The US Tax Court just released its summary judgment decision in William Prentice Cooper, III v. Commissioner, 136 T.C. No. 30 (June 20, 2011). In the first true exercise of its new jurisdiction over tax whistleblower cases, the Tax Court showed that it will closely guard that jurisdiction but will not turn itself into the IRS.
Cooper had filed two tax whistleblower claims under the new and improved program of section 7623(b). The submissions involved estate and gift tax consequences. The IRS reviewed the information but less than a year after filing sent Cooper a rejection letter stating that they could not make an award determination because they did not use his information to collect taxes. Cooper, like many tax whistleblowers, provided what he believed to be “slam dunk” information to the IRS. Cooper filed a petition to the US Tax Court seeking the Tax Court to force the IRS to audit the matters raised in his tax whistleblower submission.
The IRS came back with guns blazing and asked the Tax Court to dismiss for lack of jurisdiction. Read the fine print they said. The letter the IRS sent said they could not make an award determination. No award determination, no jurisdiction, the IRS argued. Fortunately, the Tax Court saw this as pure silliness. Saying you won’t make an award determination is the same as making a zero-dollar award determination. William Prentice Cooper, III v. Commissioner, 135 T.C. No. 4 (July 8, 2010)
Now that the Tax Court had clear jurisdiction the question to be answered was can the Tax Court force the IRS to audit the issues Cooper raised. The IRS stated that it had good reason to not go after the issues Cooper raised. The Tax Court decided that good reason or not, the Tax Court is not in the audit business. “If the Secretary does not proceed, there can be no whistleblower award.” We call this the, “you can lead a horse to water but you cannot make him drink” rule.
While the Tax Court clearly came to the correct conclusion in both decisions, the IRS’s arguments in Cooper Round 1 left a slightly bad taste in our mouths. The IRS should not be hiding from Tax Court review. Just like in an IRS audit, if you followed the rules you have nothing to fear. As for Cooper Round 2, we understand that not every tax whistleblower submission will be a clear winner and the IRS needs to allocate their resources effectively. However, we understand that there are numerous instances of quality information coming into the whistleblower office where the IRS decided not to take action on that information for reasons unknown. The real danger of a case like Cooper is that it can suggest hostility towards tax whistleblower information. Despite the perception of hostility towards whistleblowers, in our experience, when you bring the IRS high quality information that is presented in a persuasive, logical, and thorough manner, it greatly increases the chances that the IRS will act on your information. For that reason, submissions made to the IRS Whistleblower Office should be carefully prepared and should act as a roadmap that the IRS can simply follow to detect underpayments, making the decision to act on the information an easy one for the IRS.
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