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February 12, 2016

IRS Whistleblower Rewards Program; How Protected is Taxpayer Information and Whistleblower Identity?

The tax attorneys at Nardone Law Group in Columbus, Ohio continuously monitor the latest developments in the Internal Revenue Service’s efforts to identify and pursue taxpayers who the IRS believes have failed to report or pay taxes owed to the IRS. The IRS uses the Whistleblower Program to further its efforts to identify and ferret out taxpayers it believes are committing wrongdoings regarding the failure to report and pay their tax liabilities.  In a previous article, “IRS Whistleblower Rewards Program; Eligibility and Information Considered,” we discussed the requirements necessary for the IRS to accept a whistleblower submission and the types of whistleblowers eligible to claim an award. If the IRS ultimately uses the information provided by the whistleblower, the IRS may award the whistleblower up to 30 percent of the additional tax, penalty, and other amounts the IRS collects. But, given the sensitivity of the information being exposed, federal law provides rules that protect the interests of both the taxpayer and the whistleblower.

Protection of Taxpayer Information

Since the whistleblower has the right to appeal an award determination for a claim submitted under I.R.C. §7623(b), a meaningful right to appeal requires disclosure to the whistleblower of the basis for the award determination. This will often include taxpayer information that is protected from disclosure under I.R.C. §6103(a). For this reason the IRS uses confidentiality agreements as a way to protect confidential taxpayer return information disclosed during the course of an administrative proceeding. When the whistleblower signs, dates, and returns the confidentiality agreement, the Whistleblower Office will provide the whistleblower with a detailed award report and an opportunity to review the documents supporting the report. 26 C.F.R. 301.7623-3. In reviewing the document, however, the Whistleblower Office will supervise the whistleblower’s review of the information and the whistleblower is not permitted to make copies of any of the documents or other information. 

Despite the IRS’ commitment to protecting taxpayer information, the law does not provide an effective sanction if the whistleblower discloses taxpayer information in violation of the confidentiality agreement and I.R.C. §6103(h). Also, the whistleblower may, against the wishes of the taxpayer, disclose the identity of the taxpayer in a Tax Court or other judicial proceeding. But, a revision to Tax Court Rule 345 requires that taxpayer information be masked in documents filed with the Court. But, release of information during discovery in Tax Court proceedings, however, is not addressed in the new rules and has brought a new set of concerns. This issue with discovery has been highlighted in a recent Tax Court decision.

In Whistleblower One 10683W, et al, (2015), 145 TC No. 8, the Tax Court granted a group of whistleblowers’ motion to compel production of certain discovery requests relevant to the IRS’ denial of an award based on information they provided. The Court rejected the IRS’ argument that the information was outside of the administrative record, and stated that the IRS could not unilaterally decide what constitutes that record.

In this case the whistleblowers filed a claim in 2006 informing the IRS of a tax evasion scheme carried out by Target. The IRS declined to make an award to the whistleblowers, and the whistleblowers appealed. The whistleblowers alleged that the information they provided resulted in the IRS’s investigation. In the course of the appeal, the whistleblowers sought information as to who reviewed the information they provided the IRS’ investigation into Target, the publishing of the legal memorandum that was issued for general distribution during the investigation, the IRS’ investigation into the sham debt obligation, and the amount of collected proceeds. The IRS objected on the grounds that the information requested was not contained within the “Whistleblower Office’s case file,” meaning that it fell outside the “administrative record” and was beyond the scope of discovery.

The Court held that the information sought by the whistleblowers was relevant, in that it would prove whether any of the proceeds collected from Target were attributable to the information they provided. Further, the Tax Court stated that the IRS’ argument that the information was outside of the “administrative record” was an insufficient basis for denying the discovery request. The Court granted the whistleblowers’ motion, however, it included several rules and restrictions governing such disclosure and the use of the information in light of the confidentiality concerns and I.R.C §6103.

Whistleblower Protection

As a matter of policy and under I.R.C. §6103, the IRS has committed to protect whistleblower identity. The IRS has implemented a multilevel review process to ensure that the identities of whistleblowers are disclosed only after careful consideration. The IRS has indicated that it will continue to do its best to prevent disclosure and to provide the whistleblower with notification prior to a disclosure. But, under some circumstances, such as when the whistleblower is an essential witness in a judicial proceeding, it may not be possible to pursue the investigation or examination without revealing the whistleblower’s identity. If a whistleblower’s identity is revealed, the law does not provide the whistleblower with protection.

Unlike other laws that encourage whistleblowers to report information to the government, I.R.C. §7623 does not protect the whistleblower from retaliation. When the whistleblower is an employee of the taxpayer, retaliation can take the form of a job-related action. In other cases, whistleblowers may face threats of physical harm or damage to economic interests. In these situations, whistleblowers may have recourse under state law, but Federal law does not provide a remedy.

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses in federal and state tax issues, including both representation and defense against whistleblower claims. If you have information on an individual or business that has failed to report or pay taxes it owes to the IRS, or you are being investigated or prosecuted by the IRS, you should contact one of the experienced tax attorneys at Nardone Law Group to learn more about the Whistleblower Program. We will thoroughly review your case to determine what options and alternatives are available.

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February 12, 2016

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