Since its inception, the IRS’s process for paying whistleblower claimants has been widely criticized.
Setting aside these criticisms, there have been a number of developments that would-be informants have to consider before submitting IRS Whistleblower claim.
The recent Montgomery v. Internal Revenue Service, No. 17-918 (JEB) (Dist. D.C. 2018) adds another factor to consider. It addresses FOIA requests and disclosure of the informats identity using the FOIA rules.
Facts & Procedural History
The taxpayer entered into a number of partnership arrangements that produced significant tax losses. The IRS caught wind of the arrangements and determined that the arrangements were shams.
The taxpayer and the IRS eventually entered into an agreement to resolve all claims related to the partnerships.
The taxpayer then submitted Freedom of Information Act (“FOIA”) requests to obtain documents that would disclose the identity of any whistleblower who originally reported the partnership arrangements to the IRS.
The IRS’s Whistleblower Program
The IRS whistleblower program, established under Section 7623, offers individuals the opportunity to report tax violations to the IRS and potentially receive a monetary award. The program has undergone significant changes in recent years, most notably with the 2006 passage of the Tax Relief and Health Care Act, which created a new “whistleblower” program with expanded protections for informants and increased potential awards.
Under the new program, informants may receive between 15% and 30% of the proceeds collected by the IRS as a result of their information. Informants also have the right to petition the U.S. Tax Court if the IRS denies or fails to act on their claims, providing an important avenue for individuals to seek recourse if their claims are not properly addressed.
While the IRS whistleblower program serves as an important tool in promoting tax compliance and detecting tax evasion or fraud, it is not without controversy. Critics have raised concerns about the potential for individuals to fabricate or exaggerate information in order to receive a monetary award. There is also the potential for negative consequences, such as retaliation or reputational harm, for individuals who come forward with information.
Despite these concerns, the IRS whistleblower program remains an important tool in promoting tax compliance and ensuring the integrity of the tax system. The program provides an important incentive for individuals to come forward with information about potential tax violations, which can lead to increased tax revenues and a more level playing field for taxpayers. As such, it is essential to ensure that the program is administered fairly and justly, and that appropriate safeguards are in place to protect the privacy and confidentiality of informants.
If you are into history, you can read our prior article on the IRS’s new Whistleblower program here.
The FOIA, Generally
The FOIA is intended to provide concerned citizens with a means to access government records. There are a number of limitations that can allow the government to withhold documents. When it comes to the IRS, this usually involves law enforcement and deliberative process exceptions. The IRS is quick to cite these rules and does so liberally and often illegally, in responding to FOIA requests.
With this background, the question in Montgomery is whether taxpayers can use a FOIA request to obtain documents that disclose the identity of the whistleblower.
If you have read this blog before, you may recall that the courts have made it clear that the whistleblower’s identity is not always protected in litigation. We predicted that this would have a chilling effect on the number of whistleblower claims submitted to the IRS. The Montgomery case makes it even less likely that would-be claimants will submit claims to the IRS if their identity could be disclosed by a FOIA request.
In Montgomery, the IRS argued that disclosure was precluded by the settlement agreement it entered into with the taxpayer, due to collateral estoppel, and due to res judicata. The court addressed each in turn, holding that none of the defenses enabled the IRS to refuse to produce the information. This means that FOIA requests may very well reach whistleblower documents that disclose the claimant’s identity.
There is some chance that Congress may fix these disclosure issues. In the meantime, one workaround might be to have the claimant’s attorney submit the claims to the IRS. The claimants attorney-client privileged may protect the claimant’s identity.
Those submitting whistleblower claims should expect that their identities will be disclosed. The laws may protect this, but the IRS is not good at keeping information confidential. Chances are good that the IRS will release the information without even realizing it did so. The FOIA request is a good example. The IRS may not even realize that it disclosed this information when it responds to a FOIA request.