Tax Court: CPA Is Whistling in the Wind

By Ken Berry

The IRS recently told a CPA to "put his whistle away" because he wasn't entitled to a reward for turning in a fraudulent taxpayer. Now the Tax Court has upheld the IRS' decision in a new case of first impression (Cohen, 139 T.C. No. 12).
 
The IRS whistleblower program was recently updated to encourage more taxpayers to come forward when they learn about fraud (see sidebar). However, the results have been decidedly mixed. What's more, this new case shows that the IRS and the Tax Court intend to stick to the strict letter of the law.
 

Changes in Whistleblower Program

Here are some of the key changes in the IRS whistleblower program:

  • If the IRS proceeds with any administrative or judicial action based on the information provided, the informant must be rewarded based on the amount collected. This reduces the discretionary authority of the IRS.
  • A whistleblower award must equal at least 15 percent, but no more than 30 percent, of the amount collected in the investigation.
  • The program generally applies when taxes, penalties, and interest exceed $2 million or, if the taxpayer is an individual, his or her gross income exceeds $200,000.
  • A prior prohibition against including interest amounts when calculating the size of the reward was eliminated.
 
Here's what happened in the case: A New Jersey CPA alleged that tax law violations were committed by the taxpayer, a public corporation, based on information provided by his wife, the executrix of an estate. The estate held uncashed stock dividend checks issued by the taxpayer. The CPA's wife requested that the taxpayer honor those checks and pay all unpaid dividends, but the taxpayer wouldn't release dividends without her presenting an original check issued within the last ten years.
 
The CPA suspected that the taxpayer customarily retained possession of unclaimed proceeds resulting from uncashed dividend checks and unredeemed bonds. He also reviewed pleadings from a civil proceeding against the taxpayer, asserting that the allegations in that case corroborated his claim that the taxpayer possessed unclaimed assets totaling more than $700 million. Besides being obligated by law to turn over the unclaimed assets to the state, the CPA alleged that the unclaimed assets constituted unreported income for federal income tax purposes.
 
After the CPA submitted his findings to the IRS, the Whistleblower Office determined that he wasn't eligible for an award because no proceeds were collected and the claim was based on information generally available to the public. Now the Tax Court has agreed with the IRS.
 
The Court said that no relief is available to the CPA because the IRS never instituted an action or collected any proceeds. "We can appreciate petitioner's frustration that information that he believes is actionable was not pursued," opined the Court. "However, Congress has charged the Commissioner with resolving these claims and has not provided any remedies until after an administrative or judicial action and the collection of proceeds."
 
Although the outcome is somewhat discouraging, this doesn't mean you should turn a blind eye to illegal proceedings. Keep the whistle in your pocket just in case you need it.
 
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