In a recent decision, the Supreme Court declined to hear a whistleblower complaint involving alleged misconduct by the Internal Revenue Service (IRS). The lawsuit, filed by three whistleblowers, claimed that the IRS failed to investigate their claims that institutional mortgage lenders were not complying with regulations. Despite the dismissal of their case, the whistleblowers argue that the IRS should have reviewed and audited these lenders to recover taxes owed.
The whistleblowers, David E. Stone, Thomas Carroll, and David C. Depadro, tipped off the IRS about real estate mortgage investment conduits (REMICs) that were out of compliance with tax exemption rules. REMICs are financial vehicles used by lenders to hold a pool of mortgages and issue mortgage-backed securities. These entities are created and controlled by the largest financial institutions in the world and hold almost all residential mortgage loans in the United States.
The whistleblowers claim that REMICs do not meet the required conditions for tax-exempt status as laid down in the internal revenue code and the code of federal regulations. They argue that REMICs do not obtain or maintain “qualified mortgages” as defined in the code and do not comply with documentation requirements. Therefore, they should be disqualified from tax-exempt status.
The whistleblowers reported their findings to the IRS, which acknowledged receipt of the information. Some IRS investigators confirmed the accuracy of the information but the agency refused to interview the whistleblowers. The IRS ruled that it would not collect taxes owed by REMICs, a decision that the whistleblowers argue is unfair to American taxpayers who follow the rules and pay their fair share of taxes.
The legal issue at hand is whether the IRS, as an arm of the executive branch, has absolute discretion and sovereign immunity under the Administrative Procedure Act (APA) to decline to collect income taxes on bundled mortgages that are otherwise taxable. The APA is a federal statute that governs administrative law procedures for federal executive departments and independent agencies. The whistleblowers argue that the IRS’s discretion does not include the power to write off an entire category of revenue contrary to congressional intent.
The IRS did not provide its side of the story to the Supreme Court, as IRS Commissioner Danny Werfel waived his right to respond to the petition. The federal district court and the U.S. Court of Appeals for the 11th Circuit previously found that the APA could not be used to review the IRS’s position. The executive branch, according to the 11th Circuit, has discretion to refuse to pursue taxes from non-compliant REMICs, and the whistleblowers cannot sue under the APA to force the IRS to act.
While the Supreme Court’s decision not to review the case is a setback for the whistleblowers, the issue of tax compliance by REMICs remains unresolved. The allegations raised by the whistleblowers highlight a potential loophole in the tax system that allows large financial institutions to evade taxes on mortgage income. As Americans owe trillions of dollars on mortgages, ensuring tax compliance by these institutions is crucial for fair taxation.
The whistleblowers’ attorney, Robert J. Hauser, and the U.S. Department of Justice have not provided any comments on the case. However, this decision shines a light on the need for transparency and accountability in the tax system, as well as the role of whistleblowers in exposing potential misconduct. As the IRS continues to face scrutiny, it remains to be seen whether further action will be taken to address these allegations and ensure tax compliance by REMICs.
