Prescott v. Commissioner

Whistleblower Denied Share of Target A Proceeds

A whistleblower, identified as Prescott, will not receive a mandatory award for information provided about a foreign financial institution, Target A, after the Tax Court sided with the IRS. At stake was Prescott's claim to 15 to 30 percent of the collected proceeds—the mandatory award range under Section 7623(b)(1) for whistleblowers whose information leads to successful tax collection. Prescott's claim faltered under the "multiple whistleblower rule," where others had already provided the crucial information leading to the recovery.

The Timeline: A Three-Year Gap

The context for Prescott's whistleblower claim involves an IRS investigation into Target A, a foreign financial institution. The IRS Criminal Investigation division (CI) initiated its investigation in October 2010. This investigation stemmed from information provided by taxpayers seeking relief under the Offshore Voluntary Disclosure Initiative (OVDI). The OVDI program allowed taxpayers with undisclosed offshore accounts to come forward, disclose those accounts, and resolve their tax obligations. The IRS used the OVDI data to request a grand jury investigation of Target A, which the Department of Justice (DOJ) approved on December 3, 2010. By December 15, 2010, CI formalized a Subject Criminal Investigation of Target A.

The investigation progressed significantly before Prescott submitted his claim in April 2013. The IRS had already gathered substantial documentation regarding Target A and its account holders, much of it obtained through a search warrant executed against an entity associated with Target A that was also under criminal investigation. This documentation provided the basis for the IRS to request information from foreign treaty partners regarding undisclosed accounts held by U.S. persons at Target A.

By December 2014, the DOJ secured a criminal conviction against the entity associated with Target A. Subsequently, Target A entered into a Deferred Prosecution Agreement (DPA). Under the DPA, Target A agreed to pay a substantial sum to the U.S. government and to cooperate with the investigation of U.S. account holders, ultimately providing information on numerous individuals. This timeline highlights a critical three-year period during which the IRS investigation was actively underway, preceding Prescott's involvement.

The Rivals: WB-1 and WB-2 Take the Credit

Following the remand, the Whistleblower Office (WBO) reconsidered Prescott's claim, specifically applying the "multiple whistleblower rule" outlined in Treasury Regulation § 301.7623-4(c)(4). This regulation governs situations where multiple individuals independently provide information leading to the same collected proceeds; it requires the WBO to evaluate each contribution to determine award allocations.

WBO analyst Carlos Tarrago prepared a supplemental Administrative Record Memorandum (ARM). Tarrago determined that two other whistleblowers, designated WB-1 and WB-2, had made "very significant contributions" to the Target A investigation. According to the ARM, the information provided by WB-1 and WB-2 factored into obtaining a search warrant in March 2011. Crucially, the records uncovered during this search allowed the Criminal Investigation division (CI) and the Department of Justice (DOJ) to request records on Target A, which proved "critical" in securing the Deferred Prosecution Agreement (DPA). The WBO credited WB-1 and WB-2 with providing "invaluable information" used to obtain the search warrant, emphasizing that without it, CI would not have had a sufficient basis to request treaty information to uncover foreign accounts held by U.S. persons. Prescott's information, according to the WBO, was not used to obtain this critical search warrant.

Furthermore, WB-1’s information and contribution to the criminal conviction of the entity associated with Target A "paved the way" for the DPA settlement with Target A. The WBO highlighted the timing of the DPA, just three days after the criminal trial conviction of the associated entity, as evidence of the intertwined nature of the cases. The WBO found that the criminal case and the Target A case had been merged into one investigation team, operating out of CI’s Los Angeles office.

Given the substantial contributions of WB-1 and WB-2 to the successful criminal prosecutions related to Target A, the WBO analyst determined that they should receive credit for "100% of the collected proceeds." He further concluded that Prescott’s information was already known and did not provide any new information to CI, leaving "no basis to attribute any of the proceeds collected from [Target A’s] criminal case to petitioner.”

The 'Meeting' Argument: Presence Doesn't Mean Payday

The petitioner, Mr. Prescott, argued that the very fact that Department of Justice (DOJ) Attorney Ellen Quattrucci agreed to meet with him in January 2013 proved his information's value. He speculated that DOJ might have used his information as "leverage" in settlement negotiations or to "support search warrants," even if he provided no direct assistance to the IRS. Essentially, Prescott contended that Quattrucci's agreement to a meeting was de facto evidence of his "substantial contribution."

Judge Lauber rejected this argument. He reasoned that, according to the record, Prescott's former counsel had described the "extent and nature" of his information to Quattrucci in general terms during a phone call two weeks before the meeting. The court highlighted the testimony of Mr. Chatham, the WBO analyst, who noted that during a criminal investigation, the DOJ "would be expected to meet with and gather information from all credible sources and then sort out the information for their criminal prosecution case at a later date.” Therefore, the judge reasoned that merely triggering a meeting did not, by itself, establish that Prescott's information assisted the DOJ in any meaningful way, "much less that it 'substantially contributed' to the recovery of proceeds from Target A." Judge Lauber further cited Treasury Regulation § 301.7623-2(b)(1), which defines when information "substantially contributes" to an action, stating explicitly that a whistleblower does not "substantially contribute" simply by submitting information to an investigating agent. The regulation implements Section 7623(b)(1), which mandates the IRS to pay awards to whistleblowers who provide information leading to the collection of tax proceeds. Because the IRS proceeds based on information only when that information "substantially contributes" to an action against a taxpayer, the meeting did not satisfy the legal standard.

The Verdict: Substantial Contribution Explained

The court then addressed the central question of "substantial contribution" as it relates to whistleblower awards. Section 7623(b)(1) authorizes the IRS to pay awards to whistleblowers when the agency "proceeds with any administrative or judicial action... based on information" the whistleblower provides. Treasury Regulation § 301.7623-2(b)(1) clarifies that the IRS "proceeds based on information" only when that information "substantially contributes to an action against a person identified by the whistleblower." The regulation specifies that a whistleblower's information does not "substantially contribute" if the IRS merely "analyzes the information provided or investigates a matter raised by the information," especially when that matter was already on the IRS’s radar.

Here, the court upheld the WBO's determination that the whistleblower did not substantially contribute to the collection of proceeds from Target A, thus justifying the summary judgment. The IRS had already commenced its investigation of Target A in October 2010, more than two years before the petitioner's information was received in June 2013. By that time, the IRS Criminal Investigation division (CI) had uncovered substantial evidence, triggered foreign treaty requests, and obtained a search warrant that produced incriminating evidence. The court noted that the Form 11369 prepared by a special agent in September 2015 indicated that the petitioner’s information did not assist CI’s investigation. IRS agents confirmed that the petitioner’s claim information was not utilized in any way. The court emphasized that WB-1 and WB-2 provided the critical information leading to the search warrant, treaty requests, and the criminal conviction of the associated entity, events that directly led to Target A's deferred prosecution agreement (DPA).

In short, the Tax Court found that the IRS merely "investigated a matter raised" by the petitioner, a matter that was already under intensive investigation.

Impact: This case underscores a crucial takeaway for future whistleblowers: timing is everything. "Me-too" information that merely corroborates existing investigations does not qualify for a payout under Section 7623(b)(1). To secure an award, a whistleblower's information must demonstrably lead to a new action, expand the scope of an existing one, or prevent the termination of an investigation the IRS would have otherwise abandoned.