On January 10, the U.S. Court of Appeals for the District of Columbia Circuit released a decision in the Internal Revenue Service (IRS) whistleblower case Lissack v. Commissioner. The case had drawn the attention of whistleblower advocates who assessed the ruling as a mixed bag for whistleblowers.
The case concerns whistleblower Michael Lissack who blew the whistle on improper tax deductions made by a condominium development corporation. His disclosure led to the collection of $60 million in unpaid taxes. The IRS Whistleblower Office denied Lissack’s whistleblower award claim on the basis that his disclosure did not allege the specific violations which the IRS took action on. Lissack appealed the denial to the Tax Court, which upheld the denial. The D.C. Circuit then affirmed the Tax Court decision, writing that “a whistleblower whose information may have ‘substantially contributed’ to a fruitless action against a person is not entitled to share proceeds from a distinct action against that same person that did not draw on the whistleblower’s information.”
However, both the Tax Court decision and D.C. Circuit decision cited the Supreme Court’s 1984 decision in Chevron v. Natural Resources Defense Council in ruling that the IRS regulation which served as the basis of the award denial was a reasonable interpretation of the statute. On July 2, in light of the landmark Loper Bright decision, the U.S. Supreme Court vacated the D.C. Circuit ruling and remanded the case back to the court.
In its new ruling, the D.C. Circuit once again affirmed the Tax Court decision upholding the denial.
“The long-awaited Lissack decision arrived as somewhat of a damp squib for whistleblowers with good news, bad news and no-news,” says Dean Zerbe, tax whistleblower attorney and Senior Policy Analyst at National Whistleblower Center (NWC).
No News on Standard of Review
According to NWC, the no-news is that the court did not rule on the appropriate standard of review for IRS whistleblower award cases. NWC has argued that a de novo standard of review is the appropriate standard and was the intention of Congress. The bipartisan IRS Whistleblower Improvement Act introduced in 2023 makes a number of reforms to the IRS Whistleblower Program including clarifying a de novo standard of review.
“Congress needs to move forward on the bipartisan, bicameral IRS Whistleblower Program Improvement Act to ensure the proper standard of review of de novo as was intended by Congress when it passed the 2006 amendments to the tax whistleblower law,” adds Zerbe, who played a key role in drafting the amendments as Senior Counsel and Tax Counsel on the Senate Finance Committee for Senator Charles E. Grassley.
Good News on Tax Court Jurisdiction Over Award Denials
According to NWC, the good news is that D.C. Circuit made clear that judicial review by the Tax Court was appropriate here where the IRS took some action based on the whistleblower’s submission – even if ultimately an award determination was not made. The D.C. Circuit directly rejected the IRS’ narrow view of jurisdiction and ruled there was jurisdiction in Lissack since the IRS did proceed with an administrative action against the taxpayer even though there were not collected proceeds attributable to the whistleblower.
“The D.C. Circuit in Lissack finally put to bed some of the IRS’ more fervent views on the Li case and the question of Tax Court jurisdiction of whistleblower appeals,” says Zerbe. “This holding by the court in Lissack will clear up questions on Tax Court jurisdiction for a number of whistleblowers.”
Bad News on Scope of Actions Whistleblower May Qualify for Awards From
Lastly, according to NWC, the bad news for whistleblowers from the Lissack decision is that in ruling that Lissack was not entitled to an award the court deferred to the IRS’ narrow definitions of the statutory terms of “any administrative action” and “any related action.”
“It is unfortunate that the Court’s reasoning in Lissack doesn’t reflect the reality of tax administration,” adds Zerbe. “As recent TIGTA reports have shown in the IRS audits of high-wealth taxpayers – just identifying a taxpayer who is not in compliance with the tax laws — is a difficult task for the IRS. Whistleblowers who bring to light a previously unknown tax cheat – even if not for the direct issue raised by the whistleblower – are of significant value for the IRS and overall tax enforcement. It is completely understandable that Congress wanted such whistleblowers to be awarded – as they have historically been awarded under the tax whistleblower program prior to 2006.”
“I am deeply troubled that the court in Lissack invokes Skidmore deference to the IRS interpretation of the whistleblower statute – citing the IRS’ experience and informed judgment,” adds NWC Chairman of the Board Stephen M. Kohn, who has represented a number of IRS whistleblowers alongside Zerbe. The reality is that the IRS’ experience and informed judgment of administering a whistleblower award program has historically been absent. It is highly questionable for the courts to look at the historical IRS administration of the tax whistleblower program as a repository of wisdom on administration of whistleblower award programs.”
Looking Forward
Zerbe notes that the bad news of the Lissack decision could hamper the ability of the IRS to incentivize whistleblowers to expose potential tax fraud. He notes that the agency does still have the ability to pay discretionary awards in instances like Lissack where a whistleblower’s tip leads to an investigation which uncovers misconduct different that the whistleblower’s allegations.
“With the IRS looking at more limited resources going forward, it is all the more important that the IRS utilize the whistleblower program to identify the most cost-effective use of those resources by identifying possible tax cheats. And reward the whistleblower for doing so – even if it is a discretionary award. The new administration, as it looks to improve efficiency of the government, must look to the IRS whistleblower program as a means of getting more bang-for-the-buck in terms of effectively enforcing the tax laws and with the whistleblower program. Finally, the better targeting of limited IRS exam resources through the use of whistleblower information brings the additional benefit of leaving more honest taxpayers in peace.”