Congress Intended Tax Whistleblowers to Enjoy De Novo Review

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The mandatory tax whistleblower program has been a boon for the U.S. government, bringing in more than $616 million in collected proceeds in 2019 alone. However, the ability for the program to meet its maximum potential has been stymied by a system for appealing decisions that does not truly allow for due process for whistleblowers who come forward.

This is because, despite Congress’s intent for a tax whistleblower to receive de novo review at the U.S. Tax Court, petitioners are subject to an “abuse of discretion standard” of review. This incorrect standard, established in the Kasper v. Commissioner ruling in 2018, inhibits the court from fully analyzing the facts and circumstances surrounding the whistleblower’s appeal, and fails to allow for any meaningful review of the whistleblower’s claim.

Congress’s true intent when passing Internal Revenue Code Section 7623(b) in 2006, was to allow for an independent review that would strengthen the IRS Whistleblower Program in order to address perceived problems discovered by the U.S. Treasury Inspector General for Tax Administration (TIGTA).

The mandatory tax whistleblower program was modeled after one of the most successful anti-fraud provisions at that time: the False Claims Act (qui tam). The Act originated in the Civil War, but was modernized in 1986 by Chuck Grassley, R-Iowa, who was also the driving force behind Section 7623(b).

The success of the False Claims Act was credited to the program’s mandatory payments for whistleblowers, as well as a de novo judicial review of the government’s actions. And, in the early 2000s, the Senate Finance Committee – at the direction of Grassley – reviewed the IRS whistleblower program. At that time the IRS program gave discretionary awards that had no required minimums and no set structure for payment based on collected proceeds.

The results of the review made it clear that the program fell far short in terms of basic management and relevant guidelines. The program failed to collect consistent, meaningful information, ensure whistleblowers were treated fairly or given due awards. Even worse, the only avenue of appeal for claimants at the time was the Court of Federal Claims, a graveyard for tax whistleblowers. In fact, an analysis by Professor Terri Gutierrez found that the IRS won all whistleblower cases brought to Federal Claims from 1941 to 1998.

After analyzing the committee’s findings, Grassley introduced section 488 of the Jumpstart Our Business Strength (JOBS) Act in May 2004, effectively creating Section 7623(b) by creating a mandatory award, an award range of 15 to 30 percent of collected proceeds, and Tax Court review of IRS determinations. Notably, at the time of this proposed legislation, the Tax Court itself had recognized that it already had a deep tradition and practice of de novo review, as outlined in the 1991 case, Jones v. Commissioner

It was presumed that moving a tax whistleblower’s forum for appeal from Federal Claims, which used an “arbitrary and capricious” standard, to the Tax Court, with a history of de novo review, would create a more independent review process for claimants. 

The Finance Committee described the proposed Section 7623(b) as allowing for “greater certainty and independent review for whistleblowers who are seeking a cash award for providing assistance to the IRS.”

The 2004 proposal passed the Senate, but was later dropped in the House-Senate conference. Grassley, however, made the proposals again in 2005 with Section 5508 of H.R. 3, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users. And again, the Senate Finance committee commented that the provisions would allow for “greater certainty and independent review for whistleblowers who are seeking a cash award for providing assistance to the IRS.”

This proposal also failed, but good news was on the horizon. After a devastating TIGTA report in 2006 found the IRS lacked a “professional, effective office to benefit from whistleblowers,” the mandatory whistleblower program was enacted the same year through the Tax Relief and Health Care Act of 2006.

Although the path to enactment for the tax whistleblower program is not necessarily unusual, with many pieces of legislation involving different iterations over several years to come to fruition, what is eye-blinking has been the incorrect conclusion that review of tax whistleblower claims should be reviewed under an abuse of discretion standard. This standard ignores the statute’s clear legislative history, and leaves the agency with more discretion than was ever intended by Congress.

The clear statements made by the legislation’s author, Chuck Grassley, alongside the clear intent behind changing the forum for review in the face of the devastating track record for whistleblowers at Federal Claims and TIGTA’s findings, make it clear that an “independent review” was meant to allow for a de novo standard. 

A de novo judicial review is particularly important for whistleblowers, especially given the fact that federal agencies are historically hesitant to make significant awards to whistleblowers, who oftentimes are putting their career, or lives, at risk for the betterment of the country.

A lack of awareness surrounding Section 7623(b)’s legislative history has unfortunately led to inaccurate conclusions concerning the proper standard of review. This careful analysis of the section’s legislative history clearly shows Congress’s true intent for the tax whistleblower program, and the available review for those brave whistleblowers who step forward with claims of fraud.

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