The Tax Court ruled that an IRS letter denying a tax whistleblower’s claims was a “determination” giving the Tax Court jurisdiction to review the matter under IRC § 7623(b)(4). Thus, the court declared that its jurisdiction is not limited to the amount of an award but includes any determination by the IRS to deny one.
Section 7623 was amended by the Tax Relief and Health Care Act of 2006 (PL 109-432) to increase whistleblower award amounts, establish objective criteria for approving claims and reform their administration by the IRS, which had often been regarded as dilatory in its processing of claims and arbitrary in deciding them (see “The IRS Whistleblower Program: What CPAs Should Know,” JofA, Aug. 2009, page 50). The reforms included establishing a Whistleblower Office within the IRS. Notice 2008-4 provided guidance on claim submission, processing and disposition. Section 7623(b)(4) states that any determination regarding an award may be appealed to the Tax Court, which shall have jurisdiction over the matter.
In 2008, William P. Cooper III, an attorney, filed two whistleblower claims alleging that certain parties had failed to pay millions of dollars in estate and generation-skipping transfer taxes due.
The Whistleblower Office notified Cooper that the claims had been received, explained that the information would be used to determine whether to further investigate the alleged violations, and told Cooper that he would be informed after a review and investigation whether the submitted information met the criteria for paying an award. Nine months later, he received a letter denying the claims. The letter stated that an award determination could not be made under section 7623(b) because Cooper “did not identify … federal tax issue[s] upon which the IRS will take action.” The letter also said an award was not warranted for either claim because Cooper’s information did not “result in the detection of the underpayment of taxes.” Cooper then promptly filed two petitions in the Tax Court seeking a review of the denial.
In response, the IRS filed motions to dismiss for lack of jurisdiction on the ground that no determination notice under section 7623(b) had been issued. There could be a determination for jurisdictional purposes only if the Whistleblower Office undertook an administrative or judicial action and then “determined” to make an award, the IRS said. The IRS further contended that the letter wasn’t a determination because it wasn’t labeled a determination.
The court disagreed, finding with respect to the first argument that the statute expressly permits an individual taxpayer to seek Tax Court review of the amount or the denial of an award determination. With respect to the second argument, the court found that the letter was issued in accordance with procedures in the Internal Revenue Manual and Notice 2008-4. The letter provided an explanation from the manual’s list of possible reasons for denying whistleblower claims (IRM § 126.96.36.199(2)). That it was not labeled a determination didn’t matter; it constituted a determination within the meaning of section 7623(b)(4) over which the court had jurisdiction.
By Laura Jean Kreissl, Ph.D., assistant professor of accounting, and Darlene Pulliam, CPA, Ph.D., McCray Professor of Business and professor of accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.
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