The IRS has spent much time ensuring that they would not be whipsawed by paying an award on proceeds that is ultimately refunded to the taxpayer, but apparently, little consideration has been given to what happens when the IRS whipsaws a whistleblower using their information after it denied the whistleblower’s claim.  On November 2, 2012, Anonymous 1 and Anonymous 2 had their appeal of the IRS’s denial of their claim dismissed by the Tax Court despite the IRS’s notification that a division of the IRS was conducting an investigation of the taxpayer identified in Anonymous 1 and Anonymous 2’s claim.  The order dismissing Anonymous 1 and Anonymous 2’s claim states:

Petitioners provided respondent with information relating to Company X and approximately 90 of Company X’s clients.  Respondent evaluated petitioners’ information for almost two years, yet assets that he did not institute an administrative or judicial action and collect proceeds relating to Company X or its clients.  Furthermore, after the Whistleblower Office denied petitioners’ claims, a separate division of the IRS opened what respondent asserts is an independent investigation into Company X.  While we question whether the information provided by petitioners was used in the subsequent investigation, section 7623 does not provide a mechanism for petitioners to challenge respondent’s assertion.  See Cohen v. Commissioner, 139 T.C. at __ (slip op. at 9) (holding that “Congress *** has charged the Commissioner with resolving these claims and has not provided remedies until after an administrative or judicial action and the collection of proceeds.”).  Respondent established that petitioners have not met the prerequisites of section 7623(b) and petitioners have not set forth specific facts showing that there is a genuine issue for trial.

Now Anonymous 1 and Anonymous 2 are asking the Tax Court to vacate its prior decision in light of the fact that not only has the IRS begun an audit of the taxpayers identified in their whistleblower claim, but Anonymous 1 and Anonymous 2 have received letters from the IRS that the IRS has re-opened their whistleblower claims and the IRS has asked for assistance from Anonymous 1 and Anonymous 2.  We will be watching to see how the Tax Court rules on this motion to vacate its prior decision because the implications may be felt widely.  By reopening the whistleblower claims, the IRS has functionally rendered the prior denial of the claims an interim determination.  If the denial is treated as an interim decision, then it is likely that the case is not ripe under Cooper I.  However, if the decision is allowed to stand the concern is that the IRS will use Anonymous 1 and Anonymous 2’s information in an investigation and collect proceeds based on that information, and when it comes time to pay an award the whistleblowers will no longer have the right of review because the Tax Court has already ruled on that claim.  If the IRS is able to side step their duty to pay awards to whistleblowers by simply denying the claims and then opening an investigation and using the information, then the requirement to pay awards and the right of review are meaningless.  I cannot believe that this is the case.  The best end result for these whistleblowers is that the IRS successfully uses their information and then the Whistleblower Office determines that they are entitled to an award on all the proceeds collected, but in the meanwhile the Tax Court will hopefully see the position that all whistleblowers can be put in if the IRS denies their claim and then uses their information afterwards.  Therefore, we think the Tax Court should treat the previous determination of the IRS as an interim – not final – award determination and vacate its prior decision due to the subsequent re-opening of the case by the IRS.

Lynam Knott