As part of the sequestration spending cuts that began taking effect on March 1, tax whistleblower awards paid by the IRS will be reduced, the agency announced March 4.
In a two-paragraph statement posted to its website, the IRS said that under the automatic sequester cuts, any section 7623 whistleblower awards paid after March 1 will be reduced until legislative action occurs. The IRS said that in conjunction with the Office of Management and Budget, it has determined that whistleblower awards will be reduced by 8.7 percent.
Calculation of the award reduction will occur following the IRS Whistleblower Office’s determination of the collected proceeds in the case and the applicable award percentage. The IRS will then “compute the award that would have been paid, and then apply the reduction,” the agency said.
Whistleblower representatives expressed deep concern at the news and questioned the government’s legal analysis regarding the impact of the sequestration cuts on the awards.
“Everyone in Washington wishes to go after big-time tax cheats. If wishes were policy, then the whistleblower office would be fully staffed, Treasury regulations would encourage whistleblowers to come forward, and the IRS would be providing full and timely awards,” Dean A. Zerbe of Zerbe, Fingeret, Frank & Jadav PC told Tax Analysts. “Instead, we have a whistleblower office with reduced staff, Treasury regulations that pull away the welcome mat for whistleblowers, and now the latest — OMB engaged in loose-meets-fast reasoning to justify an 8.7 percent haircut on awards. Only the wishes of tax cheats are coming true with these policy decisions.”
Paul D. Scott of the Law Offices of Paul D. Scott PC in San Francisco agreed. “It is manifestly unfair to reduce award payments to whistleblowers who have come forward in reliance on a stated award structure promised by Congress,” he said. “The proposal also makes no sense. The United States will still be seeing the full benefit of recoveries from whistleblower tips. The awards are supposed to be coming from those recoveries. It does the government no good to stiff the folks who are helping them solve the nation’s budget problems.”
The IRS did not comment on its legal reasoning behind the memo or address whether the IRS Whistleblower Office would face staffing reductions as a result of the sequestration. The OMB similarly declined to comment on its role in the award reduction determination. A staffer for Senate Finance Committee member Chuck Grassley, R-Iowa, who spearheaded the 2006 amendments to section 7623, told Tax Analysts that the senator has asked the IRS to expound on the legal basis for its decision and is waiting for an answer.
The Justice Department, the SEC, and the Commodity Futures Trading Commission — all of whom have similar statutory whistleblower award programs — had not posted announcements on their websites at press time regarding the sequester’s effects on their awards, making the IRS’s notice unusual.
Gregory S. Lynam of the Ferraro Law Firm said that the sequestration memo would make sense if it were limited to awards paid under section 7623(a). “A reduction in discretionary spending is exactly what is called for, and awards paid under section 7623(a) are discretionary,” he said. “However, award payments under the new whistleblower program as enacted by section 7623(b) are not discretionary; they are mandated by statute.”
Lynam said that because section 7623(b) mandates an award of between 15 and 30 percent of collected proceeds to whistleblowers who meet the threshold requirements of that section, a sequestration reduction would run afoul of the law. “A 15 percent award determination that is then reduced 8.7 percent is a 13.7 percent award,” he said. “The commissioner has no more authority to pay 13.7 percent to a section 7623(b) whistleblower than he has to reduce a taxpayer’s child tax credit.” And because a reduced 30 percent award will be less than the top award percentage, “any award determination made under the sequestration reduction policy is on its face arbitrary, capricious, and unreasonable,” Lynam added.
“We would encourage every tax whistleblower who has an award reduced by the sequestration reduction policy to appeal the award determination to the U.S. Tax Court,” said Scott A. Knott of the Ferraro Law Firm.