I. Introduction
In the United States, 83% of taxpayers voluntarily pay their federal taxes. For the remaining 17% of taxpayers, the Internal Revenue Service (“Service”) struggles to collect the taxes owed: approximately $400 billion annually. To supplement its enforcement budget and capabilities, the Service utilizes the Whistleblower Program (“Program”). The Program makes awards to whistleblowers who submit a tip resulting in additional tax receipts. The Program’s success relies upon attracting whistleblowers who submit quality tips that uncover fraud or underpayment the Service would likely otherwise not uncover. Since the Program’s inception, however, tax whistleblowers have had limited ability to challenge awards they received, or did not receive.
Tax whistleblowers may challenge the Service’s award determinations only in Tax Court under a highly deferential abuse-of-discretion standard and using an often underdeveloped administrative record. As more fully explored in this Article, the limited forum, high standard of review, and incomplete administrative record effectively forecloses meaningful review of the Service’s award determinations. While the lack of effective review is a problem for whistleblowers, it can also be viewed as a problem for the Service and the Whistleblower Program if potential whistleblowers are dissuaded from submitting tips because they perceive that they will be treated unfairly or fail to be compensated for the professional and personal risks they undertake in blowing the whistle.
With a goal of strengthening the Whistleblower Program and improving its reputation for fairness, this Article examines the appeal process for tax whistleblower awards for consistency with fundamental taxpayer principles and existing law. Specifically, this Article uses the principles found within the Taxpayer Bill of Rights (TBOR) in section 7803(a)(3) as a normative lens to examine the forum, standard of review, and available administrative record for tax whistleblower appeals. While scholarly debate regarding the private enforceability of the TBOR is ongoing, its principles are “derived from provisions that are already part of the tax laws and procedures.” In other words, the substance of the TBOR reflects existing rights found in other sources. Even if the TBOR’s codified rights are not privately enforceable, they are, at the very least, aspirational. Treating the statements within the TBOR as aspirational standards or guiding principles for tax administration provides a framework for applying a law, originally intended to assist taxpayers, to whistleblowers, who are admittedly different than taxpayers. This Article argues that the TBOR and the principles it espouses provide an appropriate lens for conducting a normative analysis of how the Service treats those with whom it interacts—both taxpayers and whistleblowers.
In using the principles of the TBOR to examine whistleblower appeals, we take the position that all three primary components of whistleblower appeals—forum, standard of review, and administrative record—contrast with the principles expressed in the TBOR. Specifically, the guiding principles regarding the ability “to challenge the position of the Internal Revenue Service and be heard,” “to appeal a decision of the Internal Revenue Service in an independent forum,” “to be informed,” and “to a fair and just tax system” are not met by current interpretations for permissible forum, standard of review, and administrative record. When compared to taxpayers who interact with the Service in analogous ways, whistleblowers have fewer administrative and judicial forum options and must surmount a higher standard of review with a less developed factual record. To address these challenges and fulfill the TBOR’s guiding principles, we propose that tax whistleblowers have expanded forum access beyond the Tax Court. Whistleblowers should also be permitted to access the intermediate administrative appeal forum, the IRS Independent Office of Appeals. We also propose that whistleblowers’ appeals be subject to a de novo standard of review on an expanded administrative record. These proposals are opportunities available to others who challenge the Service’s actions and decisions. We posit that these proposals will affect meaningful change and enhance the fairness, and ultimately the effectiveness, of the Whistleblower Program.
II. The Whistleblower Program in Context
The Service has rewarded whistleblowers since 1867. The Service compensated early whistleblowers using a statute permitting discretionary payments. While the possibility of compensating whistleblowers has existed since the Civil War era, the actual use of whistleblowers in tax enforcement from 1876 through 2006 was limited. Hoping for more whistleblower tips to increase tax collection, Congress passed the Tax Relief and Health Care Act of 2006 formalizing the Whistleblower Program and expanding its scope. The Act, among other things, authorized the Whistleblower Office to process whistleblower claims and established a new category of mandatory whistleblower awards. The new award structure provided clarity for mandatory award calculations and removed award caps. Congress hoped these changes would entice whistleblowers with information about costly tax evasion to come forward.
