Tax Court Broadens the Definition of “Collected Proceeds” – Result: Seventeen Million Dollar Award for Tax Fraud Whistleblowers

Tax Court Broadens the Definition of “Collected Proceeds” – Result: Seventeen Million Dollar Award for Tax Fraud Whistleblowers

August 31, 2016

The nation’s top tax court recently broadened the definition of “collected proceeds” to include payments of criminal fines and civil forfeitures, which could result in increased awards for tax fraud whistleblowers.  This likely will encourage more whistleblowers to come forward with allegations of tax fraud.

The Tax Whistleblowing Law

Under the tax whistleblowing law, if the Internal Revenue Service (“IRS”) institutes an administrative or judicial action against a taxpayer and collects proceeds as a result of information provided by a whistleblower, the whistleblower will be rewarded with a portion of the “collected proceeds.”  The tax whistleblowing law permits an award of between fifteen and thirty percent of the collected proceeds and provides significant discretion to the IRS Whistleblower Officer in setting the amount of any reward based upon the extent to which a whistleblower contributed to an action.  But the law does not explicitly define what amounts should be included in the term “collected proceeds.”  This new court decision clarifies the meaning of that term.

Facts of the Case

In the case before the U.S. Tax Court, a taxpayer pleaded guilty to tax fraud and paid $74,131,694 in tax restitution, a criminal fine, and civil forfeitures to the federal government.  Two petitioners, husband and wife, applied for whistleblower awards with the IRS Whistleblower Office.  After the IRS initially denied their request, the petitioners appealed and a partial trial was held to determine: (1) what information, disclosure, and/or action, if any, petitioners provided to the IRS to detect the underpayment of tax; and (2) whether that information, disclosure, and/or action satisfied the requirements of the tax whistleblowing law.  The Tax Court agreed with the petitioners and ordered the parties to attempt to resolve their differences.  The parties agreed that the petitioners were eligible for an award and that the award should be 24% of the “collected proceeds,” but the parties were not able to agree on the amount of the collected proceeds.  

Ultimately, the parties stipulated that $74,131,694 was collected from the taxpayer, which consisted of the following: tax restitution of $20,000,001; a criminal fine of $22,050,000; a civil forfeiture of $15,821,000, representing gross fees the taxpayer received from its U.S. clients; and the relinquishment of all claims to $16,260,693 that had been previously forfeited to the United States.  The parties disagreed as to whether the criminal fine and civil forfeitures constituted “collected proceeds” for purposes of determining the amount of the whistleblowers’ award, and so the Tax Court had to step in to resolve the dispute.

The Tax Court’s Holding

The Tax Court held that the phrase “collected proceeds” is “sweeping in scope and is not limited to amounts assessed and collected under [the tax code],” and means all proceeds collected by the Government from the taxpayer.  

The Court reasoned that because the term “collected proceeds” was not defined in the law, the Court could rely on the canons of statutory construction to define the term.  The Court cited a United States Supreme Court case that defined “proceeds” as “a word of great generality” and “proceeds are not necessarily money.”  The Tax Court also relied on a case from the U.S. Court of Appeals for the Eighth Circuit that held that any property, including money, used in an illegal gambling operation may be seized and forfeited to the United States.  Lastly, the Court reviewed the Congressional intent and was very leery to limit the meaning of an expansive and general term such as “collected proceeds.”

Therefore, the Court held that criminal fines and civil forfeitures are “collected proceeds” for purposes of an award under the tax whistleblower law.  Accordingly, the Court held, the petitioners were entitled to an award of 24% of $74,131,694, or $17,791,607.  

This decision may be appealed, and the Whistleblower Wire will continue to monitor for any developments.  The decision is available here

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