Don’t Expect a Whistleblower Award for Giving the IRS Privileged Information and General Information from the Judicial Conference on this Issue

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At the recent Tax Court judicial conference, there was a specific breakout session dedicated to whistleblower cases. I attended the session not because my clinic has, or will ever have, a whistleblower case but because I have blogged a number of these cases which are coming out now with regularity. Since the jurisdictional basis is relatively new, many of the decisions set precedent. From going to this session, I now know that generally we have picked the most important issues to cover with our blog posts. Sadly, we have still not recruited a regular guest poster with expertise who could offer insights someone not litigating this type of case cannot offer. Anyone practicing in this area who would like to send us guest posts would be most welcome.

In addition to discussing and linking to information provided at the Judicial Conference about Whistleblowers, I will discuss a recent case involving the denial of any award. The case points out the difficulty that a claimant will have if the IRS determines that the information is privileged and the claimant disagrees. The Tax Court does not become the forum for litigating whether the IRS made the right decision regarding the privilege just as it does not second guess the IRS on whether it makes a good decision to pursue cases based on the information provided.

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The Conference

The non-judicial panel members for the whistleblower breakout session included: Erica L. Brady, of The Ferraro law Firm (a PT guest blogger); Bryan C. Skarlatos, of Kostelanetz & Fink, LLP; and Robert T. Wearing, of the IRS Office of Chief Counsel. The panel was co-moderated by The Honorable John O. Colvin and The Honorable Daniel A. Guy. During the session, documents were provided to attendees that were useful in following the presentation. The documentation was: first, an outline of the issues in whistleblower litigation; second, accompanying attachments to the outline of the whistleblower litigation issues; third, a general whistleblower outline on representing tax whistleblowers and defending against them; fourth, an outline on IRC section 6103 and the use and protection of taxpayer return information in whistleblower cases; and fifth, a copy of Form 11369 Confidential Evaluation Report on Claim for Award.

The Court provided some statistics on these cases during its presentation. Assuming my handwritten notes correctly captured the data provided, 101 whistleblower cases filed so far have requested permission to proceed anonymously. The Tax Court granted the request in about half of these cases, which is about the same number that were represented. The Court reminded us that the venue for appeal of these cases lies with the D.C. Circuit and stated that three cases were currently on appeal to that court. The number of petitioners seeking relief under this provision increased gradually until 2016 before dropping off in 2017. There were 56 whistleblower petitions filed in 2016 and only 45 in 2017. One panelist suggested fewer claims were filed because taxpayers and practitioners learned more about these claims. The number of IRC section 7623(b) claims has continued to rise each year. One surprising, but not too shocking, statistic was that it takes about seven and one-half years for a claim to go through the process to payout or denial.

Over 14,000 determinations have been made so far by the IRS whistleblower office but it is not clear how many of the determinations are for claims submitted under (a) and how many under (b). It is assumed that most are under (a). Last year the IRS made 242 awards, only 27 of which were under (b). Another thing I learned at the conference, related to the amount of time these cases take, is that the IRS has a relatively new program in which they try to follow up with a whistleblower each year.

The Case

On March 20, 2018, the Tax Court issued its most recent whistleblower opinion in the case of Whistleblower 23711-15W v. Commissioner, T.C. Memo 2018-34. In this sealed case, the Court granted summary judgment to the IRS because it did not initiate administrative or judicial action based on the information provided. The problem with the information was that the whistleblower, an attorney, got the information (in the view of the IRS) in a privileged context. The IRS decided that it could not use the information provided to it in order to create a case. There is not enough information in the opinion to permit a detailed analysis of the information and the privilege. The attorney must have thought that the information was not privileged. The attorney had enough concerns about the information in order to request and receive a sealing of the record of the case but that does not speak to the privilege. The IRS whistleblower office gave the information to Chief Counsel of the IRS, which opined that the privilege attached.

Petitioner had previously been employed as an attorney by the law firm that represented the reported party and alleged, based on information gathered during that relationship, that the taxpayer had “engaged in tax evasion using offshore entities.” Based on the advice received from Chief Counsel’s office, the IRS did not do anything with the information. Since the IRS showed the Tax Court that it did not collect any tax based on the tip, the Court sustained the motion for summary judgment filed by the IRS.

The whistleblower argued that the IRS should have “dug deeper” in reviewing the returns of the reported party but the Court had little trouble brushing aside this argument.

Petitioner disputed that the information was covered by the attorney client privilege. The Court stated “in reviewing the Office’s determination, however, we do not have authority to second guess the IRS’s decision not to proceed with administrative or judicial action. Our authority is limited to ascertaining whether the IRS in fact proceeded with such action and collected proceeds as a result.”

This case shows once again that whistleblowers will not get anywhere arguing to the Tax Court that the IRS failed to make good use of the valuable information provided. It also shows the value of providing the IRS with information about where the information came from and legal support for the ability of the IRS to use the information. The petitioner here disagreed with the determination of the Chief Counsel attorney that the petitioner gathered the information in a privileged setting. Petitioner should have anticipated the concern and provided a detailed legal supporting memo along with the information. Maybe the end result would not have changed, but by heading off concerns at the outset the whistleblower has a better chance that the IRS will accept the information that might otherwise cause it concern. Since the petitioner cannot use the Tax Court to settle any dispute regarding privilege, the petitioner must try to head off the concern before it gets to the stage of keeping the IRS from using the information.

 

Comments

  1. Martin B. Tittle says:

    It seems logically possible that the IRS agreed (internally, at least) with the petitioner that privilege would not apply, but felt that the privilege issue was colorable enough that litigating it, in addition to pursuing the underlying tax case, would be an uneconomic allocation of resources.

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