A. Measuring the Effectiveness of the Whistleblower Program
Recent data indicate that these changes have had very modest but cost-effective success. In Fiscal Year 2020, the Service paid $86 million in awards when it collected $472 million in revenue. While 169 whistleblowers took home award money in FY 2020, thousands more whistleblowers received nothing for reporting tax evasion. The Service has requested in its FY 2022 budget $7.4 million for the Whistleblower Program, which is 0.14% of the Service’s enforcement budget and 0.06% of the total budget request. As an investment of limited agency resources, the use of whistleblowers provides a phenomenal return. Considering the revenue recovered ($472 million) and the resources expended ($93 million, including $7 million in budgeted expenses and $86 million in awards), the return on investment is enormous, nearly 386%. This is a very rough calculation that likely undercounts ancillary agency expenses required to bring these cases to conclusion; however, this calculation also does not consider the improved tax morale from public disclosures of tax fraud brought to justice. The calculation also does not consider the increase in agency knowledge acquired from each successful whistleblower-generated case.
Tax whistleblowers are a cost-effective way to improve enforcement, but they also correct the inherent information asymmetry within the federal tax system. “Asymmetric information is a core problem for modern tax laws because the taxpayer knows the relevant facts—such as the details of the transactions that he or she engaged in—while the government does not.” Information asymmetry exists among the agency and taxpayers because tax forms request aggregated or summarized information for the tax year. Even when set forth on a supporting schedule, information is rarely broken down to the level of a detailed transaction. Information asymmetry also exists because third-party information reporting to the Service is only required for some tax information and economic transactions. Indeed, agency data clearly shows that more third-party information reporting is correlated with increased voluntary compliance. In other words, the more information that taxpayers and third parties must report to the Service, the more likely taxpayers are to comply because they know any failure to comply would be easily caught. The contrapositive is also true: the less information that taxpayers and third parties are required to disclose to the Service, the less likely taxpayers are to comply because they know that they have an informational advantage in such a situation. This inherent information asymmetry is a disadvantage for the Service in discovering and successfully enforcing the tax law, and something for which a whistleblower can assist.
While a whistleblower can assist in uncovering undisclosed (or disguised) tax avoidance or tax evasion, or explaining a complex transaction, whistleblowers can also improve existing agency enforcement mechanisms. The Service frequently uses the Discriminant Function System (DIF), which is a secret algorithm, to rate a tax return for its potential underreporting of income. This DIF scoring system is formulaic and assesses the likelihood of underreporting without factoring in personal or supplemental information. While a whistleblower tip must be vetted to determine its accuracy, the use of such a tip is administratively cost-efficient because it provides more targeted criteria for the selection of a particular taxpayer for audit, as well as details on potential tax fraud that would not appear in the DIF scoring process for audit selection. Successful whistleblower cases could be used by the agency to improve the DIF system for flagging problematic returns and discovering possible tax evasion tactics.
In sum, tax whistleblowers have proved to be cost-effective enforcement resources with a high return on investment. They help correct structural informational asymmetry problems in tax enforcement and can assist in refining other agency enforcement tools, like the DIF scoring algorithm. If all this is true, it is hard to understand why so few whistleblowers are utilized by the agency. Indeed, it would appear the agency should be doing everything within its control to encourage whistleblowers to come forward.
To maintain a viable and cost-effective Whistleblower Program, the Service should encourage whistleblowers to submit quality tips and should provide whistleblowers with a fair process for providing them with rewards commensurate with the information submitted. One way to ensure a fair process is to allow for a reasonable appeal process if whistleblowers believe they should have been granted an award but failed to receive one. This is particularly true for whistleblowers who assisted in the investigative process and provided supplemental information beyond the whistleblower tip submission.
