the Commissioner's determination. Code §7623(b)(4) is like §6330(d) in that it likewise allows an appeal from a determination, suggesting that under the reasoning of the Circuit decision in Robinetteno new evidence should be considered. In its June 8, 2008 notice, the Tax Court has already indicated in so many words that it will not apply the Circuit decision in Robinette to Whistleblower Award actions and in a footnote in Porter the Court explained that, while it distinguished the Circuit decision in Robinette, it was adhering to the position taken in its decision in Robinette.

Clearly, access to IRS files will be essential to any petitioner/claimant. It is unclear whether award determinations will even explain the grounds for the award or denial thereof. In a recent case involving what is now §7623(a), the IRS failed to disclose the precise grounds for rejecting the claim on the ground of “Federal disclosure and privacy laws.” Conner v. U.S., 76 Fed. C. 86 (2007). Accordingly, a petitioner/claimant may need IRS files to find out the grounds for the determination and to ascertain the correctness of the determination. He will want access to the files of the Whistleblower Office as well as those of the IRS (and perhaps Department of Justice) relating to the taxpayer involved. A potential obstacle is the §6103 bar on the disclosure of returns and return information.² Subsection (h)(4)(A) permits disclosure in a federal judicial proceeding if “the proceeding arose out of, or in connection with, determining the taxpayer's civil or criminal liability, or the collection of such civil liability.” Perhaps, this opens the door wide enough for a petitioner/claimant to obtain IRS documents to prove that his information “substantially contributed” to the action against the taxpayer, as well as other matters such as the amount of the taxpayer's gross income, “the amounts in dispute,” and “the collected proceeds.”

The Whistleblower Office is going to wait until collection is completed before issuing an award determination (Notice 2008-4, Section 3.08), and it has as yet not issued its first determination. Accordingly, it may be some time before the first petition is filed in the Tax Court under §7623(b)(4).

Litigation Involving §7623(a) Determinations

A number of claimants who were dissatisfied with the rewards granted or denied under what is now §7623(a) have brought suit in the Court of Federal Claims. These actions have generally been dismissed for lack of jurisdiction.³ Destefano v. U.S., 52 Fed. Cl. 291 (2002); Conner v. U.S., supra. In Krug v. U.S., 168 F. 3d 1307 (Fed. Cir. 1999), the Circuit observed, “it is an open question as to whether an agency's denial of a discretionary award is reviewable at all.” In one earlier case, Saracena v. U.S., 508 F.2d 1333 (Ct. Cl. 1975), the Court of Claims did dismiss the petition, not for lack of jurisdiction, but for failure of the plaintiff to show that the Director's determination was an abuse of discretion.

At times, the IRS enters into a contract with an informer for information or services and the Court of Federal Claims has jurisdiction to hear a suit for failure to carry out the contract. For example, see Confidential Informant 92-95-932X v. U.S., 86 AFTR 2d 6454 (Fed. Cl. 2000). In Destefano, the Court of Federal Claims held that the regulation issued under §7623 does not create an implied contract.

For more information, in the Tax Management Portfolios, see Levine and Peyser, 630 T.M., Tax Court Litigation, and Hochman, Hochman, Perez, Rettig and Toscher, 636 T.M., Tax Crimes, and in Tax Practice Series, see ¶3880, Tax Court Litigation.