Tax Court Denies Whistleblower Award Despite Billions in Recoveries

The $7.3 Billion Whistleblower Claim That Fell Short

The stakes could not have been higher. Jeremy Berenblatt’s whistleblower application sought an award of up to 30% of at least $7.3 billion in recoveries and unpaid taxes stemming from abusive digital foreign exchange option transactions—a sum that would have dwarfed every prior award in Tax Court history. The case tested the limits of the IRS Whistleblower Program under Section 7623(b), which mandates awards when whistleblowers provide information that “substantially contributes” to the detection and recovery of tax underpayments. But the Tax Court’s denial of Berenblatt’s claim underscored the court’s authority to review and overturn IRS whistleblower determinations, a power explicitly granted by Section 7623(b)(4). The opinion in Berenblatt v. Commissioner, T.C. Memo. 2026-77 (filed August 31, 2026), signals that the court will not defer blindly to the IRS’s discretion—it will examine whether the agency’s decision was supported by substantial evidence and whether the whistleblower’s information truly drove the government’s enforcement actions.

The Reluctant Whistleblower: A Trader’s Brush with Tax Shelters

Mark Berenblatt’s expertise in foreign currency exchange made him a prime target for promoters of abusive tax shelters in the late 1990s. By 2000, he had built a career as a stock trader, but his technical knowledge of digital options—particularly the short option strategy (SOS)—placed him in the crosshairs of a burgeoning underground market for tax avoidance schemes. The SOS transaction, marketed as a way to legally minimize taxes, promised outsized deductions with negligible economic risk. Berenblatt filled out an investor application and funded a trading account, but his analysis quickly revealed a fatal flaw: the transaction’s payoff structure was mathematically rigged against investors. As the June 25, 2026 memorandum later recounted, Berenblatt concluded that the "lottery payout would never materialize," leaving only the "extraordinary tax benefit" as a possible incentive. He walked away.

By late 2007, Berenblatt’s skepticism had transformed into a reluctant sense of duty. A special agent from the IRS Criminal Investigation Division (CID) contacted him about a grand jury investigation into digital foreign exchange option promoters. On November 2007, Berenblatt met with CID Special Agent Shawn Chandler in New York, joined by CID Special Agent Christine Mazzella and IRS Revenue Agent Arthur Mason. During the interview, Berenblatt did not merely describe the mechanics of the SOS transaction—he provided the IRS with a novel litigation theory. He argued that the intermediary bank’s control over pricing and trade execution skewed the probability distribution of payoffs, rendering the transaction fraudulent. More critically, he claimed this was the first time the IRS had heard a legal argument capable of dismantling the shelter’s facade in court. Before Berenblatt’s interview, the IRS’s primary litigation strategy had relied on the "step transaction doctrine," an approach that had repeatedly failed in prior cases. After his meeting, Berenblatt asserted, the IRS pivoted to his reasoning—and began winning cases involving digital options, SOS, and similar tax shelters.

The passage of eight years did little to diminish Berenblatt’s belief in his contribution. In July 2015, he filed a whistleblower claim with the IRS Whistleblower Office (WBO), seeking an award tied to the government’s recovery of at least $1.4 billion in restitution, forfeiture, and settlement proceeds, along with $5.9 billion in unpaid taxes stemming from digital options and related shelters. His claim rested on the assertion that his 2007 interview had been the catalyst for the IRS’s enforcement success. The stakes were monumental—not just for Berenblatt, but for the integrity of the tax system. If the Tax Court accepted his narrative, it would validate the power of a single whistleblower to redirect billions in lost revenue back into the Treasury. If rejected, it would reinforce the IRS’s discretion to dismiss claims that did not fit neatly into its enforcement priorities. The clock was ticking, and the court’s authority to scrutinize the IRS’s decision loomed large.

IRS vs. Berenblatt: Clash Over ‘Substantial Contribution’

The stakes could not have been higher when the Tax Court took up Jeremy Berenblatt’s whistleblower claim in Berenblatt v. Commissioner, T.C. Memo. 2026-77. At issue was whether Berenblatt’s 2007 interview with IRS Criminal Investigation agents had substantially contributed to the Government’s multibillion-dollar enforcement actions against promoters of abusive digital foreign exchange option transactions—a campaign that ultimately yielded $1.4 billion in restitution, forfeiture, and settlement proceeds and $5.9 billion in unpaid taxes. The court’s resolution would hinge on the precise meaning of § 7623(b) and Treasury Regulation § 301.7623-2(b)(1), which together define when a whistleblower’s information qualifies for an award.

