DC Circuit Affirms Tax Court on Lack Of Jurisdiction for Awards from Voluntary Disclosures in OVDI (8/12/24)

I previously blogged about a whistleblower claim dismissal in Shands v. Commissioner, 160 T.C. 388 (2023), here. Tax Court Sustains IRS WBO Denial of Whistleblower Claim for Award Based on All OVDI Collected Proceeds (3/13/23), here. The whistleblower (Shands) sought the mandatory and discretionary awards under § 7623(b) for collections in the IRS Offshore Voluntary Disclosure Initiative (“OVDI”) which allegedly exceeded $2.3 billion, with a resulting minimum 15% award that would exceed $345 million. The claim was based on Shands’ cooperation with the IRS in identifying and prosecuting Swiss Bank account enablers (bankers, etc.), actions which allegedly led the IRS to adopt the OVDI which in turn resulted in the IRS collecting substantial FBAR  penalties and income tax, penalties and interest. The Tax Court rejected his claim for lack of jurisdiction because the collections in the OVDI were not administrative or judicial actions based on Shands’ information.

The D.C. Circuit affirmed on appeal.  Shands v. Commissioner, ___ F.4th ___ (D.C. Cir. 2024), DCCir here and GS here. The Court agreed that the collections from taxpayers joining the OVDI were not proceeds from administrative actions (or related actions) from Shands' information. The Court reasoned (Slip Op. 11-12):

     OVDI cases do not generally give rise to Tax Court jurisdiction because they typically are not “against” any taxpayer. Rather, a taxpayer who participates in the OVDI chooses to disclose overseas accounts; calculates the taxes, interest, and penalties associated with the voluntary disclosure; and then pays the amount that is owed. That process is initiated and directed by the taxpayer. It therefore cannot be fairly characterized as the IRS proceeding with an action against the taxpayer. See Li, 22 F.4th at 1017. Indeed, the defining features of the OVDI program are the taxpayer’s voluntary disclosures and payments: The OVDI thus bears no [*12] resemblance to the IRS-driven actions that are listed as examples of “administrative actions” in the applicable regulation, see 26 C.F.R. § 301.7623-2(a)(2) (citing as examples “an examination, a collection proceeding, a status determination proceeding, or a criminal investigation”).

Certain other points:

1. The Court noted that voluntary disclosures which are followed by administrative audits (which was a possibility in OVDI and undoubtedly occurred in some cases such as, for example, when taxpayers opted out or were removed from OVDI) might confer jurisdiction (Slip Op. 12-15, bold face supplied by JAT):

    We acknowledge that OVDI cases or other voluntary disclosure programs could lead to administrative or judicial actions that might justify a whistleblower award under circumstances not at issue here. For example, a voluntary disclosure through the OVDI could result in an examination (that is, an audit) of the taxpayer by the IRS, which would be an administrative action by the agency against that taxpayer. See 26 C.F.R. § 301.7623-2(a)(2). Shands, however, argues only that OVDI cases themselves — i.e., the taxpayer’s voluntary disclosure of assets and payment of taxes, interest, [*13] and penalties — are “administrative actions.” That claim falls short.

* * * *

But as we have already explained, the mere possibility that an OVDI case could evolve into an “administrative action” taken by the IRS against a taxpayer does not provide a basis for jurisdiction where no such evolution has been identified. Shands does not, for example, point to any taxpayer who participated in the OVDI as a result of Shands’s cooperation and then faced an audit that was triggered by the OVDI disclosure.

    Shands blames the IRS for his failure to cite any specific OVDI-related administrative action that arose from his cooperation. He highlights the Tax Court’s denial of his motion to compel the IRS to turn over information identifying all taxpayers who participated in the OVDI program — a ruling that assertedly prevented him from identifying actions taken by the IRS against OVDI participants. Shands claims that disclosure of the information he sought might have revealed “the extent to which the IRS relied on information provided by Shands in . . . OVDI proceedings [and] whether the IRS conducted a full examination of any U.S. Client who applied for OVDI.” Reply Br. 14. But Shands made no mention of the discovery motion in his opening brief, and “[a]rguments raised for the first time in a reply brief are forfeited.” Fore River Residents Against the Compressor Station v. FERC, 77 F.4th 882, 889 (D.C. Cir. 2023). In any event, Shands’s motion to compel sought the disclosure of extensive records pertaining to all OVDI participants, without tailoring his request to the information relevant to the jurisdictional inquiry — i.e., whether the IRS took action against any of the participants in response to their voluntary disclosures. The Tax Court thus did [*15] not abuse its discretion in denying such a motion. See In re Sealed Case (Med. Recs.), 381 F.3d 1205, 1211 (D.C. Cir. 2004) (“We review a district court’s discovery rulings for abuse of discretion.”); 26 U.S.C. § 7482(a)(1) (instructing courts to “review the decisions of the Tax Court . . . in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury”). 

2. In addition, the Court held that Shands had waived by not asserting an alternative theory of jurisdiction relating to the actions against the enablers that then might give rise to a related action claim for the OVDI. (Slip Op. 15-16.)

Shands thus has waived any reliance on the original actions against Lack, Gadola, and BKB as a basis for jurisdiction over the OVDI claim.

3. Shands previously was awarded $8.5 million in 7623(b) awards unrelated to his OVDI claim.