A tax whistleblower got a rare, if narrow, win after being denied an award by the IRS. The D.C. Circuit’s decision in Trongone v. Commissioner reversed a Tax Court judgment that had sided with the IRS and sent the matter back for further proceedings.
The win? The Circuit panel agreed with the whistleblower, who was proceeding without an attorney with the help of the Georgetown University Law Center Appellate Litigation Clinic, that the IRS cannot deny a whistleblower award without a supporting record.
The Underlying Whistleblower Claim
The whistleblower had reported alleged underpayments involving a corporation and its majority shareholder for tax years 2004-2012, and she had flagged the likelihood of similar underpayments in later years. It turned out that the IRS had already been investigating much of the reported conduct, so while it ultimately collected money from both taxpayers, the IRS Whistleblower Office denied her claim on the grounds that it had not proceeded based on her information.
If that’s the case, then the IRS is correct to deny the claim. The trouble here was that there was a lack of information about what happened with the later tax years, which ultimately proved fatal to the IRS position (at least for now).
When the IRS initially reviewed the whistleblower’s submission, it determined that certain documents were potentially “tainted,” meaning privileged or unlawfully obtained. The agency set aside those documents, but it still forwarded the whistleblower’s Form 211 and cover letter to the examination team. It put forward ample evidence of how the tax adjustments for the early years were determined and that the whistleblower’s information did not contribute. When addressing the later tax years 2013-2017, however, the IRS relied on a bare assertion that the examination team could not have used the submission because of the taint issue.
The court found that because portions of the submission had in fact been passed to the examination team, the IRS had an obligation to provide more support for its decision as to those years. It could not simply assume that the information had not been used but, on remand, must further support its decision in the record. So while it is a win, it’s a cabined one that may not result in an award for this particular whistleblower.
Why the Decision Matters for Whistleblowers
The case is a win for whistleblowers generally, however, because it will help ensure greater transparency within the IRS program. The Whistleblower Office has generally done a great job explaining its positions, but sometimes lack of bandwidth or institutional instincts to protect taxpayer privacy may stand in the way of fully explaining its decision-making. Ms. Trongone’s victory should help tilt the balance in favor of greater information about the agency’s thinking. That should be a benefit to the IRS and to those who bring forward information about tax fraud or avoidance.
For whistleblowers, the case also underscores the importance of identifying and separating potentially privileged or otherwise tainted material, as well as documenting exactly what you submit.