B. The Whistleblower Experience
Tax whistleblowers who have filed appeals regarding their failure to receive an award often present a frustrating picture. One such taxpayer, Joseph Insinga, felt a favorable award determination was all but guaranteed based on the tip information he provided to (and followed up by communications with) the Whistleblower Office. After Insinga submitted a tip to the Service, he was contacted numerous times by Service employees to explain the complex business transactions and documents surrounding the alleged tax underreporting. Insinga fully cooperated throughout the investigation, and he documented numerous emails and phone calls with Service employees about the substance of his submission. Insinga’s knowledge of the alleged tax evasion was particularly helpful given the complex nature of the underlying tax transactions. In his ensuing Tax Court petition challenging the Service’s refusal to grant him a whistleblower award, Insinga stated that
[o]nly the highest level of management at Rabobank, from Petitioner’s management position and above, could have possibly accessed this global information. Petitioner alleges that beside himself, only four (4) other people within Rabobank’s Corporate Finance Group, could possibly have had access to and the capability of divulging all of the information and documentation pertaining to all of the transactions that Petitioner had submitted to the IRS.
Despite years of cooperation from Insinga, the Whistleblower Office subsequently informed Insinga, for the first time, that there were other sources of information related to his whistleblower award claim. Insinga filed a Tax Court petition seeking discovery regarding his whistleblower award claim. Faced with Insinga’s pending Tax Court case, the Whistleblower Office issued an award denial to Insinga. Ultimately, Insinga died without receiving compensation for the valuable (as alleged by Insinga) information that he submitted 14 years earlier to the Service.
Insinga’s case highlights the hardship a whistleblower faces in challenging a whistleblower determination. Insinga believed that he had provided significant assistance to the Service, and he also believed that the Service had settled disputes with the taxpayers on whom he had blown the whistle. Insinga filed numerous motions for discovery to find evidence supporting his entitlement to an award. Skeptical that the Service had provided Insinga with an accurate and complete administrative record, the Tax Court ordered the Service to produce additional documents. However, the court was reluctant to provide Insinga with all of the documents he requested primarily because of taxpayer privacy rights protected by section 6103. In addition to document production, the court also ordered the Service to respond to interrogatories. The court ultimately permitted discovery because it questioned the completeness of the Service’s administrative record. The Tax Court has contemplated similar additions to the administrative record in other whistleblower cases.
Insinga’s case garnered media attention, and cases like Insinga’s create a narrative that the Whistleblower Program can ill afford. Insinga’s treatment by the Service is not an isolated event. Indeed, no whistleblower award appeal has ever succeeded. Potential whistleblowers who hear of Insinga’s and others’ experiences may be discouraged from submitting tips, and yet the Service presumably needs whistleblowers to supplement its enforcement efforts. When the Service allows whistleblowers to assist enforcement but adheres to a process that fails to fairly compensate them for their contributions and risk, the Whistleblower Program and its contribution to tax enforcement are jeopardized.
III. Whistleblower Claims, Awards, and Appeals
In the experience of many whistleblowers, the Whistleblower Program is not living up to its potential and is not achieving its desired results. To understand how a Program with such evident potential fails to achieve it, we must understand how the system works. Below, we briefly outline the tax whistleblower claim, award, and appeals process to lay a foundation for critically considering whistleblower appeal rights.
A. Whistleblower Claims Under Section 7623
Under the Whistleblower Program, whistleblowers may submit a claim under the traditional discretionary system (a “section 7623(a) claim”) or a claim that alleges substantial tax underpayments under section 7623(b) (a “section 7623(b) claim”). Section 7623(b) requires allegations of tax underpayments of at least $2 million for businesses or $200,000 for individuals. While the Service has complete discretion for paying whistleblowers submitting section 7623(a) claims, the statute requires that the Service pay whistleblowers who file section 7623(b) claims an award of 15–30% of the proceeds collected (i.e., aggregate revenues received because of the whistleblower’s submitted tip). Awards to whistleblowers who submit tips based on public information, such as an administrative hearing or from the news media, are capped at ten percent of the proceeds collected. For the whistleblower to receive an award, the information submitted in the claim must be the “but for” cause that proceeds were collected; the information may cause the Service to initiate a new action, expand the scope of an ongoing action, or continue pursuing an ongoing action so long as the whistleblower’s information substantially contributes to the action.
