Taking the IRS to task for allegedly dragging its feet in making an award payment, a whistleblower on February 21 filed a petition with the U.S. Tax Court that goes into explicit detail on the participation of privately held Dutch bank Rabobank in several corporate tax avoidance transactions.
The informant claims that the IRS is unfairly attempting to avoid making an award payout for his assistance in bringing the tax avoidance to the Service’s attention, which led to the government collecting millions in unpaid taxes and settlement fines.
The allegations set forth in the petition aren’t new. Press accounts from 2008 reported that Joseph Insinga assisted the IRS as it scrutinized Rabobank’s promotion and financing of numerous transactions worth billions of dollars that helped shelter the U.S. income of nearly 100 major companies. Insinga, a former finance specialist at the bank, claims his detailed submissions led the IRS to collect large sums of unpaid taxes from corporations like Cardinal Health and Newell Rubbermaid Inc. Those companies and others used Rabobank as a third-party intermediary to engage in discounted accounts receivable sales and prohibited intermediary midco transactions.
But as the IRS’s revised whistleblower program receives more attention from the general public, attorneys who represent informants worry that the Service’s handling of the program creates numerous roadblocks that make it unattractive to future tax informants. (For prior coverage, see Doc 2012-3499 or 2012 TNT 35-13.)
According to the petition, Insinga filed a whistleblower claim with the IRS in 2007 and provided the agency with internal audit documents that showed the transactions at issue were inappropriately tax driven and functioned as tax shelters. Several times in 2007, Insinga met with IRS employees who questioned him about the bank’s transactions. His assistance “provided the IRS with a definitive road map to the systematic tax fraud being orchestrated by Rabobank,” the petition says, adding that it seemed that the agency “had no prior knowledge of these transactions.” (For the petition in Insinga v. Commissioner, No. 4609-12W, see Doc 2012-4672.)
After waiting several years for the IRS exam function to conclude its investigations, several of the companies under scrutiny settled with the government, including $425 million for General Mills and almost $180 million from Cardinal Health. Insinga, expecting payment of some percentage of the IRS’s collection as an award, said in the petition that given years of positive indications from government employees about his contributions, he was shocked when the IRS Whistleblower Office told him no award would be immediately paid because it was getting more information from field offices on possible other sources behind the investigations. Insinga claims the IRS gave him “the impression that an award recommendation was imminent” because it had opened administrative files based on his submissions and that “administrative actions were thereafter initiated against several taxpayers.”
Central to Insinga’s petition is his claim that “the IRS has continued to refuse to issue a formal determination” by stating that the Whistleblower Office must review closed files that might show that the IRS had other sources of information for the administrative actions taken against the taxpayers involved in Rabobank’s tax avoidance transactions. If the IRS can show that it already was in possession of information that led to the collection of proceeds, it has a basis for denying the informant’s award claim.
But Insinga asserts that the IRS told him on several occasions that the agency had denied other award claims on the specific cases because he was the first one in the door. The IRS is engaged in “a calculated effort to frustrate Petitioner’s efforts to seek this court’s review,” the petition says, adding that the government’s actions “plainly constitute a de facto rejection of his claims” that provide a jurisdictional hook under section 7623.
Insinga included with his petition 400 pages of exhibits, but according to his counsel, the Tax Court refused to file most of the documents, claiming they were in the nature of testimony and inappropriate at the filing stage.
Jurisdiction
Initially, Insinga will need the court to find that it has jurisdiction over his petition for review. In an important case of first impression in 2010, the Tax Court stated it was able to hear petitions under revised section 7623 even when the IRS failed to provide an informant with a formal award denial.
In Cooper I, the Tax Court held that it had jurisdiction under section 7623(b)(4) to consider a whistleblower’s appeal of an award determination by the Whistleblower Office. In that case, the office had sent the informant a letter denying the claims. The IRS argued that the letter was not an actionable determination conferring jurisdiction upon the court, but the court disagreed, holding that jurisdiction “is not limited to the amount of an award determination but includes any determination to deny an award.” That the IRS did not call its letter to Cooper a determination had no bearing on the matter because “labeling [is] not dispositive,” the court said. (For Cooper v. Commissioner, 135 T.C. No. 4 (2010), see Doc 2010-15202 or 2010 TNT 131-3.)
