Tax Court in Brief | Whistleblower 972-17W v. Commissioner | Whistleblower Entitled to Unredacted (Mainly) Administrative Record

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Tax Litigation:  The Week of July 11th, 2022, through July 15th, 2022

Whistleblower 972-17W v. Comm’r, 159 T.C. No. 1 | July 13, 2022 | Toro, J. | Dkt. No. 972-17W


Short SummaryA whistleblower (WB) provided information to the IRS under section 7623.  Based on this information, the IRS initiated actions against three taxpayers and collected proceeds.  However, the IRS Whistleblower Office (WBO) denied WB’s claim for a mandatory award under section 7623(b).  WB filed a petition with the United States Tax Court, challenging the WBO’s determination.

The Tax Court ordered the IRS to file unredacted copies of the administrative record of the three taxpayers.  The IRS filed a redacted copy of the administrative record and requested that the court excuse him from filing an unredacted copy due to section 6103.  After the Tax Court ordered the IRS to submit the unredacted copy for review in camera, the IRS moved for the court to modify its order, arguing again that section 6103 does not permit the IRS to disclose to the court the information that the IRS redacted.

Key Issues

  • Whether the Tax Court has subject-matter jurisdiction to a claim under section 7623 when a whistleblower submits information to the WBO, the IRS uses such information to initiate an investigation, and the IRS collects proceeds from the information.
  • Whether section 6103 prohibits the IRS from disclosing the target’s unredacted administrative file in a section 7623 proceeding.

Primary Holdings:

  • If the IRS uses information provided to it from the WBO and opens an investigation and collects tax proceeds from the information, the Tax Court has subject-matter jurisdiction to review the WBO’s subsequent determination to reject an award.
  • Section 6103(h)(4)(A) authorizes disclosure of a third-party taxpayer’s unredacted administrative record in cases under section 7623.

Key Points of Law:

  • Section 7623 provides for awards to individuals who submit information to the IRS about third parties who have underpaid their taxes or otherwise violated the internal revenue laws. In these instances, section 7623(a) authorizes discretionary payments in certain circumstances, whereas section 7623(b) provides for nondiscretionary (e., mandatory) awards.
  • Under section 7623(b)(1), a whistleblower generally is entitled to a mandatory award if the Secretary of the Treasury proceeds with an administrative or judicial action based on information provided by the whistleblower and collects proceeds as a result of the action. The amount of the award is generally between 15% and 30% of the collected proceeds, depending on the extent to which the whistleblower substantially contributed to the action.  R.C. § 7623(b)(1).
  • In some circumstances, a mandatory whistleblower award under section 7623(b)(1) may be reduced or denied. Specifically, section 7623(b)(2) provides for the potential reduction of an award if the Secretary’s action is based principally on publicly available information rather than the whistleblower’s information, while section 7623(b)(3) provides for the reduction or denial of an award based on the whistleblower’s culpability for the tax underpayments underlying the award.  In addition, section 7623(b)(5) sets out certain monetary thresholds that must be met for section 7623(b) to apply in the first instance.
  • The Tax Court is a court of limited jurisdiction; accordingly, it exercises jurisdiction only over matters that Congress expressly permitted it to consider. Whistleblower 21276-13W v. Comm’r, 155 T.C. 21, 26 (2020).
  • Section 7623(b)(4) provides that any determination regarding an award under section 7623(b)(1), (2), or (3) may be appealed to the Tax Court, and the Tax Court shall have jurisdiction with respect to such matter. Determinations under these provisions are generally made by the WBO, which reviews whistleblower claims to determine whether an award will be paid and, if so, decides the amount of the award.  See, e.g., R.C. § 7623(b)(1), (2)(A), (3).
  • Based on section 7623(b)(4), the Tax Court has jurisdiction over any appeal of a determination that a whistleblower is entitled to an award under section 7623(b)(1). Moreover, the Tax Court has held in prior decisions that it has jurisdiction over cases where the WBO rejects or denies a whistleblower’s claim.  See Lacey v. Comm’r, 153 T.C. 146, 163 n. 19 (2019).  And the Tax Court has held that jurisdiction exists regardless of whether the IRS proceeds with an action or collects proceeds based on the whistleblower’s information.  See Lacey, 153 T.C. at 169.
  • The D.C. Circuit Court of Appeals disagreed with the Tax Court’s prior interpretation of section 7623(b)(4) in Li v. Comm’r, 22 F.4th 1014 (D.C. Cir. 2022). Specifically, in Li, the D.C. Circuit concluded that the Tax Court does not have jurisdiction to review the WBO’s threshold rejection of a whistleblower claim.    Rather, the court in Li reasoned that the WBO makes an award determination under section 7623(b)(1) when the IRS actually proceeds with an action based on a whistleblower’s information.  Id.
  • Section 6103(a) generally provides that returns and information must be kept confidential unless disclosure is specifically authorized by the Code. See Mescalero Apache Tribe v. Comm’r, 148 T.C. 291, 294 (2017).  Under section 6103(h)(4), though, a return or return information may be disclosed in a federal or state judicial or administrative proceeding pertaining to tax information in certain instances.  As an exception to this rule, section 6103(h)(4) also provides that a return or return information shall not be disclosed if the Secretary determines that such disclosure would identify a confidential informant or seriously impair a civil or criminal tax investigation.
  • Section 6103(h)(4)(A) authorizes the disclosure of tax returns or return information in a federal judicial proceeding pertaining to tax administration if the taxpayer is a party to the proceeding or the proceeding arose out of, or in connection with, determining the taxpayer’s civil or criminal liability.
  • When a statute does not define a term, federal courts “ask what that term’s ordinary, contemporary, common meaning was when Congress” enacted the relevant provision. Food Mktg. Inst. v. Argus Leader Media, 139 S. Ct. 2356, 2362 (2019) (quotes omitted).

Insight: The opinion in Whistleblower 972-17W is a win for whistleblowers.  Under this opinion, the Tax Court may order the IRS to provide the whistleblower with unredacted copies of the target’s administrative file, subject to limited exceptions otherwise discussed in the opinion.

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