What is Sequestration?

Back in 2011, Congress passed the (“BCA”).  This law was passed in response to the raising of the debt ceiling.  The BCA requires that the President (usually through the Office of Management and Budget(“OMB”)) reduce spending (i.e. appropriations) in a given year if they exceed the pre-set caps.

The key features of BCA were:

• Spending was reduced more than the increase in the debt limit.

• The bill directly specified $917 billion of cuts over 10 years in exchange for the initial debt limit increase of $900 billion

• Established the Congressional Joint Select Committee on Deficit Reduction to produce deficit reduction legislation of at least $1.5 trillion over 10 years by November 23, 2011.  If Congress failed to enact deficit reduction by December 23, 2011, then Congress could extend debt ceiling by $1.2 trillion, but triggered across the board cuts (sequestrations) as of January 2, 2013.

• Sequestration would apply to defense and non-defense programs equally, and unless exempted, would apply to mandatory and discretionary spending.

• Exempted programs are: Social Security, Medicaid, civil and military employee pay, veterans, or etc.

In 2012, Congress passed the Taxpayer Relief Act (TRA).  This law amended the Budget Control Act to include the following:

• Delayed sequestration for 2 months.

• Lowered offset amounts for 2014 due to 2 month delay.

• For 2013, cut homeland security and international affairs (as security funding) to lessen impact of cuts to defense programs.

• Included provision to BCA stating that appropriations would be reduced “notwithstanding any other provisions of law”.

How does it apply to IRS Whistleblowers?

Beginning in 2013, IRS notified whistleblowers that beginning in March 2013, BCA as amended by TRA, required certain reductions in awards paid by the IRS.  These reductions would be calculated after the IRS Whistleblower Office determined the award that would have been paid, and then apply the sequestration reduction. 

The applicable sequestration rates are:

• 2013 – 8.7%

• 2014 – 7.2%

• 2015 – 7.3%

• 2016 – 6.8%

• 2017 – 6.9%

• 2018 – 6.6%

• 2019 – 6.2%

IRS’ Rationale for applying Sequestration:

IRS position is that the sequestration reduction is undertaken by a “separate operation of law.”  According to the IRS, the determination to reduce a whistleblower award due to sequestration is not a Whistleblower Office determination, but is due to Title 2 United States Code Section 901, and implementation by Congress, President and OMB.  To the IRS this justifies the reduction of an award paid because the Whistleblower Office allegedly has paid the required amount required under I.R.C. § 7623 to the whistleblower, and if there is a reduction due to some operation of law, it is not the IRS’ problem.

The reason IRS is claiming that it is a separate operation of law, is that under BCA of 2011, the Executive Branch (President, OMB) has to reduce the current year’s spending such that it does not exceed the stated caps.  Since whistleblower award payments are authorized by Congress appropriations, whistleblower award payments are then direct spending, and subject to BCA’s mandated sequestration, unless it appears on an exemption list located at Tile 2 United States Code Section 905 (f) and (g).  Since whistleblower award payments are not included on the exemption list, according to the IRS, whistleblower award payments are subject to sequestration at the above listed percentage reductions.

Tax Court Resolution

To date, there is no published opinion by the Tax Court which enumerates its stand on the IRS’ sequestration reduction.  Some issues that need to be addressed include:

• Does the Tax Court have jurisdiction to resolve this conflict, or should it be heard in the Court of Federal Claims?

• Does the Court of Federal Claims case regarding supremacy of BCA over other appropriations laws control in determining whether the IRS may reduce a whistleblower award payment?

• Following the rationale of the Court of Federal Claims case, does Congress’  2018 amendment of I.R.C. § 7623 therefore manifests Congress’ intent not to permit IRS to otherwise reduce the whistleblower award payments?

• Are whistleblower award payments otherwise exempt from sequestration?

• Is the IRS allowed to make a reduction of the award not otherwise stated by I.R.C. § 7623 or the regulations thereunder?

• Is the IRS allowed to make a sequestration reduction because the reduction would reduce award percentage below the mandatory award percentage?

• If the IRS’ reduction is in fact a reduction of the award percentage below the mandatory award percentage, is the reduction the subject to the Tax Court’s review under I.R.C. § 7623(b)(4)?

• Following the Court’s Opinion in Whistleblower 21276-13W v. Commissioner (collected proceeds is the maximum the government got regardless of whether IRS has access to the collected proceeds), does it matter to the Court, as alleged by IRS, sequestration happens by separate operation of law, or is the IRS’ reduction of the award due to sequestration not permissible because it doesn’t matter which governmental agency is reducing the award paid, the reduction is still below the mandatory payment amount?

• Will the Court allow IRS to advance the position that IRS Whistleblower Office isn’t the part of the government reducing the whistleblower award payments due to sequestration, when in Whistleblower 21276-13W v. Commissioner, the Court specifically rejected the IRS’ efforts to differentiate between government agencies?

Conclusion

The IRS in further limiting the effectiveness of the whistleblower program has begun reducing awards payable to whistleblowers which are not permitted under I.R.C. § 7623 or the regulations thereunder.  IRS claims that it is not reducing the awards payable; but by separate operation of law, the government is required to reduce the award payments.

IRS’ position would be equivalent to someone who owed you money (a creditor) saying that they are only going to pay you 93% of the amount they owed, because their parent company requires that they can only pay back 93% of the amount they owed.  In this example, no one would accept repayment on those terms, or would they accept the IRS’ argument that the reduction was not made by the IRS’ Whistleblower Office.  Likewise, any payment of less than the 100% of the award determined by the IRS is not full payment of the award and violates I.R.C. § 7623.