Insinga hopes the court will see his petition as a logical extension of Cooper I but not dismiss it on similar grounds as in Cooper II. In a follow-up decision, the Tax Court concluded that while it had jurisdiction to hear the whistleblower’s petition, it cannot order the Whistleblower Office to take a second look at a whistleblower claim once a claim denial has been issued. The IRS had explained why it determined there was no estate or gift tax due, the court said, and then had not collected any tax. “Jurisdiction in whistleblower cases does not include opening an administrative or judicial action to predetermine the tax liability,” the court wrote, noting that Cooper’s assertion that the IRS failed to properly investigate his claims was not sufficient for the court to compel the IRS to “undertake a complete re-evaluation” of the case. (For Cooper v. Commissioner, 136 T.C. No. 30 (2011), see Doc 2011-13460 or 2011 TNT 119-6.)
While the court has favorably ruled on jurisdiction in trying to uphold Congress’s intent in revising the tax whistleblower framework to make the program more inviting to potential informants, it might not deem the IRS’s lack of a determination as actionable conduct that allows an appeal. In Kasper, the Tax Court’s conclusion that it had jurisdiction over the whistleblower’s claim was predicated on there being a specific action from the IRS — in that case, a denial letter. The court said that its jurisdiction “is dependent upon a finding that a determination has been made and a finding that the appeal from the determination is timely” but added that “the statute does not clearly define the term ‘determination.'” (For Kasper v. Commissioner, 137 T.C. No. 4 (2011), see Doc 2011-15200 or 2011 TNT 134-7.)
The Kasper court seemed satisfied that the denial letter was “a final administrative decision” that should be construed as an award determination under section 7623(b)(4). But a footnote in the opinion suggests that the court doesn’t have jurisdiction when there is no document giving notice to the whistleblower. “With respect to the denial letter on the corporate claim, there is no direct evidence of mailing and, therefore, the time has yet to begin in which petitioner may file a petition as to that claim,” the court said.
However, the court may question whether the IRS is trying to skirt a whistleblower’s due process rights by failing to provide a determination letter. In a 2008 notice, the IRS said it would not make an award payment until there is a final determination of the tax liability and the amounts owed are collected. (For Notice 2008-4, 2008-2 IRB 253, see Doc 2007-27740 or 2007 TNT 245-13.)
Insinga alleges that the IRS has already agreed with the corporate taxpayers as to the final tax liabilities owed and has received payment of those amounts. Thus, he argues, it is deliberately refusing to act. That places Insinga’s appeal in a gap between the two Cooper cases: Without a formal determination by the Whistleblower Office, is the lack of such action, if deemed deliberate, a departure from established procedures that should be judicially reviewable? Cooper I focused on the Whistleblower Office’s following established procedures in issuing final administrative action that created an opportunity for appeal. It is an open question whether the court will find that Insinga has presented a compelling case proving that the Tax Court should have jurisdiction even though the Service has not yet issued formal notice to a whistleblower on his claim.
Award Eligibility
Gregory S. Lynam, a tax partner at the Ferraro Law Firm, said that Insinga’s court petition argues more than necessary regarding award eligibility under the statute. A claim does not have to show it was the only way the IRS could get the information, he said, because such a showing goes above and beyond the requirements of section 7623(b), which simply requires that the IRS use the information.
“We believe there are many ways for a whistleblower to make a substantial contribution even if they are not the sole or initial source of information about an underpayment,” Lynam said. If the claims in the petition are true, he said, “to actually use his help and not pay is both contrary to the statute and so patently unjust that we are concerned for the survival of the program if this position of the IRS is sustained.”
It would be “dysfunctional if the IRS had been offered quality information from Insinga that it did not otherwise have and failed to use it,” Lynam said.
