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Tax Court dismisses whistleblower's case against IRS

Last month, we posted about the record-setting $104 million award given to a whistleblower for providing detailed information about UBS's offshore tax evasion practices. Other whistleblowers in California and around the country may be tempted to come forward and report alleged instances of criminal tax activity in the hopes that they too could earn their own, albeit smaller, reward.

It is important to note, however, that some whistleblowers can come away empty handed if the Internal Revenue Service decides not to act on the information they provide. That is the message delivered by the Tax Court in a recent case in which a man asserted that the IRS should be forced to reopen his whistleblower claim after initially declining to pursue it. The Tax Court disagreed, dismissing the whistleblower's case entirely.

The man brought the whistleblower claim because he believed he had information that a public company was in possession of unreported income. When he brought this to the attention of the IRS, however, the agency told him that he would not receive a reward because it did not collect any taxes from the company and because the information was available to the public.

Frustrated that the IRS might later collect taxes without issuing him a reward, the man filed his case in Tax Court, arguing that the IRS should reopen the whistleblower claim or at least give him an explanation regarding its decision not to pursue it. In short, the Tax Court dismissed the man's case because the law precludes a whistleblower from seeking a remedy until after the IRS begins a judicial or administrative proceeding and collects proceeds.

Since the IRS declined to act on the whistleblower's information, it never began such a proceeding against the alleged tax-evading company and never collected proceeds from it. While the court acknowledged the whistleblower's predicament, it noted the statutory scheme that constrained its ability to grant relief to him and other whistleblowers in like circumstances.

Source: U.S. Tax Court, "Cohen v. Comm'r," 139 T.C. No. 12, Oct. 9, 2012

• Bringing a case in Tax Court requires thorough knowledge of the substantive and procedural rules involved. You can learn more my visiting my Irvine tax litigation page.

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