IRS Tax Whistleblower Articles

Tax Court's Stance on Anonymous Whistleblowers Draws Praise

by Matthew R. Madara

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Practitioners who regularly represent tax whistteblowers said May 21 that three new Tax Court memorandum opinions permitting petitioners to proceed anonymously in whistleblower actions against the IRS should give whistleblowers the confidence to continue coming forward.

Citing the need to bolster its whistleblower case law, the Tax Court on May 20 issued the three decisions: Whistleblower 10949-13Wv. Commissioner, T.C. Memo. 2014-94 ~; Whistleblower 13412-12Wv. Commissioner, T.C. Memo. 2014-93 8:1; and Whistleblower 11332-13Wv. Commissioner, T.C. Memo. 2014-92 c:J. Each decision involves an anonymous petitioner seeking judicial review of an IRS Whistleblower Office determination.

According to Judge Diane L. Kroupa, who wrote the opinions, proceedings before the Tax Court carry a presumption of public openness unless good cause exists to seal the court records.

Kroupa explained that the Tax Court adopted Rule 345(a) to create a means to preserve whistleblower anonymity. Rule 345(a), which became effective in July 2012,1ets petitioners seek permission to proceed anonymously if they can articulate a "sufficient, fact-specific basis for anonymity." According to the Tax Court, "a whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interests in knowing the whisteblower's identity." Mere annoyance, embarrassment, or harm to the whistleblower's reputation is insufficient.

Dean Zerbe of Zerbe, Firgeret, Frank & Jadav PC said the three memorandum opinions should reassure tax whistleblowers that the Tax Court is broadly sympathetic to whistleblowers who have fair reasons to seek to proceed anonymously in Tax Court. "I have found in my own practice that most whistleblowers are particularly focused on proceeding anonymously in Tax Court, so this trio of cases is good news," Zerbe said.

Stephen M. Kohn of Kohn, Kohn & Colapinto LLP said the decisions are significant because requiring whistleblowers to divulge their identity would have a chilling effect and stop other whistleblowers from coming forward. The opinions are necessary to make the whistleblower program vibrant and effective, he said.

According to Kohn, the cases establish the precedent necessary for whistleblowers to understand both the Tax Court's analysis of the law and what they need to qualify for anonymity under Rule 345(a). The decisions will encourage high-quality filings because whistleblowers in significant positions of authority can seek anonymity to avoid potential professional repercussions from filing whistleblower claims, he said.

The Tax Court determined that the petitioners in each case met the factual burden necessary to proceed anonymously. In two of the cases (Dkt. Nos. 10949-13W and 11332-13W), the whistleblowers reported tax fraud schemes involving their employers; the filings say each whistleblower's action led to the recovery of more than $30 million in taxes, penalties, and interest.

The whistleblowers both sought judicial review of the IRS's section 7623(a) whistleblower awards. The Tax Court granted the whistleblowers' Rule 345(a) motions to proceed anonymously because disclosing their identity could have resulted in retaliation, social and professional stigma, economic duress, and the risk of physical harm.

Zerbe said those two cases were clear-cut because denying anonymity could have resulted in physical harm. But he said the third case is more interesting because the focus was on harm to the whistleblower's employment, professional standing, and retirement benefits.

In that case (Dkt. No. 13412-12W), the whistleblower reported alleged tax violations committed by the whistleblower's former employer. The IRS concluded that it was unable to collect any amounts on the whistleblower's claim and failed to issue an award. The whistleblower sought judicial review and moved to proceed anonymously, citing potential interference with the whistleblower's retirement benefits and professional ostracism that could interfere with future job prospects.

Saying it would "err on the side of caution," the Tax Court granted the whistleblower's Rule 345(a) motion despite reservations about the whistleblower's alleged harm. According to the Tax Court, disclosing the whistleblower's identity might result in the "risk of retaliation, social and professional stigma and economic duress," even though the whistleblower's retirement benefits were governed by a retirement plan and administered by an independent trustee.

According to Kohn, the harm threshold is satisfied in this case because the court also looked to reputational harm and professional ostracism. Whistleblowers are often scorned by former friends and colleagues, so ostracism should weigh heavily in the court's analysis, he said.

Zerbe said he has seen the Tax Court allow similar cases to proceed anonymously but that as Kroupa's opinion makes clear, the court will take a harder look at those anonymity requests from taxpayers. The bottom line is that "whistleblowers need to have a good rationale for proceeding anonymously," and Rule 345(a) motions should include a detailed statement specifying why anonymity is necessary, Zerbe said.

Scott A. Knott of the Ferraro Law Firm said the decisions appear consistent with his firm's experiences regarding whether the Tax Court will allow docketed whistleblower cases to proceed anonymously. Knott said the Tax Court is willing to let whistleblowers proceed anonymously if they satisfy the requirements in Whisteblower 14106-10Wv. Commissioner, 137 T.C. No. 183 (2011) ~.

According to Knott, the Tax Court typically seals cases only temporarily. However, Whisteblower 11332-13Wv. Commissioner provides an exception to that rule "if unsealing the case could likely cause physical harm to the whistleblower," he said. In granting that whistleblower's motion to proceed anonymously, the Tax Court determined the whistleblower was at "significant risk of severe physical harm if the case does not remain sealed" because the targets of the whistleblower action subjected the whistle blower to intimidation, aggression, and threats of physical harm.

"In some ways, the most interesting parts of the decisions are the detailed discussions of the dangers that some whistleblowers can go through to bring important information of tax evasion to the government," Zerbe said. The cases are a good reminder of why taxpayers should be thankful for whistleblowers coming forward and of the importance of the IRS working with whistleblowers and fairly rewarding them for their efforts, he said.