Whistleblower Denied $690M Claim

TLDR: The Court of Appeals for the District of Columbia upheld the Tax Court's decision dening a whistleblower's $690M claim for helping prosecute banks, bankers, and individuals for failure to disclose foreign financial accounts.

Posted on August 17, 2024

Whistleblower claims are interesting. The short version of whistleblower claims is that when somebody tells the IRS about a person or entity potentially evading taxes, that somebody may be able to collect up to 30% of the amount the IRS recovers as a reward. Whistleblower 6544-19W piqued my interest. After all, who wouldn’t be curious as to why somebody was seeking $690 Million as a whistleblower? Spoiler alert: The claim was denied.

In this case, Thomas Shands had an undisclosed Swiss bank account and decided to take advantage of the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) to come clean. To his surprise, while coming clean, he learned the IRS was already criminally investigating him for failing to disclose his offshore account. Clearly not wanting to go to prison, he did what a lot of criminals do, he became an informant for the government. As part of his efforts to help the government he, inter alia, wore a wire and recorded conversations between himself and bankers. This led to investigations of the bankers and at least the bank itself. Once the IRS started its investigation, the bank told many customers and they initiated their own OVDI proceedings to avoid time at Club Fed as well. Based on convictions or plea deals by others about whom Shands provided information or initiated OVDI action sua sponte, the IRS collected over $2.3 BILLION!

Naturally, Shands wanted a cut of that massive amount. For his efforts against the bankers and bank, Shands received over $8.5 million. But Shands and wanted more. He requested an additional claim number related to his original Form 211. His logic being that since he helped expose the bank, he should get a cut of anybody ensnared in the IRS’s net. The IRS however disagreed. Can’t say I blame them. That’s a LOT of money to pay an alleged criminal. After the IRS denied the claim, Shands did want any red-blooded American would do, he sued the IRS.

The court denied his claim on a jurisdictional argument instead of the merits, which I find interesting. Subject matter jurisdiction has the potential to be fascinating. In law school you spend an entire semester learning about the topic because before a court (in this case the Tax Court) can hear a case, it must have both personal jurisdiction (jurisdiction over the person) and subject matter jurisdiction (jurisdiction over the subject matter at hand). Most of the time subject matter jurisdiction is relatively straightforward and basic black letter law, but when you get into even the slightest of grey areas, it gets fascinating quickly! Personal jurisdiction only gets interesting, in my opinion, when dealing with long arm statutes used to haul foreign people or companies into US courts.

I won’t bore you all with the details of the Court’s reasoning since I’ve already rambled enough. Kudos to you if you’re read this far. The short version is that for a whistleblower claim to stand, there must be an administrative or judicial action “against any taxpayer.” Because OVDI actions are initiated by the taxpayer, they are not actions “against” the taxpayer. The logic being that we file our tax returns every year and even though that is a proceeding “established and supervised by the IRS for the specific purpose of collecting proceeds,” it is not seen as an action or proceeding “against” us. Now if we are audited, that is a proceeding “against” us because the IRS initiated it. If Shands could have identified bank customers that were audited because of their use of the OVDI program, he might have scored a bigger payday. Yes, he did try, but the IRS wouldn’t allow him to go on a fishing expedition.

You can read the full opinion here.


DISCLAIMER: The above is not accounting or legal advice. Taxpayers are advised to engage competent accounting and/or legal professionals to discuss their specific situations and legal/accounting needs.

· Copyright © Roger Lang 2024