For tax whistleblowers, deciding whether to go to Tax Court is a major decision. As I’ve written previously there are a number of factors that go into deciding whether it makes sense to go to Tax Court for a whistleblower case. Moreover, two recent court decisions have provided clarity on that decision – and have also been helpful in improving discovery for whistleblowers in Tax Court.
In general, good candidates for Tax Court are those cases where the whistleblower has some belief/confidence that the IRS took action (or related action) against the taxpayer (or related taxpayer) based on information provided by the whistleblower – which resulted in collected proceeds.
Threshold Requirements For Tax Court Jurisdiction Of Whistleblower Cases – The Li Case
In the recent case of Li v. Commissioner, 22 F.4th 1014 (D.C. Cir. 2022) the D.C. Circuit Court of Appeals addressed the question of when the Tax Court would have jurisdiction of a whistleblower case. In short, can the whistleblower even have her case heard by the Tax Court?
The facts in Li (undisputed by the whistleblower) were that the whistleblower’s submission was rejected by the WBO classifier and was never sent to the field. In short, the whistleblower’s Form 211 was subject to a threshold rejection – essentially that the filing never got of the box and was never sent to the field for consideration and therefore no action was taken by the IRS (and certainly no collected proceeds).
In short, the Circuit Court’s reasoning is that it is a threshold requirement for a whistleblower award for a whistleblower to: a) provide information; b) that information is used by the government to take action; and, c) that action resulted in collected proceeds. If the information was never used for an action — there can be no award. Under the Court’s reasoning, there is no jurisdiction for the Tax Court to hear the whistleblower’s case – and the case will be dismissed.
The decision in Li also reinforces the long-understood view of the Tax Court that a whistleblower will not be given any relief if they go to the Tax Court and are seeking to have the Tax Court direct the IRS to take action against the taxpayer. Don’t waste the stamp.
However, the Court in Li specifically stated that it did not address the facts where the whistleblower believes the IRS wrongly denied an award (remember in Li the whistleblower agreed that the rejected by the WBO and never sent to the field). That takes us to the next case – Whistleblower 972-17W v. CIR, 159 TC 1 (2022).
The Tax Court Clarifies Jurisdiction – Whistleblower 972-17W
The Tax Court addressed the unanswered question in Li –in short, what if the whistleblower disagrees with the IRS claim that the whistleblower filing was subject to a threshold rejection. That the whistleblower believes that the submission was sent to the field and did result in collected proceeds.
The Tax court first notes that Li should be viewed narrowly as “. . . confined to threshold rejections in which the IRS takes no action.” P. 9. The Tax Court then makes clear that in Li the D.C. Circuit had explicitly not reached the question of whether the Tax Court had jurisdiction over a case in which the IRS proceeded against a target taxpayer based on a whistleblower’s information, but the whistleblower office wrongly denied the whistleblower’s application for an award. In its decision in Whistleblower 972-17W, the Tax Court specifically found then that the Tax Court does have jurisdiction to review a whistleblower case where the question is whether the whistleblower office had wrongly denied a whistleblower’s award. Good news for whistleblowers.
The cases that I’ve taken to Tax Court fall into this broader category — where the whistleblower knows/believes (or the IRS has agreed – a close reading of the denial letter can often be helpful in this regard) that the information was sent to the field and resulted in collected proceeds – but that the IRS has wrongly denied an award (based on a mistake of law and/or fact). It is key though, to ensure that the Tax Court has jurisdiction that the whistleblower properly pleads the necessary facts.
Good News On Whistleblower Discovery In Tax Court
The Tax Court in Whistleblower 972-17W also provided good news for whistleblowers as well on discovery. In short, the Tax Court found that the IRS had taken an improper view that Section 6103 allows them to limit the amount of material that a whistleblower can review in discovery in Tax Court litigation. The IRS position – which often leads to heavy redaction — has hamstrung markedly the efforts of whistleblowers to obtain a full understanding of what happened in their case.
The Tax Court in Whistleblower 972-17W cites to 6103(h)(4)(A) as authorizing the disclosure of the redacted information that the whistleblower sought. This issue of redacted information has been a grind in a host of Tax Court cases. Getting this whistleblower–friendly ruling is most helpful so that whistleblowers can now look to getting a fuller picture of the IRS actions in their case and will hopefully speed whistleblower cases along to resolution.
Notes On Anonymity And Standard Of Review in Tax Court
A reminder that a whistleblower can seek to go to Tax Court anonymously. In very general terms, the Tax Court has been open to granting anonymity for whistleblowers who will be potentially subject to financial/emotional distress if their name is revealed.
Finally, whistleblowers still labor under a standard of review of “arbitrary and capricious” for the IRS actions. That is, the whistleblower must show that the IRS in its decision on the facts was arbitrary and capricious (as opposed to the more traditional de novo review – where the court decides the issue). The Tax Court does review errors of statute by the IRS de novo (and that is commonly where many of the disputes arise – and where we’ve had most of our wins on behalf of clients). Hopefully, Congress will enact much-needed proposed bipartisan reforms that will clarify that tax whistleblower cases are subject to de novo review.
Providing for independent judicial review of tax whistleblower cases was one of the critical reforms that Congress enacted when it modernized the IRS whistleblower award program in 2006. Judicial review by the Tax court is an important protection for whistleblowers to ensure that they’ve been treated fairly and in compliance with the law.