The Service has long struggled to incorporate the assistance of whistleblowers into its examination (or audit) function, partially because of prior agency policies and partially because of the agency’s internal cultural resistance to working with whistleblowers. The lengthy Service processes for taxpayer audits and collections, and for whistleblower claim processing, result in whistleblowers waiting many years with little, if any, communication (or, indeed, compensation) from the Whistleblower Office. As a result, many whistleblower advocates have voiced strong frustration with the lack of communication between whistleblowers and the Whistleblower Office. While, in theory, a tax whistleblower could be seen as a partner and resource working alongside the Service, in practice significant tension exists between whistleblowers and the Service. More recent statutory changes in 2019 clarified the agency’s ability to communicate and collaborate with whistleblowers; however, whistleblowers encounter near constant uncertainty throughout their relationship with the Service.
The Program has undergone minor statutory and administrative changes since the expansion of section 7623 in 2006. Most recently, the 2019 Taxpayer First Act addressed the disclosure of information to tax whistleblowers and added retaliation protection that whistleblowers before the Securities and Exchange Commission (SEC) have long enjoyed. The revisions add some clarity to a whistleblower’s role in Service examinations and to the ability to exchange information with the Service, subject to confidentiality rules. Additionally, the amendment provides whistleblowers with the ability to request status updates about their claims. While these statutory amendments somewhat improve collaboration and add retaliation protection, they do not address the key issue for whistleblowers: getting paid.
B. Appealing a Determination
Tax whistleblowers are at the mercy of the Whistleblower Office for their award determination and have one limited option to appeal an award decision. Under section 7623, a whistleblower may appeal an award determination to the Tax Court within 30 days. The statutory right to appeal depends upon whether the whistleblower has received a “determination” within the meaning of the statute.
The Tax Court decided the first major challenges to an award determination in Cooper v. Commissioner, writing in two separate opinions. In Cooper I, the whistleblower challenged the Service’s refusal to award him any collected proceeds under section 7623. The Tax Court addressed whether the denial of an award is appealable as a “determination” under section 7623. The court sided with the whistleblower, relying on the legislative intent as found in the Joint Committee on Taxation’s technical explanation of section 7623(b)(4) that “[t]he provision permits an individual to appeal the amount or a denial of an award determination to the United States Tax Court.”
While Cooper I appeared to be a victory for whistleblower rights allowing the appeal of denials as well as awards, the court disappointed whistleblowers with its findings in a subsequent decision in the same matter. In Cooper II, the whistleblower asked the Tax Court to require the Service to act on his tip. He requested the court to “direct [the Service] to undertake a complete re-evaluation of the facts in this matter, begin an investigation, open a case file, and take whatever other steps are necessary to detect an underpayment of tax.” The Tax Court declined to order agency action and granted the Service summary judgment. The court found that the Service’s decision not to pursue the substance of Cooper’s claim was entirely within the agency’s discretion. In other words, the Tax Court was unwilling to order the Whistleblower Office to investigate a whistleblower’s tip.
As a result, the Cooper decisions left whistleblowers with only a limited victory. Under these decisions, the Tax Court would exercise its jurisdiction to review awards, award amounts, or the denial of an award; however, the Tax Court would not exercise any authority to compel the Service to investigate a whistleblower tip.
