How the D.C. Circuit’s Upcoming Decision in Lissack Could Begin to Undo the IRS’s Nullifications of the Whistleblower Program

We welcome first time guest-blogger Michael Humphreys.  He practiced transactional tax law for several years at Cravath and Skadden and provided transactional tax advice at EY for several years thereafter. He re-entered legal practice four years ago to represent a whistleblower in a high stakes case in Tax Court. He has written a forthcoming article which will appear in Tax Notes and expects to supplement it with two additional articles.  He can be reached at Keith

Tax Notes will be publishing on Monday, April 10th, an article of mine with the following provisional title: “How the D.C. Circuit Can Save an IRS-Nullified Whistleblower Law.” This blog entry provides a brief introduction. I would welcome any comments sent to my email address above.

Section 406 of P.L. 109-432, division A, Title IV (December 20, 2006), redesignated then section 7623 as subsection (a), added new subsection (b), and added statutes surviving outside of the Code (“statutory notes”) and amendments to the Code to implement new subsection (b) (collectively, capitalized “Section 406”).

Before Section 406, section 7623 had granted the IRS sole discretion over whether and how much to pay persons (“informants”) for information leading to the detection of underpayments of tax. The IRS used its powers to develop what it called the Informants’ Rewards Program (the “informant program”). Congress left the informant program untouched by preserving prior section 7623 as new subsection 7623(a). The other provisions of Section 406 created a new program (the “whistleblower program”), which was based explicitly (in key parts word for word) on the 1986 reforms to the qui tam provisions of the False Claims Act (the “1986 FCA reforms”).

The upcoming Tax Notes article urges the U.S. Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) to reach two, possibly three, holdings in the main tax whistleblower case before it, Michael Lissack v. Commissioner, USCA 21-1268 (“Lissack”). In so doing, the D.C. Circuit must overrule an appalling decision reached last year by a different panel of D.C. Circuit judges in Li v. Commissioner, 22 F.4th 1014 (D.C. Cir. 2022) (“Li”). The Li panel was grossly deceived by an amicus curiae brief filed by the D.C. office of large corporate law firm with a whistleblower-defense practice area.

The three recommended holdings are summarized below. Needless to say, the IRS is litigating the opposing positions. If the IRS prevails, the pragmatic nullification of the whistleblower program, effected by IRS leadership within a year of the enactment of Section 406, will be formally complete, with the exception of a tiny number of claims currently under appeal.

The three recommended holdings reflect a “radical” analysis of the law, in the original meaning of “originating in the root or ground.” The analysis is grounded as none has been before in the words of Section 406, considered as an integrated whole, and as an explicit incorporation by Congress of the 1986 FCA reforms into section 7623. The radical analysis has yielded what will seem upon first reading as radical conclusions. Sometimes there is nothing so astonishing as the simple truth.  

Readers wondering why anyone would bother to invest so much analysis in an area of law that has attracted zero scholarship and precious little of practitioner attention might want to read the immediately following paragraphs. Those not wondering why should skip ahead to the “First Holding Sought.”


How the Tax Notes Article Came to Be

Due to an incorrect Tax Court holding obtained by IRS litigators against a pro se whistleblower in Kasper v. Commissioner, 150 T.C. 8 (2018) (“Kasper”), the evidence in a Tax Court appeal of the denial of a whistleblower claim under section 7623(b)(1) (as further defined below, a “(b)(1) claim”) is shockingly limited. There is no “trial” and no discovery within the ordinary meaning of the term. Instead, the Tax Court limits its review, under an “abuse of discretion” standard, to documents originally filed with the IRS by the whistleblower (the “(b)(1) claimant”) and documents subsequently prepared, edited, and selected by the IRS (in its sole discretion) for inclusion in the “administrative record” for the (b)(1) claim (such evidentiary restriction, the so-called “record rule”).

A (b)(1) claimant appealing in Tax Court may, however, obtain discovery of IRS documents the IRS has not already curated in anticipation of such litigation. In particular, a (b)(1) claimant may obtain “extra-record” evidence regarding “the mental processes of [IRS] decisionmakers” by submitting “meaningful documentation” making a “strong showing of bad faith or improper behavior” by the IRS. See Van Bemmelen v. Commissioner, 155 T.C. 64 (2020) (“Van Bemmelen”).

As the IRS proceeded to file numerous motions needlessly delaying disposition of my client’s case, I had the time and motivation to research the history of the whistleblower program to find publicly documented evidence of systematic bad faith by the IRS. The more I looked, the more I saw. The IRS was not merely applying the law desultorily or in bad faith; it had devoted itself to a subtle, relentless, and comprehensive campaign to nullify virtually every element of the whistleblower program Congress enacted in 2006.

After I filed on behalf of my client meaningful documentation making such strong showing of bad faith or improper behavior by the IRS as part of discovery-related motions, the IRS moved—two years into the litigation—to block all public access to filings in the case, even if redacted of all “return information” of the taxpayer.

