Saturday, December 17, 2011

U.S. Tax Court Rules that IRS Whistleblower Claimant May Remain Anonymous but Refuses to Seal Case

As discussed previously, courts increasingly refuse the request of relators to seal their False Claims Act (“FCA”) cases when the government declines to intervene and they seek to dismiss.  See blog entries 11/14/11, 10/31/11. The U.S. Tax Court recently addressed this issue of protecting the identity of a tax whistleblower in a Tax Court case and arrived at a very different conclusion:  the tax whistleblower may remain anonymous but it refused to seal the case. See Whistleblower 14106-10W v. Commissioner of Internal Revenue, United States Tax Court, 137 T.C. No. 15.   The Tax Court based its decision in large part on the fact that the Internal Revenue Service’s Whistleblower Program does not protect whistleblowers from retaliation and that the Internal Revenue Service (“IRS”) treats whistleblowers as confidential informants.

The case arose out of claim made to the IRS by a whistleblower that his former employer had underpaid its tax.  The IRS denied the petitioner’s claim for a whistleblower award, and the whistleblower challenged that denial in Tax Court.  

As described on its website, the IRS has a “Whistleblower Program,” 26 U.S.C. § 7623(b), that “pays money to people who blow the whistle on persons who fail to pay the tax that they owe. See 26 U.S.C. § 7623(b).  If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.”  The IRS program further provides that if “the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court.”  Unlike the False Claims Act, however, if the IRS declines to pursue the claim, the whistleblower does not have an independent right to proceed with the claim against the defendant. 

In the Tax Court case, the Whistleblower filed a motion for protective order requesting the court to protect his identity and to seal the tax case.  The Whistleblower alleged that even though he no longer worked for the taxpayer, he feared retaliation by his former employer.  He also claimed that he would be professionally ostracized if his identity as a whistleblower were disclosed.  

In a lengthy and well-reasoned decision, the Tax Court surveyed federal law on whether and when courts can permit litigants to remain anonymous and can seal a case.  The Tax Court further noted that the IRS treats whistleblowers as “confidential informants” and that courts frequently protect the identify of informants.
The Tax Court granted the Whistleblower’s request to protect his identity, remain anonymous, and to redact identifying information, noting:

petitioner has demonstrated a risk of harm that far exceeds in severity mere embarrassment or annoyance. The retaliation, professional ostracism, and economic duress which petitioner reasonably fears are, we believe, no less severe than the harm posed to attorneys and doctors suing to enjoin disciplinary proceedings, unsuccessful job applicants suing to protect their reputation, public aid recipients, or Native Americans joining in a lawsuit pitting their personal interests against those of their communities--all cases in which plaintiffs have been allowed to proceed anonymously.

A key consideration that the Tax Court cited in protecting the Whistleblower’s identity was that the IRS Whistleblower program does not have an anti-retaliation protections like other whistleblower statutes have, such as the False Claims Act.  As the Tax  Court observed: 

the False Claims Act contains an antiretaliatory provision. See 31 U.S.C. sec. 3730(h). Moreover, almost all the States have enacted statutes protecting employees in the public and/or private sectors who report illegal conduct.  In stark contrast, section 7623 contains no antiretaliatory provisions.

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