Should the IRS Change Its Policy of Not Communicating with the Whistleblower Prior to Making an Award Determination?
/Yes, the IRS should seek input from the Whistleblower and should not limit its determination of an Award based solely on the information of one IRS examination agent.
In Kasper v. Commissioner, 150 T.C. No. 2 (2018), the U.S. Tax Court limited its review of an IRS determination of award to the “abuse of discretion” standard (i.e., whether IRS abused its discretion in the determination of the award). In addition, the Court limited its review to the IRS “administrative file” upon which the determination was based. Although the administrative file should contain all the facts and documents supporting the award determination, typically, the Whistleblower Analyst only relies on Form 11369, Confidential Evaluation Report on Claim for Award, which contains a few Yes/No questions, that may be supplemented by a narrative prepared by the IRS agent. The Whistleblower’s legal team is never notified that the IRS audit is completed, its outcome, nor is it given an opportunity to review the Form 11369 to provide a response or input of its own.
Despite the Kasper Court limiting its review to the administrative record (i.e., the “record rule”), the Court identified six exceptions to the record rule, including where the IRS fails to consider other relevant factors. In addition, the Court stated that the IRS cannot unilaterally decide what constitutes the administrative record.
IRS Position
Because the IRS controls the narrative, it is unlikely that the Court would determine that the IRS Whistleblower Office abused its discretion if all the facts to the contrary are not in the file. With no communication with the Whistleblower throughout the whistleblower process, there is normally little or no input from the Whistleblower. An actual example of the IRS’ efforts to minimize an award to a Whistleblower is as follows:
Example - IRS Controls the Facts: IRS Exam team loses the Whistleblower Claim file. Two years later the IRS exam team claims it finds out for the first time that it lost the file and is immediately sent a new file by the IRS Whistleblower Office. However, the taxpayer comes forward and reports the Whistleblower issue within hours after the new file is created (i.e. 3 years after Claim was submitted to IRS). Of course, the newly created file contains no facts reflecting any IRS action (i.e., audit, phone calls, meetings, etc.) and the IRS exam manager claims he does not know if the IRS took an action based on the Whistleblower’s claim. Further complicating the situation for the Whistleblower, the IRS exam manager (who allegedly lost the file) claims to have lost all his emails that might shed light on past IRS action taken using the Whistleblower’s information. The Whistleblower Claim is denied because the IRS took no action. Query: Did IRS abused its discretion in denying an award if a newly created administrative file contains no facts of its actions causing the reporting by the taxpayer
Analysis
In Whistleblower cases, the IRS controls all the facts similar to a taxpayer in a tax deficiency case. Arguably, controlling the facts and creating the administrative file allows the IRS to be in a position that it cannot “abuse its discretion” (defined as an erroneous view of the law or a clearly erroneous assessment of the facts). In the typical Whistleblower case, the determination/rejection of an award is solely based upon the IRS’ version of the facts. Therefore, the longstanding IRS policy of not communicating with the Whistleblower throughout the (5-7 year) process keeps the Whistleblower ignorant of the proceedings and limits or denies the Whistleblower an opportunity to provide relevant facts so that a fair and proper determination of an award can be made.
By keeping the Whistleblower ignorant of the status of the case during the administrative process, the IRS is essentially preventing the Whistleblower from providing other relevant factors that should be considered in the determination of an award.
Conclusion
Ideally, to increase efficiency, reduce unnecessary litigation and promote the IRS Whistleblower Program, the IRS should alter its policy of not communicating with the Whistleblower. During litigation (i.e. the judicial appeal), the Whistleblower, through the discovery process, is able to review the administrative file and determine what the IRS did, or didn’t do, in the audit. Although now happening in the judicial process, rather than the administrative process, the Whistleblower can now address his/her contribution to the “detection” and “collection” of tax. In the litigation process, as stated above, the administrative file may, with the permission of the Court, be supplemented (i.e., an exception to the “record rule”) with relevant factors so that the Whistleblower Office can make a second, and proper, determination of award based upon all the facts.
During the administrative process, the IRS should communicate the status of its actions and allow the Whistleblower to provide additional information, as necessary, to the IRS so that a proper determination of award can be made the first time. It is simply poor policy and a waste of resources to force Whistleblowers to litigate these cases to learn the facts, only to provide additional relevant factors for consideration so that a second and proper determination of award can be made.
Author Thomas C. Pliske is a former IRS attorney. He established the Tax Whistleblower Law Firm in 2008 whose sole practice is representing Whistleblowers before the IRS and the U.S. Tax Court.