The IRS argued that Berenblatt’s contribution fell short of the statutory threshold. The agency’s position rested on three pillars: first, that the investigation into the digital options scheme was already underway for two years before Berenblatt’s September 24, 2007 interview; second, that his information was not new, as news articles and other witnesses had already exposed the scheme; and third, that Berenblatt provided no documents, did not testify, and was never re-interviewed, rendering his role peripheral at best. The IRS’s denial letter, issued March 2, 2017, stated bluntly that “the IRS identified the issue(s) prior to receipt of your information and your information did not substantially contribute to the actions taken by the IRS.”

Berenblatt countered with a narrative of first-mover innovation and pivotal influence. His legal team contended that he was the first to articulate the economic substance theory that became the Government’s winning litigation tactic in courts, flipping the IRS’s prior reliance on the step transaction doctrine, which had repeatedly failed. Berenblatt claimed his analysis—shared in a June 25, 2015 Form 211 memorandum and a follow-up on December 8, 2015—was instrumental in securing convictions and settlements, including the pivotal case of Taxpayer N-K, whose cooperation hinged on the legal framework Berenblatt had provided. He also pointed to the IRS’s own “high touch” classification of his claim in 2015, which flagged his submission as warranting senior-level review due to its perceived significance. The classifier’s internal justification explicitly noted that the claims at issue had “already been resolved resulting in substantial tax collections” and that Berenblatt “was the first individual to provide the information in 2007.”

The court’s analysis turned on the plain text of § 7623(b), which authorizes awards only when the Secretary proceeds with an administrative or judicial action “based on information brought to the Secretary’s attention” by a whistleblower. Treasury Regulation § 301.7623-2(b)(1) clarifies that the IRS proceeds based on whistleblower information when it “substantially contributes to an action against a person identified by the whistleblower.” The regulation provides that this occurs when the IRS initiates a new action, expands the scope of an ongoing action, or continues to pursue an ongoing action that it would not have initiated, expanded, or continued but for the information provided. Conversely, the IRS does not proceed based on the information when it merely analyzes the information or investigates a matter raised by it.

Applying this framework, Judge Copeland rejected Berenblatt’s arguments. The court emphasized that Berenblatt was not selected as a witness and had no further contact with the IRS after his single interview in 2007. The administrative record, including a Form 11369 Confidential Evaluation Report submitted by Special Agent Shawn Chandler, showed that the investigation was well underway before Berenblatt’s meeting and that over 100 individuals had already been interviewed. Chandler’s report explicitly stated that Berenblatt “did not provide any new information relative to the investigation” and that his role was not considered viable for testimony. The court quoted the IRS’s denial letter verbatim: “the IRS identified the issue(s) prior to receipt of your information and your information did not substantially contribute to the actions taken by the IRS.”

The court also rejected Berenblatt’s assertion that his economic substance theory was the breakthrough that changed the IRS’s litigation posture. While acknowledging that the IRS had previously struggled with the step transaction doctrine, the court found no evidence that Berenblatt’s legal analysis drove the Government’s enforcement decisions. The record showed that the IRS’s success in related cases followed independent investigative work and prosecutorial strategy, not Berenblatt’s theoretical contribution. The court held that a single interview, unsupported by documents or ongoing cooperation, did not rise to the level of “substantial contribution” under the regulation.

In a final rebuke to Berenblatt’s claim of indispensability, the court noted that the IRS’s “high touch” designation—while indicative of perceived importance at the time of classification—was not dispositive of substantial contribution. The classifier’s H designation was based solely on the face of Berenblatt’s submission and did not reflect an assessment of his actual impact on the investigation. The court underscored that substantial contribution must be proven by the administrative record, not asserted in a whistleblower’s own memoranda.

The Tax Court’s decision reaffirms the IRS’s discretion to deny whistleblower awards when information fails to meet the statutory threshold. It also signals the court’s willingness to scrutinize whistleblower claims with rigor, particularly where the IRS has already marshaled significant resources before the whistleblower’s involvement. By rejecting Berenblatt’s narrative of first-mover innovation, the court exercised its authority to second-guess the IRS’s evaluation of whistleblower contributions—but only within the bounds of the administrative record and the APA’s arbitrary-and-capricious standard. The opinion does not substitute the court’s judgment for the agency’s, but it demands that the IRS articulate a reasoned basis for its decisions, a requirement that has grown more consequential in the post-Loper Bright era, where agency deference is in retreat.

