Lesson From The Tax Court: Whistleblowers Don't Get To Work The Case

You can't bring a Qui Tam action against a tax cheat.  You can blow the whistle, but it's not the same.

Qui Tam actions are lawsuits brought by private parties on behalf of the federal government against those who have defrauded the government.  Congress has long allowed such actions.  The current rules are found in 31 U.S.C. §3730.  That statute permits private parties to enforce the provisions of the immediately preceding statute, 31 U.S.C. §3729, known as the False Claims Act.

The False Claims Act, however, explicitly excludes actions against tax cheats from its scope.  See §3729(d).  That means private parties cannot bring Qui Tam actions to enforce the tax laws.  Instead, to help the IRS enforce the tax laws, Congress has created a whistleblower program, codified in §7623.  It permits individuals who report wrong-doing to the IRS to “receive as an award at least 15 percent but not more than 30 percent of the proceeds collected...”  In FY18, the Whistleblower Office's Report To Congress said that the program resulted in collection of over $1.44 billion, at a cost (of awards) of $312 million (about a 21% award rate). 

The recent case of Vincent J. Aprunzzese v. Commissioner, T.C. Memo. 2019-141 (Oct. 21, 2019)(Judge Vasquez) teaches the difference between a Qui Tam action and whistleblowing.  There, the whistleblower argued that he was due a larger award because the IRS could have collected much more based on the information he gave.  The Tax Court rejected the argument.  The case also shows why allowing Qui Tam actions for tax would not be a good idea: you don’t want private parties working the audits.  Details below the fold.

The Law: The Difference Between Qui Tam Actions and Whistleblowing

31 U.S.C. §3730 permits private persons to enforce the provisions of the False Claims Act (31 U.S.C. §3729) by filing an appropriate Complaint in federal district court, with a copy served on the Attorney General’s office.  But the Complaint must remained sealed, and may not be served on the defendants, until the AG’s office has the opportunity to review the Complaint and decide whether to start its own enforcement action.  Only if the AG’s office gives the green light can the private party pursue the case.  Once so permitted, however, the private party has control over the case and its development, including the use of civil litigation discovery tools. 

Congress enacted the False Claims Act after the Civil War and authorized Qui Tam actions as part of that.  At that time Congress did not explicitly forbid Qui Tam actions for fraudulent tax claims.  In fact, Congress did not add the prohibition in §3729(d) until 1986.  However, courts interpreted provisions in the relevant tax statutes as vesting total control over tax suits in the government.  The language is currently codified in §7401 (“No civil action for the collection or recovery of taxes...shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General or his delegate directs that the action be commenced.”).  It traces back to the Revenue Act of 1866, §9, 14 Stat. 98, 111.  Courts routinely held that the language in the tax statutes trumped the False Claim Act language. See e.g. United States ex rel. Roberts v. Western Pacific Ry. Co., 190 F.2d 243, 246–47 (9th Cir.1953) (“in respect to tax frauds the legislative purpose was not to permit a [qui tam ] action ... to be maintained by an individual, at least without express consent of the Commissioner of Internal Revenue”).

While private parties cannot enforce tax laws through Qui Tam, the IRS has long been authorized to pay informants for information.  Congress really boosted the program in 2006 by creating the Whistleblower Office and mandating payments of between 15% and 30% of “the proceeds collected as a result of the action.”   The “action” referred to is the action of the IRS.  If the IRS takes no action, no award is due.  And if the IRS takes action but collects nothing, no award is due.  See Cohen v. Commissioner, 139 T.C. 299 (2012).  Nor must the IRS explain to the whistleblower's satisfaction why it did not work the case the way the whistleblower thought it should be worked.  Id. at 304 ("Section 7623(b) does not provide any relief before whistleblower information leads to an administrative or judicial action and the collection of proceeds.")

Control.  That is the big difference between the Qui Tam and the whistleblower procedures.  If a private party is permitted to pursue a Qui Tam suit, that party has full control.  But a whistleblower’s participation in law enforcement is limited solely to providing information.  Put another way, the Qui Tam rewards a private party for enforcing the law, a whistleblower payment rewards a private party for giving information the government would otherwise not have had.