Despite the precedent the Tax Court announced in Cooper I, in which the court held that it had jurisdiction to review a whistleblower award denial, in January 2022 the D.C. Circuit Court of Appeals issued a (somewhat surprising) decision in Li v. Commissioner, in which it significantly limited the Tax Court’s jurisdiction to hear award denials. Li had submitted a whistleblower tip, but the Whistleblower Office did not forward the tip for investigation because the Office had found the tip to contain vague and speculative information. Li filed a petition in Tax Court requesting a review of the Service’s refusal to investigate the claim. The Tax Court ruled in favor of the Service, and Li appealed to the D.C. Circuit. Although neither party in Li had initially made any jurisdictional challenges on appeal, the government in a subsequent filing with the appellate court did, in fact, challenge the Tax Court’s jurisdiction to hear Li’s case. The Court of Appeals evidently agreed, for it held that “the Tax Court lacks jurisdiction to hear appeals from threshold rejections of whistleblower award requests.” Concluding that Cooper I was “wrongly decided,” the Court of Appeals found that “[a] threshold rejection of a whistleblower’s Form 211 for vague and speculative information is not a negative award determination, as there is no determination as to an award under subsections (b)(1)-(3) whatsoever.” The court’s conclusion was based on a close reading of section 7623 that
an award determination by the IRS arises only when the IRS “proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary’s attention by [the whistleblower] . . . .” A threshold rejection of a Form 211 by nature means the IRS is not proceeding with an action against the target taxpayer.
On its face, Li did not eliminate the Tax Court’s jurisdiction to review all award denials; it only eliminated appeals of threshold rejections. However, the sweeping language at the end of the decision suggests that it will likely be read more broadly than merely preventing appeals for claims rejected for providing only vague and speculative—or similar—information. Specifically, the court’s observation that section 7623(b)(4) “confers jurisdiction only when there is both an IRS action based on whistleblower information and proceeds collected from that action” invites an overly broad reading beyond the facts in Li. The Court of Appeals never states what “IRS action” would be sufficient, and that lack of guidance may well create even more uncertainty for whistleblower appeals. Moreover, all whistleblowers will face this uncertainty because the Tax Court’s decisions under section 7623 are all appealed to the D.C. Circuit Court of Appeals. At present, Li is binding precedent for the Tax Court’s decisions in tax whistleblower cases.
This decision by the D.C. Circuit further limits the ability of whistleblowers to challenge Service actions (or inactions) regarding whistleblower tips they have submitted. For whistleblowers seeking judicial review of Whistleblower Office decisions, any proceeding must have progressed to taxpayer examination (as well as assessment and successful collection) to provide a potential avenue for challenge. However, even if examination, assessment, and collection have occurred, whistleblowers cannot be certain that these facts are enough to ensure that the Tax Court would order the Service to issue an award. Because no whistleblower has ever won an appeal, it is unclear what facts, if any, would be sufficient to justify ordering an award on appeal.
IV. The Rights of Tax Whistleblowers to Challenge Awards
In general, tax whistleblowers are treated significantly worse and have fewer options for resolving any dispute with the Service than if they were taxpayers. Whistleblowers have a single venue for hearing their dispute judicially—the Tax Court—while taxpayers have three different options and longer time periods for filing. This limited opportunity for dispute resolution for whistleblowers, as compared to taxpayers, is limited further when opportunities for administrative appeal within the agency are considered. While most other taxpayers have the opportunity to choose an intermediate administrative review in the agency’s Independent Office of Appeals before even exercising their judicial options, this opportunity for administrative appeal is not available to whistleblowers. Furthermore, when a whistleblower arrives in Tax Court to challenge a determination without an intermediate appeal, the Tax Court hears a truncated case and uses a highly deferential standard for review. Compared to taxpayers, whistleblowers have a more limited opportunity to develop evidence and make their case. And whistleblowers must overcome an abuse-of-discretion standard, which is higher than the standard more often used by the Tax Court when hearing other disputes. In short, whistleblowers having disputes with the Service are not treated like others with analogous agency disputes.
A. Forum
A whistleblower seeking to challenge an award determination from the Service has only one venue in which to proceed—the Tax Court. Taxpayers with federal tax disputes may select any one of three judicial options for challenging the Service’s actions. Taxpayers may choose to have their dispute heard in federal district court or the Court of Federal Claims, or avail themselves of the opportunity to be heard in the Tax Court. Whistleblowers, however, may only challenge a determination in the Tax Court. The primary tax whistleblower statute, section 7623, grants whistleblowers a short window and limited venue to challenge whistleblower awards (or denials). Specifically, the statute states that “[a]ny determination . . . may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).” The limited venue is a departure from jurisdiction to hear tax disputes with the Service generally.