I began reading Procedurally Taxing. There I learned about Li, which literally eliminated the whistleblower program for all future (b)(1) claimants.

Under Li, if the IRS (really LB&I) sees that a future (b)(1) claim is “too big to pay,” it can prevent any Tax Court appeal simply by directing the whistleblower office (the “WO”) to “reject” the (b)(2) claim upon receipt, without “assigning” it to an “appropriate office” elsewhere in the IRS (an “AO”). Yes. I reached out to Ms. Li about her petition to SCOTUS for a writ of certiorari, but we disagreed about the writ.

Then I learned in Procedurally Taxing that the D.C. Circuit was reviewing Lissack, which would extend Li. Under Lissack as the IRS wishes it to be decided, in the case of all current (b)(1) claims that have already been “assigned” by the WO to an AO, the IRS can prevent any Tax Court appeal by directing such AO to “deny” the claim. Yes. Unfortunately, I did not find about Lissack until such time that it would be impossible to file before oral argument. The D.C. Circuit clerks advised that I could still file a proposed brief, which provided an analysis similar to what is in the Tax Notes article, but severely constrained by a word limit. The D.C. Circuit declined to accept the brief, probably because it would have required a response brief from the IRS that would have further delayed proceedings.       

At that point I decided to do all I could to get the analysis out in a public forum that the three judges in the Lissack panel would be likely to hear about and read. I prepared a comprehensive analysis of how the IRS has nullified the whistleblower law through written guidance, operational decisions, Treasury regulations, and strategic litigation, mainly against pro se petitioners (the “nullifications”). These nullifications are based entirely on public documents and not documents in the case in which I represent a client currently in litigation. Tax Notes advised me to write a shorter article focused on Lissack and then to present the remaining material in two less urgent articles to be published later.

First Holding Sought

The first holding the D.C. Circuit should reach is that Mr. Lissack had the right under section 7623(b)(4) to appeal to the Tax Court the denial by the IRS of his claim for an award under section 7623(b)(1).

More precisely—and yet more generally—section 7623(b)(4) explicitly grants the Tax Court “subject matter jurisdiction” to hear an “appeal” of “any” administrative “determination” by the IRS “regarding” an award for a whistleblower claim such as Mr. Lissack’s that satisfies the threshold requirements of section 7623(b)(1) (a “(b)(1) claim”). Claims qualifying as (b)(1) claims must allege amounts in dispute exceeding $2 million, not be based on public allegations, and not involving tax abuses in which the whistleblower was complicit.

Section 7623(b) claims under paragraphs (2) (based on public allegations) and (3) (involving whistleblower complicity) may be appealed as well, but such claims are expressly at the discretion of the IRS and thus peripheral to the core purpose of the whistleblower program. The second sentence of the official legislative history describes Section 406 as follows: “Generally, the provision establishes an award floor of 15 percent of the collected proceeds … if the IRS moves forward with an administrative or judicial action … based on information brought to the IRS’s attention by an individual.”  

Under the first sentence of section 7623(b)(1), “if the Secretary proceeds with any administrative or judicial action based on” the “information” in the (b)(1) claim (“(b)(1) information”), the Secretary “shall” pay the individual filing the (b)(1) claim (the “(b)(1) claimant”) “at least 15 percent … of the proceeds collected as a result of the action … or from any settlement in response to such action.”

This core provision corresponds exactly to the key provision in the 1986 FCA reforms, 31 U.S.C. section 3730(d)(1): “If the [Department of Justice (“DOJ”)],” after reviewing the “information” contained in a qui tam action filed by a person (the “complainant”), “proceeds with [the] action brought by [the complainant], such [complainant] shall … receive at least 15 percent … of the proceeds of the action or settlement of the claim.”

Information that initiates action immediately locks in the right to 15 percent of any proceeds ultimately collected under such action. This is true regardless of any future contribution of the (b)(1) claimant, as it is for an FCA complainant.

The second administrative determination by the IRS is almost always the settlement agreement reached with the taxpayer regarding the action. This establishes the amount of proceeds collected—the dollar amount to which the award percentage applies. The third administrative determination is set forth separately in the second sentence of section 7623(b)(1). After proceeds are collected, the IRS determines the “amount” by which the award percentage may be increased from 15 percent up to 30 percent “depending upon the extent to which the person [—the (b)(1) claimant, not the (b)(1) information—] substantially contributed to the action.”

The IRS cannot delay an appeal by delaying notice to the whistleblower of an administrative determination under section 7623(b)(1). The IRS delayed notification of its final administrative determination to deny Mr. Lissack’s (b)(1) claim by at least five years.

Any concerns that (b)(1) claimants would file ‘too many’ appeals to the Tax Court were addressed in two ways by Congress. First, the threshold requirements for a (b)(1) claim were so stringent that only a tiny percentage of information disclosed under section 7623 could result in appeals. Second, Section 406 amended the Code to permit the Tax Court to use “special trial judges” to handle section 7623(b)(4) appeals with the utmost of judicial economy.