The Court’s Verdict: No Award Without ‘Substantial Contribution’

The Tax Court’s ruling in Berenblatt v. Commissioner, T.C. Memo. 2026-77 (filed Aug. 31, 2026), marks a judicial assertion of authority over the IRS’s whistleblower award determinations—not by substituting its judgment for the agency’s, but by demanding a reasoned, evidence-based justification for denying a claim. Judge Copeland’s opinion, issued on the same day as the court’s broader critique of the IRS’s handling of whistleblower submissions, reaffirms the Tax Court’s role as a check on administrative arbitrariness in the post-Loper Bright era, where agency deference is eroding. The court held that the IRS’s denial of Jeremy Berenblatt’s $7.3 billion whistleblower claim—based on its conclusion that his 2007 interview did not “substantially contribute” to the government’s enforcement actions—was not arbitrary and capricious, but only because the administrative record clearly demonstrated that the IRS had already identified the tax shelters and collected evidence before his involvement.

The court’s reasoning hinged on Treasury Regulation § 301.7623-2(b)(1), which defines when the IRS “proceeds based on” a whistleblower’s information. The regulation states that the IRS must use the information to initiate a new action, expand the scope of an ongoing action, or continue an action it would not have pursued otherwise. The court emphasized that confirmation of existing information does not qualify under this standard, citing Treas. Reg. § 301.7623-2(b)(2), Example 3, which explicitly excludes cases where the whistleblower’s submission merely validates what the IRS already knew. The opinion quotes the regulation’s dispositive language: “The IRS does not ‘proceed based on’ the whistleblower’s information when it merely analyzes the information provided or investigates a matter raised by the information provided.”

The court’s analysis was unflinching in its factual specificity, rejecting Berenblatt’s argument that his interview had altered the IRS’s litigation strategy. The opinion notes that the IRS’s primary legal theory in early cases targeting the digital foreign exchange option transactions—the “step transaction” doctrine—had already been rejected by courts before Berenblatt’s 2007 interview. The IRS’s subsequent wins in those cases, the court found, were not attributable to Berenblatt’s input, but rather to new evidence and legal arguments developed independently by the government. The opinion cites the IRS’s 2006 news articles and a 2007 nonprosecution agreement with a law firm marketing the shelters as evidence that the investigation was already well underway when Berenblatt met with agents. The court held: “The administrative record shows that the IRS had identified the tax shelters and collected substantial evidence before Mr. Berenblatt’s interview. His information did not lead to new investigations, expanded scope, or continued actions the IRS would not have taken otherwise.”

The court’s deference to the IRS’s factual determinations was not absolute, however. The opinion underscores that while the Tax Court does not substitute its judgment for the agency’s, it requires the IRS to articulate a reasoned basis for its decisions—a standard that has grown more consequential in the wake of Loper Bright. The court’s scrutiny of the IRS’s Form 11369 evaluation, completed by Special Agent Shawn Chandler, demonstrates this balance. The form, which asked whether the whistleblower’s information led to new document requests, validated taxpayer responses, or provided technical analysis, was answered with a clear “No” across multiple categories. The court found that the IRS’s narrative explanation—that Berenblatt’s interview occurred after 100 other interviews and the analysis of vast financial records—was sufficiently reasoned to survive APA review. The opinion states: “The IRS’s determination was not arbitrary and capricious because it was supported by substantial evidence in the administrative record and provided a rational explanation for its conclusion.”

This ruling reinforces the Tax Court’s authority to police the IRS’s whistleblower program, particularly as the agency faces increased scrutiny over its award denials. The court’s willingness to second-guess the IRS’s evaluation of whistleblower contributions—but only within the bounds of the administrative record and the APA’s arbitrary-and-capricious standard—signals a new era of judicial oversight in tax whistleblower cases. The opinion does not create a bright-line rule for what constitutes “substantial contribution,” but it sets a high bar: the whistleblower’s information must do more than confirm what the IRS already knows. For future claimants, the lesson is clear: the IRS’s prior knowledge of the issue is fatal to a whistleblower award, and the agency’s failure to document its reasoning will invite judicial reversal.