The tax whistleblower statute, section 7623, only contemplates judicial review of a determination in the Tax Court. It is entirely silent on any intermediate or administrative remedies; however, the statute grants broad authority for agency’s adoption of regulations. The section 7623 regulations provide the opportunity for whistleblowers to comment on an award determination, rejection, or denial. Under these regulations, a whistleblower receiving a denial or rejection has 30 days to submit comments to the Whistleblower Office. After reviewing the whistleblower’s comments, the Whistleblower Office will provide the basis for rejecting the whistleblower’s comments or make a preliminary award recommendation.
When (and if) the Service makes a preliminary award recommendation for a section 7623(a) claim, a whistleblower can similarly provide comments within 30 days. For a section 7623(b) claim, the Service sends the whistleblower a preliminary award recommendation, which is expressly not a “determination” triggering appeal rights under the statute. Upon receipt, a whistleblower can (1) do nothing, (2) waive all of her administrative and judicial appeal rights and accept the recommendation, (3) sign a confidentiality statement to have the opportunity to review a more detailed report for the basis for the recommendation, or (4) submit comments within 30 days. For whistleblowers receiving an award, denial, or rejection, the process provided by the regulation, in so far as it allows whistleblowers to submit comments to the Whistleblower Office within 30 days, does not provide the opportunity for any meaningful appeal as the process would appear to lack objectivity. The party (the Whistleblower Office) reviewing the whistleblower’s objections to the determination, denial, or rejection is the same party (the Whistleblower Office) that made the initial determination.
Other than the comment procedure described above, the regulations are silent as to whether a whistleblower may access the agency’s internal appeals apparatus available to other taxpayers. The Service has long offered other taxpayers the opportunity to have their disputes reviewed by an internal agency appeals officer in some form or another. An early version was the independent Special Advisory Committee, created in 1927, followed by Technical Staff with settlement authority in 1933, and the Appeals Division in 1978. The Taxpayer First Act of 2019 established the latest, and also the most formal and binding form of agency review, in the Independent Office of Appeals. The purpose of the Independent Office of Appeals is to
resolve Federal tax controversies without litigation on a basis which—(A) is fair and impartial to both the Government and the taxpayer, (B) promotes a consistent application and interpretation of, and voluntary compliance with, the Federal tax laws, and (C) enhances public confidence in the integrity and efficiency of the Internal Revenue Service.
Moreover, the Office “shall be generally available to all taxpayers.” This is newly codified language and arguably a new mandate for the Service. Prior to establishment of the Independent Office of Appeals, the Service historically gave itself some limited exceptions to the availability of the agency’s appeals office. The Service made no exception for whistleblowers; then again, the Service has never invited whistleblowers to make use of the appeals office or its processes. Even in “no immediate tax consequences” cases, it considers such cases “when requested by the taxpayer.”
When whistleblowers disagree with the Service, they have no opportunity for an intra-agency appeal with a different decision maker, unlike all other taxpayers before the Independent Office of Appeals. Moreover, whistleblowers have but a single forum for judicial review that can only be accessed for 30 days. In comparison, other taxpayers have three forums, including the Tax Court with access for 90 days, and may have access to the federal district courts or the Court of Federal Claims for timely refund lawsuits beyond the 90-day limitations period.
B. Administrative Record
When tax whistleblowers appeal a determination to the Tax Court, the court uses the administrative record as the basis for the appeal. As the Supreme Court has stated, the contents of the administrative record are to receive “a thorough, probing, in-depth review.”
