Confidentiality
In our experience, the IRS does an extremely good job at protecting a whistleblower’s identity. Generally, if the IRS acts on a whistleblower’s information the IRS does so by auditing the taxpayer. To the taxpayer, this feels just like what it is – an audit. In fact, the IRS’s own Internal Revenue Manual instructs that IRS examiners “may neither confirm nor deny that there is a whistleblower claim.”
Generally, section 6103 of the Internal Revenue Code protects whistleblowers because it prohibits the IRS from disclosing a whistleblower’s information and aside from explicit exceptions within that section, it instructs that tax returns and return information including whistleblower submissions – are confidential. The broad definitions of tax return and return information provided by section 6103 make nearly any information received, prepared, or collected by the IRS or furnished to the IRS regarding a taxpayer’s tax liability protected from disclosure and the IRS has taken the position that whistleblower submissions fall under the protections of this section. In fact, unauthorized disclosure of, or access to a taxpayer’s tax return or return information, implicates criminal penalties and the taxpayer affected may seek civil damages. Both the criminal and civil statutes have teeth. Under section 7213, willful unauthorized disclosure of returns or return information by a Federal employee or former employee is a felony punishable with a fine of up to $5,000 or up to five years in jail, or both, plus costs of prosecution. On the civil side, section 7431 creates a cause of action for a taxpayer whose return or return information was disclosed in violation of section 6103. The taxpayer may receive damages of $1,000 for each disclosure or actual damages plus punitive damages and costs of bringing the action.
There are however, some circumstances under which a whistleblower’s identity could legally be revealed by the Government such as when a whistleblower is needed to testify in court. Treasury Regulation § 301.7623-1(e) provides that:
The IRS will use its best efforts to protect the identity of whistleblowers. In some circumstances, the IRS may need to reveal a whistleblower’s identity, for example, when it is determined that it is in the best interests of the Government to use a whistleblower as a witness in a judicial proceeding. In those circumstances, the IRS will make every effort to notify the whistleblower before revealing the whistleblower’s identity.
Generally, a whistleblower may be called as an essential witness in a judicial proceeding if IRS Counsel is not able to defend the Service’s adjustments without revealing the existence or identity of a whistleblower. In our experience, it is rare that a whistleblower would be considered an essential witness in a judicial proceeding. We have been consistently impressed by the IRS’s dedication to a non-disclosure policy protecting IRS whistleblowers.
In 2017, the IRS formalized this non-disclosure policy with Chief Counsel Notice 2017-005 (CC-2017-005). [internal link] The Notice doesn’t mince words, stating in the introductory background paragraph that “the Service is committed to keeping the existence and identity of whistleblowers confidential.” The Notice sets forth the procedures for IRS Chief Counsel attorneys to obtain approval to disclose the existence or identity of a whistleblower. Where the IRS determines that a whistleblower is an essential witness in a judicial proceeding CC-2017-005 instructs that each and all of the following steps must be taken before the whistleblower’s existence or identity is revealed:
- First and foremost, Counsel must “carefully consider and weigh the potential risks to the whistleblower and the Government’s need for the disclosure, and look for alternative solutions.
- Counsel must inform the whistleblower and determine whether the whistleblower is willing to be identified.
- Counsel must write a memorandum in the format provided in the Notice, that explains why revealing the existence or identity of a whistleblower is necessary to prove the Government’s case. The memorandum must address, among other things: the facts of the case, why the whistleblower is an essential witness, what the alternatives were to revealing the existence or identifying of the whistleblower and why they are not available, how the whistleblower or whistleblower documents would be used to prove the Government’s case, the extent of any known potential risks faced by the whistleblower as a result of being identified, and concerns or requests that the whistleblower expresses with respect to being identified.
- The memorandum must be approved by the Division Counsel and submitted to Procedure and Administration, Branch 5.
- Procedure and Administration must obtain approval from IRS-CI, Director of Operations, Policy, and Support.
- The views of the IRS-CI must be incorporated into the memorandum.
- Counsel must obtain approval from the Director of the Whistleblower Office.
- Counsel must obtain approval from the Deputy Chief Counsel (Operations).
While there are circumstances under which an IRS whistleblower’s existence or identity could be revealed, CC-2017-005 ensures that Counsel will run the gamut of the multi-level approvals shown above before a whistleblower’s existence or identity is revealed.
Anti-Retaliation
Currently, section 7623 does not contain an anti-retaliation provision. The lack of an anti-retaliation provision for IRS whistleblowers is not for lack of trying and there are signs that an anti-retaliation provision similar to those contained in other whistleblower award statutes is on the horizon. The Treasury Department’s Inspector General for Tax Administration suggested adding an anti-retaliation provision to section 7623 in 2009 and 2012 which made it into President Obama’s budget for fiscal 2014. The anti-retaliation provision proposed was similar to the one found in the Federal False Claims Act. Congress however, did not approve the provision.
In March of 2017, Senator Chuck Grassley (R-Iowa) and Senator Ron Wyden (D-Ore.) introduced the IRS Whistleblower Improvements Act of 2017 (the Act). The Act is bipartisan legislation which, among other things, aims to protect whistleblowers from workplace retaliation. The Act was previously introduced by the Senators in 2016 as an amendment to the Taxpayer Protection Act of 2016 but was never passed by the Senate effectively making this legislation a re-introduction.
The best protection against retaliation however, is the ability to remain anonymous. As a result of the absence of an anti-retaliation provision in 7623, the IRS recognizes that whistleblowers may experience adverse consequences if their identity is revealed. Accordingly, those considerations are part of the IRS’s calculus in determining whether or not a whistleblower is an essential witness in a judicial proceeding as discussed above.
Lynam Knott P.A. works diligently with the IRS to protect the identity of our clients. If you have information about the underpayment of tax and would like to know more about how the IRS formally, and informally, protects your identity contact us at 1-800-275-3332.