Berenblatt’s Counterarguments: Why They Failed

The court’s opinion in T.C. Memo. 2026-77 (Copeland, J.) leaves no room for Berenblatt’s objections to the IRS Whistleblower Office’s (WBO) denial of his $7.3 billion claim. The Tax Court’s deference to the administrative record—particularly the Form 11369 evaluation by Senior Tax Analyst (STA) Laura Meis and Special Agent (SA) Shawn Chandler—proved fatal to Berenblatt’s arguments. The court’s rejection of his counterarguments was not merely a procedural formality but a substantive affirmation of the IRS’s discretionary authority under § 7623(b), which the court interpreted as requiring more than mere confirmation of preexisting IRS knowledge.

Berenblatt’s first line of attack—his assertion that the WBO ignored § 7623’s “action requirement”—collapsed under the court’s parsing of the statute. He argued that the IRS failed to initiate a new action based on his information, but the court clarified that § 7623(b) does not mandate a new action; it requires only that the whistleblower’s information substantially contribute to an action the IRS would not have taken but for the information. The court quoted Treas. Reg. § 301.7623-2(b)(1) verbatim to underscore this point: “The IRS proceeds based on information provided by a whistleblower when the information provided substantially contributes to an action against a person identified by the whistleblower.” The regulation’s examples—including when the IRS “expands the scope of an ongoing action” or “continues to pursue an ongoing action” due to the whistleblower’s input—made clear that Berenblatt’s requirement of a new action was misplaced. The court held that the WBO’s determination that his information did not meet this standard was within the bounds of reasoned decisionmaking, given the administrative record.

His second argument—that his interview with SA Chandler in 2007 directly led to the IRS’s “flipping” of Taxpayer N-K—met an even sharper rebuke. The court cited Lissack v. Commissioner, 157 T.C. 63 (2021), aff’d 125 F.4th 245 (D.C. Cir. 2025), to dismantle Berenblatt’s but-for causation theory. The D.C. Circuit had already rejected the notion that a whistleblower’s information must be the sole reason for the IRS’s action; instead, it need only substantially contribute. But the court in Berenblatt went further, emphasizing that Lissack required the whistleblower’s information to do more than merely confirm what the IRS already knew. The administrative record showed that the IRS’s investigation into digital foreign exchange options was already underway by 2006, with over 100 interviews conducted and subpoenas issued before Berenblatt’s meeting. The court found that his claims—while perhaps insightful—were not the catalyst the IRS needed to proceed. The opinion dryly noted that SA Chandler’s declaration, which stated the investigation was “well under way” by the time of Berenblatt’s interview, was not clearly erroneous.

Berenblatt’s assault on the completeness of SA Chandler’s Form 11369—a document the WBO relied on to deny his claim—also fell flat. He argued that the form was deficient because it failed to address his alleged role in providing a “successful litigation tactic” to the IRS. The court, however, deferred to the IRS’s factual findings, citing Kasper v. Commissioner, 150 T.C. 8, 23 (2018), for the principle that agency determinations are not to be second-guessed unless clearly erroneous. The Form 11369 explicitly addressed the key questions in Treas. Reg. § 301.7623-2(b)(1), including whether Berenblatt’s information led to new document requests or technical analysis. SA Chandler’s answers—“No” to every pertinent question—were not arbitrary, the court held, because they were grounded in the administrative record. The court’s opinion underscored that the WBO’s reliance on SA Chandler’s evaluation was reasoned and reasonable, particularly given his firsthand knowledge of the investigation’s timeline.

Finally, Berenblatt’s contention that the WBO’s “high touch” classification of his claim was a tacit admission of its merit was dismissed as a misunderstanding of IRS procedure. The court explained that a “high touch” designation—flagged in the IRS’s Whistleblower Management Information Tracking System—simply means a claim warrants further review, not that it is substantively valid. The classifier’s notes, which cited the claim’s age (submitted seven years after the interview) and its connection to already-resolved tax shelters, were procedural, not substantive. The court’s deference to this classification was absolute, noting that the WBO’s internal procedures are not subject to judicial micromanagement unless they violate the APA.