Because both section 7623 and its legislative history are silent as to the appropriate record for the review of whistleblower appeals, the Tax Court has applied applicable administrative law. Under the Administrative Procedure Act (APA), judicial review of an administrative agency’s action is of “the whole record, or those parts of it cited by a party.” Often known as the record rule, it is the default scope of APA judicial review. There are, however, several exceptions to this default rule. In Esch v. Yeutter, the D.C. Circuit Court of Appeals recognized that “it may sometimes be appropriate to resort to extra-record information to enable judicial review to become effective.” The opinion cited eight separate exceptions to the record rule, which subsequent cases appear to have narrowed to four; other Courts of Appeals have determined their own alternative set of exceptions, with as few as one and as many as four or five exceptions. Little is clear, apart from the fact that exceptions to the record rule differ among the circuits. In 2018, the Tax Court was still citing Esch v. Yeutter as expanding the record in the following six instances:
when agency action is not adequately explained in the record; when the agency failed to consider relevant factors; when the agency considered evidence which it failed to include in the record; when a case is so complex that a court needs more evidence to enable it to understand the issues clearly; where there is evidence that arose after the agency action showing whether the decision was correct or not; and where the agency’s failure to take action is under review.
Because the Tax Court’s decisions in whistleblower actions under section 7623 are appealed to the D.C. Circuit Court of Appeals, the Tax Court should apply that Circuit’s interpretation of the record rule in a whistleblower action.
The APA provides no definition of “the whole record,” nor does the statute explain how to ascertain the whole record. Courts offer an agency “a presumption of regularity” as to what the agency declares to be the administrative record, but courts do not permit an agency to “unilaterally decide what constitutes an administrative record.” Nevertheless, the Service has attempted to define the contents of a whistleblower administrative record. The regulations under section 7623 define a whistleblower administrative record as “all information contained in the administrative claim file that is relevant to the award determination and not protected by one or more common law or statutory privileges.”
A limited “record rule” differs from the Tax Court’s traditional scope of review that allows for the presentation of evidence in tax disputes. The tax whistleblower’s statutory right to an appeal is nearly identical with the appeal rights for Collections in Due Process (CDP) cases in that there is a 30-day window for appeal of the determination. The language from the CDP provision in section 6330(d) provides that “[t]he person may, within 30 days of a determination under this section, appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).” Almost identically, section 7623(b) provides that “[a]ny determination regarding an award under paragraph (1), (2), or (3) may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).” CDP cases generally allow for the presentation of evidence beyond the administrative record.
The Tax Court has nevertheless been reluctant to consider new evidence in tax whistleblower cases. Indeed, the vast majority of whistleblower appeals are resolved on summary judgment in favor of the Service. The few cases that have survived summary judgment have ultimately been resolved, too, in favor of the Service. To date, there has not been a single successful challenge to a whistleblower determination. As the court noted in Kasper v. Commissioner, “[s]ince the enactment of section 7623(b) in 2006, few—if any—whistleblower cases have reached this Court on their merits . . . .”
As one of the first whistleblower cases to reach the Tax Court on the merits, Kasper forced the court to explore “the proper scope and standard of review to apply in whistleblower cases . . . .” In that case, Kasper submitted a whistleblower tip to the Service alleging that his employer, Target, violated the overtime pay requirements with its policies, which caused it to underpay wages. The Service denied Kasper’s claim for an award, citing boilerplate language that “your information did not cause an investigation or result in the recovery of taxes, penalties, or fines.” However, Kasper noted that the Service had successfully settled claims for employment taxes during a bankruptcy proceeding for $37.5 million that he believed were a result of the information he provided. Kasper challenged the Whistleblower Office’s denial of his award, but the Tax Court upheld the denial. The court found the unpaid wages to be a matter for the Department of Labor and not an issue for the Service because no tax is owed on unpaid wages.
While the result was unfavorable for Kasper, the Tax Court expressed some willingness to supplement the administrative record if the record is incomplete. As the court noted, “[t]he record rule doesn’t always tell us to stop with the record.” The court expressed caution in allowing the agency the unilateral authority to determine what constitutes the administrative record and a willingness to allow supplemental information to be entered as part of the record if an exception to the record rule applies.
