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D.C. Circuit Could Finally Fix IRS Whistleblower Program

May 25, 2022, 8:45 AM

The IRS whistleblower law, Section 7623 of the tax code, is among the most effective whistleblower programs in the US, mandating the payment of financial awards to those who provide original information to the IRS concerning a violation of the tax laws if their information results in a sanction against the tax law violator.

The whistleblower program has been remarkably successful in detecting and deterring tax crimes. From 2007 to 2020, the IRS Whistleblower Office collected more than $5.9 billion in sanctions and made awards in the amount of more than $1 billion.

This success is undermined, however, by a recent decision by the US Tax Court, which has appellate jurisdiction over the IRS, concerning the appropriate standard of review for analyzing decisions made by the IRS Whistleblower Office. The decision has grave implications for the future of the whistleblower program because, if upheld, it will bind whistleblowers to a review process that does not favor them, reducing the likelihood that whistleblowers will come forward.

The case, Lissack v. Commissioner, deals with a whistleblower who reported improper tax deductions made by a condominium development corporation. The whistleblower’s tip ultimately led to the collection of $60 million in unpaid taxes. However, the IRS denied the whistleblower’s claim and the whistleblower appealed the denial to the US Tax Court, which ultimately upheld the denial of the award.

Central to the unfavorable outcome was the Tax Court’s application of an “arbitrary and capricious” standard of review, which required the court to defer to the Whistleblower Office’s decision. The standard essentially determines the extent to which the Tax Court will scrutinize the decision made by the IRS Whistleblower Office regardless of the underlying facts. In Lissack, the application of the “arbitrary and capricious” standard unsurprisingly resulted in an adverse decision for the whistleblower and did not allow the judge to fully evaluate the conditions for the Whistleblower Office’s denial.

Under a de novo standard, the US Tax Court decides an issue without giving any deference to the decision made by the IRS, thereby giving the court greater independence in its determination. Conversely, under an arbitrary and capricious standard, the court will only overturn the IRS’s decision if it is arbitrary, capricious, or manifestly contrary to the statute—a very restrictive and deferential standard that makes a reversal extremely unlikely.

By applying an arbitrary and capricious standard, the Tax Court has imposed an enormous burden on whistleblowers who believe they were unjustly denied an award by the IRS. The court’s decision severely limits effective oversight by federal courts of decisions made by the IRS that affect the important contributions of whistleblowers who report tax violations. To restrict or deny whistleblower rewards without appropriate judicial review would result in an inevitable chilling effect on the IRS whistleblower program.

Despite recent reform efforts, a number of issues have undermined the effectiveness of the program, such as excessive delays in the issuance of awards to meritorious whistleblowers, resulting in a massive backlog of over 23,000 cases. In cases like Lissack, these delays are metastasized by an unfair standard of review.

But there is hope. By looking to the law’s legislative history—a critical source for interpreting its meaning—it becomes evident that Congress intended for de novo review of IRS decisions. A version of the IRS whistleblower law has been on the books since 1867, but the IRS whistleblower statute underwent a major overhaul in 2006 as part of the Tax Relief and Healthcare Act to fix a slew of problems with the existing program.

A Senate Finance Committee report on an earlier version of the bill stated that the legislative update was intended to provide “greater certainty and independent review for Whistleblowers.” Courts have long interpreted “independent review” to mean de novo review. The de novo standard gives reviewing courts the ability to independently take in the facts and determine whether the outcome was reasonable rather than arbitrary or capricious.

In passing the legislative overhaul of the IRS whistleblower statute, Congress sought to fix a lack of oversight in IRS decisions. Academic analyses and congressional reports considered by Congress revealed that the IRS frequently ignored its own internal policies, demonstrating the need for more judicial scrutiny. It is clear that Congress intended a de novo standard to be applied to the review of IRS decisions to offer precisely the type of judicial scrutiny needed. Lissack is a testament to how important independent review is to the success of the IRS whistleblower program.

The Tax Court’s decision in Lissack has been appealed to the US Court of Appeals for the D.C. Circuit. The National Whistleblower Center—along with Kohn, Kohn, and Colapinto, LLP and Zerbe, Miller, Fingeret, Frank, Jadav, and Hunziker, LLP—filed an amicus brief in the appeal, urging the reversal of the lower court’s decision.

This will be the first opportunity for the D.C. Circuit to decide the correct standard of review for determinations made by the IRS Whistleblower Office. It is critical that circuit court reverse the Tax Court’s decision. Failure to do so would return the program to the shortcomings

Congress intended to remedy with the 2006 amendments. It is not an overstatement to say that the future success of the IRS whistleblower program is now in the hands of the D.C. Circuit.

The IRS tax whistleblower program joined ranks among the other highly effective US programs only after the 2006 amendments, which were designed to improve oversight at the IRS Whistleblower Office and better incentivize whistleblowers through the promise of independent review. Michael Lissack now awaits that independent review, and the D.C. Circuit is in the critical position to ensure that he and other IRS whistleblowers who might be denied an award can receive the fair and independent evaluation Congress intended.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Siri Nelson is executive director at the National Whistleblower Center and an adjunct professor at Northeastern University School of Law.

Ben Falstein is an attorney currently serving as a litigation fellow with the National Whistleblower Center.

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