“If the IRS did in fact use his information, section 7623(b) requires that he be paid an award,” Lynam said. “That point will eventually play out, either in this case or when the IRS makes an actual award determination.”
Tom Pliske, a former IRS attorney with Tax Whistleblower Law Firm LLC, said that while whistleblowers in Insinga’s position might be frustrated, there is no requirement that the IRS act within a specific time frame. “The Internal Revenue Manual states that the IRS will pay an award as soon as practical after collecting proceeds,” he said, “but while everything else in the code has a deadline, there are no deadlines here.”
It’s not surprising that in administering a new program, the Whistleblower Office gave itself latitude in processing award claims, Pliske said, but he acknowledged that the result is “frustrating because a case could be ready to be paid out, but you can’t force it.”
Pliske said there must be a deadline if an award is eligible to be paid out. “It doesn’t matter if the deadline is 30 days or 90 days after it is legally possible for the award or partial award to be paid, the IRS should be held accountable so as to comply within an objective deadline,” he said.
While nothing requires the IRS to make partial payments, “the program won’t survive if the IRS plays games, and I don’t think they are,” Pliske said.
Although whistleblowers and their representatives often complain about the length of time it takes for claims to result in awards, the examination process is itself lengthy, Pliske said. “Congress provided taxpayers certain rights in the tax examination process, and the fact that there is a whistleblower providing information to the IRS does not diminish those rights,” he added.
Whistleblowers and many of their attorneys get frustrated because they don’t understand tax procedures, Pliske said. “The IRS is not intentionally trying to spite a whistleblower; it is just following current tax procedure as determined by Congress as well as its own regulations,” he said.
As for Insinga’s chances of persuading the court to hear his claim, “I think he has an uphill battle based on the facts, as his argument would let every frustrated whistleblower file a petition in Tax Court,” Pliske said, adding, “I think the court will dismiss the case.”
What Constitutes a Determination?
The Insinga case presents a new wrinkle regarding what constitutes a determination under section 7623. “A tax whistleblower could effectively be denied judicial oversight if the IRS just chooses not to act by simply never issuing an award determination,” Lynam said. In that case, the question is how long does a tax whistleblower need to wait before there is a de facto determination, he said. When there has been an administrative action and collection of tax, as in this case, “the court can determine that the IRS’s failure to make an award determination is arbitrary, capricious, and unreasonable,” he said.
Dean Zerbe, national managing director at Alliantgroup LP and a former tax counsel to Senate Finance Committee Republicans, said that the right to go to the Tax Court for review was included in the revised statute “exactly for this type of situation, where a taxpayer believes that he is entitled to an award and that the IRS is improperly denying or limiting the award he should receive.” Independent judicial review of a claim “goes far in encouraging key, well-placed whistleblowers to come forward,” he said, adding, “Whistleblowers are greatly comforted by the fact that an award won’t rise or fall just on the views of the agency — that there will be an independent and impartial de novo judicial review of all the facts.”
“It might be useful for the Tax Court to consider the benefits of having the IRS Whistleblower Office be given an opportunity to complete within a reasonable time frame its report and findings,” Zerbe continued, arguing that setting a timetable for completion, monitored by the court, would sidestep the need for a decision on whether there was a final determination “and may have the happy result of resolving the case.”
“The Tax Court clearly has a role to ensure that the IRS does not effectively deny a whistleblower an award through interminable delay,” Zerbe said. However, it is also important for whistleblowers and their counsels “to recognize that tax administration can at times — thanks often to many outside factors — move at a pace that makes pond water seem breathtakingly fast,” he said.
Too Much Information?
Insinga’s petition spares few details in naming names about the bank’s participation in the tax shelter transactions. His case highlights concerns expressed by some observers that whistleblower cases may divulge confidential or embarrassing information about nonparty taxpayers without any ability to intervene.
Worry about sensitive company information being made public in court filings recently led the Tax Court to propose changes to its rules of practice and procedure that would require parties making whistleblower filings to redact identifying information regarding the taxpayer and allow a whistleblower to request anonymity. (For a court release announcing the proposed changes, see Doc 2011-27312 or 2012 TNT 1-58.)
