Whistleblower Office Announces New Sequestration Rate as Washington Prepares for Government Shutdown.

The IRS Whistleblower Office renewed its position that awards under section 7623 are subject to the automatic sequester cuts, on its website, stating that:

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, whistleblower award payments issued under Internal Revenue Code section 7623 are subject to sequestration. This means that every award payment made to a whistleblower under Section 7623 on or after October 1, 2013, and on or before September 30, 2014, will be reduced by the fiscal year 2014 sequestration rate of 7.2 percent. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.

The sequestration reduction will be applied after the Whistleblower Office determines the amount of collected proceeds and the applicable award percentage to be paid under section 7623. Whistleblowers will be advised of the sequestration reduction in correspondence from the Whistleblower Office concerning a proposed award amount and an award determination.

As discussed previously, we believe that ANY sequestration rate that reduces a 7623(b) award is illegal.  The IRS is confusing its discretion under section 7623(a) with their “shall pay” mandate under section 7623(b) and will almost certainly be successfully challenged by a whistleblower in tax court.  Awards paid under section 7623(a) are discretionary and, therefore, may be reduced by the sequestration reduction rate.  However, awards under section 7623(b) are not discretionary, as their payment is mandated by statute, and are not available for reduction.  Section 7623(b) states that the Commissioner shall pay whistleblowers, who meet the threshold requirements, 15 to 30 percent of collected proceeds.  Under the Fiscal Year 2014 sequestration reduction rate cuts these awards would be limited to between 13.92 and 27.84 percent, effectively precluding the Commissioner from paying an award of 30 percent. 

We hope that the battle over the budget ends soon and the issue of sequestration reduction cuts becomes moot; however, in the mean time we will continue to counsel any client whose award is reduced under these guidelines to challenge the reduction in the United States Tax Court.