Appeals regarding (b)(1) claims are not limited, as IRS litigators have relentlessly argued since Section 406 was enacted, to the last possible administrative determination under section 7623(b)(1). This is the third administrative determination that applies only if the IRS has already decided to offer an award: the final award percentage (15 to 30 percent).

The IRS position that (b)(1) claimants can only appeal the amount of an award the IRS offers, but not the outright denial of any award, is absurd and malign. The legislative history made plain that the purpose of Section 406 was to establish a 15 percent award floor. No floor exists if a (b)(1) claimant can only appeal the extent to which an award offer exceeds 15 percent, not the right to the 15 percent minimum.

Second Holding Sought

The second holding the D.C. Circuit should reach is that reg. section 301.7623-2, which the Tax Court relied upon in deciding against Mr. Lissack, is utterly invalid under any conceivable Chevron analysis. This regulation, which was based on written guidance issued by the IRS Office of Chief Counsel (“OCC”) within a year of the enactment of Section 406, affirmatively nullified section 7623(b)(1) and pragmatically nullified section 7623(b)(4). The IRS minimized public scrutiny of its nullifications by presenting them first informally in Notice 2008-4, I.R.B. 2008-2, rather than by presenting them (through Treasury) as proposed regulations. 

As explained in the article, OCC issued written guidance and Treasury wrote regulations that scrambled the terms used in section 7623(b)(1) to nullify all administrative determinations described above other than the final one after collections are complete. No public commentators noticed. The IRS successfully relied upon the fact that proposed regulations under Section 406 could not be expected to elicit detailed analysis by public commentators such as the Tax Section of the New York State Bar Association.

OCC and Treasury rewrote section 7623(b)(1) so that no (b)(1) claim would be paid unless the (b)(1) information satisfied, in hindsight, two tests found nowhere in section 7623(b)(1). First, the (b)(1) information would have to qualify as the only possible cause of the initiation of the action. If any other later information could have initiated the action, the (b)(1) claim would get nothing. Second, the (b)(1) information would have to qualify as the (only named) “cause” of the completion of the action: the recovery of proceeds. 

This replicated the reward determination procedures and principles under the informant program. Under the informant program, there was only one administrative determination, after collections. With hindsight, the IRS would determine the “value” of the informant’s initially filed information compared with the value all of the information generated by the IRS during audit, appeals, and collections, including information obtained from the informant at the request of the IRS (the “retrospective relative value” test). To obtain the maximum award percentage of 15 percent, the informant had to file documentation sufficient not only to initiate the action, but also to “result in, or be a direct factor in” the final recovery of proceeds; that is, to dispose of the case with minimal IRS effort (“dispositive documentation”).

The retrospective relative value test and dispositive documentation test made informant claims regarding taxpayers audited by what is now called the Large Business and International Division (including predecessor divisions, “LB&I”) (“LB&I claims”) virtually impossible. Tax planning underpayments by LB&I taxpayers are usually complicated and take a long time to resolve. The longer the fight, the greater the information generated by the IRS, and the smaller the relative value of the information initially filed by the informant. Unlike the case with simple fraud by smaller taxpayers, production of a missing document rarely disposes of a case.

LB&I had been protected from informants by the award guidelines under the informant program. LB&I was immediately protected from whistleblowers by OCC, which rewrote section 7623(b)(1) so that (b)(1) claims would be treated exactly the same as they would have been if Section 406 had never been enacted.

Not only were LB&I claims destined for denial; final determinations were delayed for several years. Under the ‘logic’ of the retrospective relative value test, the single and final administrative determination would not be made until collections were complete. LB&I audits often take several years. This systematic delay in notifying (b)(1) claimants that their (b)(1) claims have been denied gave the IRS several years to put into place numerous other nullifications to destroy the whistleblower program. It also pragmatically nullified section 7623(b)(4) as justice delayed is justice denied.

Third Holding Sought

Third, to the extent a decision based on the facts of Lissack may differ depending upon the judicial standard of review, such standard should be de novo, not for abuse of discretion. Nothing in the wording of section 7623(b)(4) implies any limitation as to standard of review. Furthermore, the first sentence of section 7623(b)(1) contains certain words that deviate significantly from the corresponding provisions under the 1986 FCA reforms. These deviations prove that Congress intended de novo review to apply because it would prove necessary. The article explains how LB&I subsequently proved precisely why the edits by Congress were in fact necesssary.


As mentioned above, the forthcoming article in Tax Notes is the first of three. The second article provides a full discussion of the informant program (and the bogus so-called “Special Agreements” thereunder), operational decisions by IRS management that rendered the whistleblower office created by Congress irrelevant, other nullifications introduced by OCC guidance, and how the Treasury regulations ‘codified’ and extended OCC’s nullifications. The third article will analyze in detail the strategic litigation campaign by IRS litigators, begun shortly after the whistleblower program was created, to reduce section 7623(b)(4) appeals to rubber-stamp proceedings in which judicial review is reduced to a determination whether the IRS “abused its discretion” based on the “administrative record” curated by the IRS itself.