The United States Tax Court, in its recent memorandum opinion Whistleblower 11099-13W v. Commissioner, T.C. Memo. 2026-5, addressed a pivotal question for tax professionals regarding the definition of "collected proceeds" under Internal Revenue Code (I.R.C.) § 7623(b). The case centers on whether a whistleblower is entitled to an award when a taxpayer, allegedly prompted by an IRS investigation, voluntarily changes its accounting method and self-reports additional tax on original returns.

Factual Background of the LIFO Inventory Dispute

In July 2008, the petitioner filed IRS Form 211, Application for Award for Original Information, alleging that a target corporation (Target) was engaged in a manipulative tax evasion scheme. The petitioner, a former employee of a Target affiliate, claimed Target used its Last-In, First-Out (LIFO) inventory accounting method to artificially inflate its cost of goods sold (COGS) through "coupled" year-end trades, thereby deferring income tax indefinitely.

The IRS Whistleblower Office (WBO) referred the claim to the Large and Mid-Size Business Division (LMSB). Although multiple audit cycles (2006–2009) investigated the allegations, the examination teams concluded they "could not substantiate" the whistleblower’s claims. Specifically, the Revenue Agent Analysis noted that the whistleblower "lacked the education, knowledge and applicable expertise necessary to properly understand corporate accounting and federal tax issues" and failed to provide a "paperwork flowchart" or specific third-party names required to discover the scheme. Consequently, the IRS made no adjustments to Target’s inventory or COGS for the audited years.

While the 2008–2009 audit was ongoing, Target filed Form 3115, Application for Change in Accounting Method, to voluntarily switch from LIFO to First-In, First-Out (FIFO) accounting for the 2011 tax year. Under I.R.C. § 481(a), such a change requires the taxpayer to "recapture" its entire LIFO reserve as income; in this case, Target estimated it would recognize I.R.C. § 481(a) income in excess of $9 billion.

Petitioner’s Request for Relief and Summary Judgment Motions

The WBO denied the petitioner’s award application on the grounds that the information provided "did not result in the collection of any proceeds". The petitioner appealed this determination to the Tax Court under I.R.C. § 7623(b)(4), seeking an award based on the incremental tax Target paid after allegedly abandoning the LIFO scheme in 2009 and renouncing LIFO in 2012.

The petitioner argued that Target’s actions were "compensable acts" because they caused the taxpayer to pay more tax, and these changes were allegedly tied to the IRS action initiated by his information. The Commissioner moved for summary judgment, asserting that as a matter of law, "self-assessed amounts reported by taxpayers on original returns are not, for purposes of I.R.C. § 7623(b)(1), ‘proceeds collected’".

The Court’s Analysis of the Law and "Collected Proceeds"

The court’s analysis focused on the statutory requirements of I.R.C. § 7623(b)(1), which provides that a whistleblower shall receive an award of 15% to 30% of the "proceeds collected as a result of the action". Drawing on the Administrative Procedure Act (APA), the court reviewed the WBO’s determination for an abuse of discretion, meaning it checked if the decision was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law".

Central to the court’s legal framework were two prior decisions: Whistleblower 16158-14W v. Commissioner, 148 T.C. 300 (2017) and Lewis v. Commissioner, 154 T.C. 124 (2020). In Whistleblower 16158-14W, the court established that "[c]ollected proceeds do not include self-reported amounts collected when a taxpayer changes its reporting for years that are not part of the action". The court further noted that the "mere fact that the taxpayer filed an original return is not a civil proceeding by the Commissioner".

In Lewis, the court expanded this principle, holding that "reported, paid tax is not collected proceeds" even in instances where an ongoing audit was expanded to include the year in which the tax was reported and paid. The court in the present case emphasized that while whistleblower information might contribute to a taxpayer’s decision to change its reporting, such voluntary compliance does not satisfy the statutory requirement for an IRS-initiated "administrative or judicial action" resulting in collected proceeds.

Application of the Law to the Facts

The court applied these precedents to the petitioner’s claim regarding Target’s accounting method change. Even if the court accepted the petitioner’s "speculative allegations" that Target abandoned the LIFO scheme and switched to FIFO because of the IRS investigation, those facts were deemed immaterial.

The court found that the administrative record contained no indication that the examination team expanded its audit to the years affected by the FIFO change. More importantly, the court ruled that Target’s filing of a non-compulsory Form 3115 was a "voluntary taxpayer-initiated" change. Because the additional tax was reported on original returns and not collected as a result of an IRS adjustment or "action," it could not constitute "collected proceeds". As the judge stated: "reported, paid tax is not collected proceeds".

Conclusions Arrived at by the Court

The Tax Court concluded that the WBO Director "did not err in determining that the information petitioner provided did not result in the collection of any proceeds". Because no proceeds were collected within the meaning of I.R.C. § 7623(b), the WBO did not abuse its discretion in denying the award.

The court granted the Commissioner’s Motion for Summary Judgment and denied the petitioner’s various motions to supplement the administrative record, ruling that additional evidence regarding Target’s motivations would not change the legal outcome. For practitioners, this case reinforces a strict interpretation of "proceeds collected": an award requires the IRS to actually detect tax noncompliance and collect amounts through its own action, rather than merely inducing a taxpayer to self-correct in subsequent filings.

Prepared with assistance from NotebookLM.