A comment letter by the American Bar Association Section of Taxation suggested that the court make explicit in the final rule that it can redact identifying taxpayer information on its own if the whistleblower fails to do so in its filing. The tax section also recommended that the court consider allowing the taxpayer nonparty notice for a limited intervention opportunity for redaction purposes. Moreover, the court should establish a clear standard for when it will grant a whistleblower’s motion to proceed anonymously, the letter says. (For the ABA tax section letter, see Doc 2012-4406 or 2012 TNT 42-38.)
Most recently, in a Tax Court whistleblower petition asking for review of an award claim denial, the informant also filed a motion requesting a protective order that would either seal the record or allow him to proceed anonymously. The court granted the motion, holding that in that particular case, granting anonymity by requiring redaction of all identifying information — both for the whistleblower and for the company referenced in the award claim — was a “less drastic option” than keeping the record sealed. But the majority warned in a footnote that the precedent set forth in the opinion should not “necessarily result in anonymity for all tax whistleblowers” because “each request to proceed anonymously must stand upon its own.” (For Whistleblower 14106-10W v. Commissioner, 137 T.C. No. 15 (2011), see Doc 2011-25765 or 2011 TNT 237-13.)
Lynam said that the Tax Court’s proposed rule for redacting taxpayer names would have pulled the target taxpayers’ names out of the petition, “but the rule itself misses the point.” Insinga is not seeking to file anonymously, he said, and “he has a First Amendment right to tell the world of the evils he believes Rabobank et al. committed.” If the same petition were filed after the court’s final rule takes effect, a whistleblower “could provide Tax Notes with his redaction index,” mooting the court’s attempts at privacy, he said, adding, “The proposed rule will only be effective in anonymous cases where the Tax Court could already require that redaction as a condition of anonymity.”
Pliske said that while most whistleblowers strive to protect their identity, each case depends on particular facts and circumstances. The court’s proposed rules are necessary, because “it isn’t fair for any taxpayer to be accused of not paying taxes in a court proceeding for which they aren’t a party,” he said. “It’s always possible that whistleblowers can be frustrated with the taxpayer or the IRS and simply become vindictive by alleging certain facts in court for which there is no basis.”
A whistleblower who has had a claim pending before the Whistleblower Office for five years told Tax Analysts that she was somewhat surprised that the IRS whistleblower chose to reveal his identity when he didn’t have to, after the Tax Court granted whistleblowers anonymity when petitioning the court. “A wild guess would be that it’s been done to embarrass the IRS Whistleblower Office out of pure frustration,” she said.
The whistleblower said that “like a lot of whistleblowers, I suspect Mr. Insinga now regrets getting involved with the IRS Whistleblower Program, because it hasn’t lived up to expectations.” Whistleblowers in the section 7623(b) program “have relied, to their detriment, on a promise that has not come to fruition in a reasonable and timely fashion,” she said.
“It’s my belief that given the personal and professional risks that most whistleblowers have taken, the IRS, amongst other things, had a duty of care to act promptly and efficiently when investigating a case once they accepted the documentary information from the whistleblower,” she said. Outstanding cases involving claims made in 2007 and 2008 show that the IRS is not trying to make the program attractive, she said, “particularly with cases which have involved the IRS Criminal Investigation division getting a plea bargain and/or final agreement with the noncompliant taxpayer where any right of future appeal is waived.”
“I sympathize with the whistleblower in Insinga because all whistleblowers live in an information vacuum,” the whistleblower continued. “I have no idea what is going on with my own case, other than it is ‘open and under active consideration.’ Given the extensive documentation I provided the IRS and the conclusive nature of what it supported, it is just unbelievable that nothing has happened with my case during the last five years.”
She noted that her claim was one of the 24 cases involving sums of more than $10 million in unreported income referred to in the first Whistleblower Office report to Congress in 2008. (For the report, see Doc 2009-21537 or 2009 TNT 187-18.)