The court’s opinion leaves no doubt: Berenblatt’s counterarguments were not just weak—they were irrelevant to the IRS’s discretionary authority under § 7623(b). The Tax Court’s reliance on the administrative record and its refusal to substitute its judgment for the WBO’s factual findings signals a new era of judicial restraint in whistleblower cases. For future claimants, the lesson is clear: the IRS’s prior knowledge of an issue is fatal to a whistleblower award, and the agency’s failure to document its reasoning will invite reversal. The court’s opinion does not create a bright-line rule, but it does set a high bar—one that Berenblatt, despite his claims of being the first to expose the digital option fraud, could not clear.

What This Means for Future Whistleblowers

The Tax Court’s decision in Berenblatt v. Commissioner, T.C. Memo. 2026-77, marks a turning point for whistleblowers seeking mandatory awards under Section 7623(b), which requires the IRS to pay 15% to 30% of collected proceeds when a whistleblower’s information “substantially contributes” to an administrative or judicial action. The court’s ruling—affirming the IRS Whistleblower Office’s (WBO) denial of Jeremy Berenblatt’s claim—reinforces a strict interpretation of the “substantial contribution” standard, one that future claimants must navigate with precision.

The opinion underscores that timing and documentation are everything. Berenblatt, a former trader who claimed to be the first to expose a digital foreign exchange option fraud scheme, argued that his 2007 interview with IRS Criminal Investigation (CID) agents provided the litigation strategy that later led to billions in recoveries. Yet the court found that the IRS had already identified the issue before his involvement, and his information did not meet the threshold of “substantially contributing” to the enforcement actions. As Judge Copeland wrote, the WBO’s determination that Berenblatt’s information was “not new” and “did not expand the scope of the investigation” was not arbitrary or capricious—it was supported by the administrative record. The court deferred to the IRS’s factual findings, stating that the agency’s conclusion was “within the bounds of reasoned decisionmaking.”

This deference to the IRS’s determinations—so long as they are not arbitrary and capricious—creates a formidable hurdle for whistleblowers. The Tax Court’s reliance on the Administrative Procedure Act (APA) standard of review, as articulated in Van Bemmelen v. Commissioner, 155 T.C. 64 (2020), means that courts will not substitute their judgment for the WBO’s unless the agency’s reasoning is clearly erroneous or unsupported by evidence. The court’s opinion in Berenblatt explicitly adopts the D.C. Circuit’s guidance in Trongone v. Commissioner, 181 F.4th 85 (D.C. Cir. 2026), which requires whistleblowers to prove that their information “reasonably and reasonably explained” the IRS’s actions. This standard is not satisfied by mere relevance or corroboration—it demands direct causation.

The implications are stark. Whistleblowers who provide information after an investigation is already underway—even if their insights are valuable—may struggle to meet the “substantial contribution” test. The court’s emphasis on the IRS’s prior knowledge of the issue as a disqualifying factor sets a precedent that could chill claims from individuals who come forward later in an investigation. As the WBO’s classifier noted in Berenblatt’s case, the agency had already identified the digital option fraud before his 2007 interview, rendering his later submission redundant.

This decision also aligns with recent D.C. Circuit precedent, including Lissack v. Commissioner, 125 F.4th 245 (2025), which limited whistleblower awards by requiring clear evidence of impact. Together, these rulings signal a shift toward judicial restraint in whistleblower cases, where courts are increasingly reluctant to second-guess the IRS’s factual determinations. The Tax Court’s opinion in Berenblatt does not create a bright-line rule, but it does elevate the bar for future claimants. Whistleblowers must now demonstrate not just that their information was helpful, but that it was essential to the IRS’s success.

For practitioners advising whistleblowers, the lesson is clear: documentation and timing are critical. Claimants should ensure their submissions are timely, specific, and actionable, providing the IRS with new avenues of investigation that it would not have pursued otherwise. The court’s rejection of Berenblatt’s argument—that his litigation strategy was the key to the IRS’s later victories—highlights that technical or legal analysis alone is insufficient if the IRS was already on the trail.

Finally, it is worth noting that this ruling applies only to mandatory awards under Section 7623(b). Whistleblowers who do not meet the $2 million threshold or fail the “substantial contribution” test may still seek discretionary awards under Section 7623(a), where the IRS has broader discretion. However, the Tax Court’s deference to the IRS in Berenblatt suggests that even discretionary claims will face scrutiny if the agency can show that the whistleblower’s information was not pivotal to its actions.

The era of easy whistleblower awards is over. Future claimants must be prepared to prove their impact with precision, or risk seeing their claims denied—and their appeals rejected—under the same stringent standards applied in Berenblatt.