US Tax Court rules in favor of IRS whistleblowers with broad definition of ‘collected proceeds’

IRS whistleblower collected proceeds

A recent Tax Court decision could help IRS whistleblowers become eligible for greater rewards. (Photo via Flickr)

A recent US Tax Court opinion that adopted a broad definition of what counts as “collected proceeds” in a case — a key factor in determining IRS whistleblower rewards — will be a major boon for future tax whistleblowers.

The decision from US Tax Court Judge Julian Jacobs should help assure IRS tax whistleblowers that their information will have a greater potential for bringing in rewards.

Before this decision, while taxes collected under Title 26 were clearly part of the “collected proceeds” of a case, it was unclear whether criminal penalties and civil forfeitures were counted as well.

Tax whistleblowers are entitled to 15 to 30 percent of all “collected proceeds.” What recoveries are included in “collected proceeds” has a significant effect on the whistleblower’s potential award. The IRS has historically taken the position civil forfeitures do not count.

The Tax Court, however, rejected the IRS’s interpretation and held that “collected proceeds” is a general term, saying the statute is “straightforward and written in expansive terms,” meaning criminal penalties and civil forfeitures should make up the total from which the whistleblower’s award is calculated.

The decision awarded the whistleblowers in the case $17.8 million dollars, which was calculated from the total recovery made up of criminal penalties, and civil forfeitures, as well as taxes collected under Title 26. Under the old “collected proceeds” definition, the whistleblower’s award would have been $4.8 million.

This decision should give tax whistleblowers more incentive to step forward where before they may have hesitated, particularly where the uncollected taxes might not be significant. If criminal penalties and forfeitures were not considered “collected proceeds,” An IRS whistleblower might be left with little or no reward in exchange for undertaking the risk of reporting.

This decision also demonstrates once again that the Tax Court will not necessarily endorse the IRS’s interpretation of the whistleblower provision, which is important, given that the IRS’s views have often been less than favorable for whistleblowers.

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