Facts and Lesson

Mr. Apruzzese and a second person (unnamed and not part of the suit) blew the whistle on an estate they were suing.   In the course of that suit, Mr. Apruzzese discovered information he thought showed the estate had cheated on its estate tax return.  The estate’s tax return was already under examination but was about to get away with it.  The Examiner was just about to issue a “no change” letter when he received Mr. Apruzzese’s information.  The Examiner used the new information to conclude that the estate had used “tax affecting” business valuations on prior gift tax returns and, as a result, had significantly understated its estate and gift tax liability.  Based on that conclusion, the IRS and the estate agreed to adjust the estate’s tax liability upwards by just over $424,000.  The estate paid the increased tax and the Whistleblower Office recommended an award amounting to 22% of the collected proceeds (less something called a sequestration reduction).  Mr. Apruzzese was to get just over $43,000.

Mr. Apruzzese disagreed with this award and petitioned the Tax Court for review.  His argument was that he was due a larger award because “the IRS has failed to fully comprehend the scope of the failure of the [estate] to accurately reflect [it’s] assets and liabilities. *** the IRS...accordingly has failed to properly determine the amount of additional taxes owed by [the estate].”  What Mr. Apruzzese wanted was for the Tax Court to order the IRS to do its job better, hit the estate for a larger tax liability, and thus award him a correspondingly larger amount.

Judge Vasquez ruled that neither the Court nor Mr. Apruzzese could tell the IRS how to do its job. Quoting a prior opinion, Judge Vasquez noted that “Although Congress authorized the Court to review the...award determination, Congress did not authorize the Court to direct the [IRS] to proceed with an administrative or judicial action.” 

Bottom Line: A Whistleblower is not an honorary Revenue Agent.  Mr. Apruzzese could have saved himself time and effort if he had learned that lesson. 

Commentary

Some commentators have argued that Congress should expand Qui Tam actions to tax cheats.  Two excellent articles to read up on this subject are:  Dennis J. Ventry, Jr., Whistleblowers and Qui Tam for Tax, 61 Tax L. 357, 382 (2008); and Franziska Hertel, Note: Qui Tam For Tax? Lessons From the States, 113 Columbia Law Rev. 1987 (2013). 

I respectfully disagree with both these authors.  I do not think expansion of the False Claims Act to permit Qui Tam actions against tax cheats would be a good idea.   Today’s lesson illustrates why. 

The first concern I have is one that both Professor Ventry and Ms. Hertel consider.  It is that if Qui Tam suits are to be effective, the private party will need access to information held by the IRS.  The information known to the private party is only one piece of the examination puzzle.  The tax law, however, is particularly protective of taxpayer privacy.  Heck, just look at how hard it has been for various private parties to obtain Trump’s returns!  At the very least, allowing Qui Tam actions would require some significant modification of §6103 and would likely add significant complexity to disclosure law.   In this case, for example, we do not know the name of the taxpayer who did wrong. But if this had been a Qui Tam action, that taxpayer's tax return information would be publicly available, including disclosures likely prohibited by §6103 if made by the IRS.  And while you might think that appropriate in this case (because the taxpayer either cheated or was in error), in other cases the private party may well not prevail and yet disclosure would occur.

The second concern I have is one not addressed by either Professor Ventry or Ms. Hertel.  It is about who gets to exercise control over the scope of an audit and over application of the law to different taxpayers.  After all, part of the IRS mission is to apply “the tax law with integrity and fairness to all." And the IRS Office of Chief Counsel mission is to provide “correct and impartial interpretation of the internal revenue laws and the highest quality legal advice and representation for the Internal Revenue Service.”

Giving control over examinations to private parties threatens to undermine both of these missions.  The Tax Code has tons of restrictions on the conduct of the IRS.  The IRS has elaborate and detailed sets of policies — policies  found in that capacious compendium of the Internal Revenue Manual, found in the myriad computer algorithms driving the automated processes, and found in the extensive training provided to Revenue Agents and Examiners.

All of these restrictions and policies control the scope of examinations and attempt to make administration of the tax laws as fair as humanly possible.  The IRS and the Office of Chief Counsel attempt to administer the law uniformly.  Sure, the policies and controls are inadequate.  You bet that IRS employees screw up.  Yes, IRS resources are scarce and getting scarcer as Congress continues its misguided drive to “starve the beast.”  But the notion that we should delegate enforcement of the tax laws to private actors who are untethered to any set of restraints or nationwide policies is downright scary.  And the alternative — to tether all private parties to the restrictions in the Tax Code and to the policies embedded in the IRM — does not appear to me to be in any way practical. 

The whistleblower award program is much more consistent with the inquisitorial nature of tax administration.  The IRS has powerful information-gathering tools.  Paying whistleblowers for useful information is another useful tool, and one whose use is subject to statutory restrictions and the administrative policies.

Whistleblowers should not be allowed to work the case, either under the current system or in the guise of a Qui Tam action. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.