The court also noted the possibility that the Whistleblower Office could distribute a whistleblower claim to a Service division but fail to follow up regarding how (if at all) the information was used. If this occurred, a court’s review limited to the administrative record would be insufficient to determine a whistleblower award. The court permitted Kasper to supplement the administrative record with the Service’s bankruptcy file. Nevertheless, Kasper’s supplemental evidence was insufficient to convince the Tax Court that his tip information produced collected proceeds because the standard procedure for the Service in bankruptcy claims is to review the employment tax issues. In light of Kasper, whistleblowers who wish to supplement the administrative record must make a compelling case for an exception to the record rule.
C. Standard of Review
When Congress overhauled the Whistleblower Program in 2006, it gave the Whistleblower Office the exclusive task of determining whether an applicant qualifies as a whistleblower and, if so, the amount of any monetary award. Applicants who believe the Service erred may appeal to the Tax Court. But what amount of deference should the Tax Court give the Whistleblower Office’s award determination? According to the Tax Court, the answer lies in the role Congress envisioned that the Tax Court would play in whistleblower claims. Is the Tax Court a trial court or an appellate court in whistleblower cases?
In most of its business, the Tax Court acts as a trial court. Indeed, the Tax Court’s creation was a legislative attempt to make it an alternative to federal district courts. Its principal function is as a trial court in deficiency and overpayment cases. When the Service and a taxpayer disagree about tax owed by the taxpayer, both the Service and taxpayer fully present the facts and law in their case before the Tax Court. In deficiency and overpayment cases, the Service and taxpayers act as litigants in a trial court; they engage in discovery and motions practice. The Tax Court hears any evidence and arguments, including evidence and arguments not previously presented during the Service determination.
Deficiency and overpayment cases are subject to a de novo standard of review for agency action. De novo review requires the court to render a decision untethered to any factual or legal conclusion made by the agency and without giving deferential weight to the agency’s determinations. Courts have concluded that the Tax Court’s de novo standard of review in deficiency cases is a matter of Congressional mandate; Congress tasked the Tax Court to “determine” the appropriate relief, not just to hear appeals. In Wilson v. Commissioner, the Ninth Circuit found this Congressional phrasing critical. Had Congress wanted the Tax Court to simply act as a reviewing court, it would have said so. Instead, Congress chose language which granted the Tax Court the discretion to find the right result, which implies a grant of de novo review.
The Tax Court’s de novo standard of review of Service determinations in deficiency/overpayment cases stands in stark contrast to the traditional review of other federal administrative agency determinations: abuse of discretion. Section 706 of the APA provides six standards of review:
(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
(B) contrary to constitutional right, power, privilege, or immunity;
(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;
(D) without observance of procedure required by law;
(E) unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute; or
(F) unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.
Most commonly, agency determinations are reviewed by trial courts using the first “abuse-of-discretion” standard; that is, an agency’s determination will be reversed if its conclusion is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
In considering the standard of review for tax whistleblowers, the Tax Court concluded that the appropriate standard is “abuse of discretion.” Referencing the logic of Wilson, the Kasper court focused on section 7623(b)(4)’s statement that the Service’s whistleblower award may be “appealed to the Tax Court” and explained that the court will not substitute its judgment for that of the Whistleblower Office. The court reasoned that the whistleblower does not have an underlying tax liability to dispute; rather, the court has jurisdiction only to review the determination of the Whistleblower’s Office to grant or deny an award.
Under an abuse-of-discretion standard, the Tax Court must limit its review to identify whether the Whistleblower Office made any errors in applying the law or assessing the facts. Importantly, the identification of errors is limited to the administrative record. This is a problem for current and future whistleblowers because it puts the whistleblowers in an unbalanced power struggle with the Whistleblower Office. A whistleblower challenging a denial or the amount of an award has no ability to submit additional information to the Tax Court if the administrative record is lacking. If the only way for a whistleblower to have a successful appeal is to demonstrate Whistleblower Office errors, and the Whistleblower Office controls the record that will be examined, at what point does the whistleblower have an opportunity to present his or her side of the story? The status quo process presumes the administrative record must be accurate. But what if it is not? The abuse-of-discretion standard sets an unreasonably high bar for whistleblowers that no whistleblower to date has been able to overcome in Tax Court.
