Tax Court Blasts IRS for ‘Obfuscation’ in Whistleblower Case

In an unusually blunt opinion, the U.S. Tax Court rebuked the Internal Revenue Service for continuing to fight award claims made by two anonymous whistleblowers — even as the agency was reopening the same claims in a related investigation.

In a dismissal order issued on May 10, 2013, Judge Maurice Foley slammed the IRS for providing “incomplete, misleading, and possibly inaccurate information” in the case.

“We do not know whether these failures were the result of bureaucratic confusion or ineptitude,” wrote Judge Foley. “We do know, however, that the obfuscation surrounding this matter has either been caused or exacerbated by” the federal agency.

Judge Foley kicked the case back to the IRS, which must determine anew whether to acknowledge a link between its investigation and the two whistleblowers’ tips. If there is a link, the duo may get a share of any money the government recovers from “Company X,” the alleged wrongdoer.

Full details of the tax probe remain secret, except that it is being conducted by the Small Business/Self-Employed division of the IRS.

The order was a further illustration of chronically crossed wires — or worse — between the IRS and citizens who report possible tax fraud. Whistleblower advocates including Sen. Chuck Grassley (R-Iowa) have complained that the agency seems hostile to such tipsters, declining to give them rewards, credit, updates, or even basic encouragement.

“At least the IRS Whistleblower Office reopened the awards claim in this case,” said R. Scott Oswald, managing principal of The Employment Law Group, a law firm that represents whistleblowers. “I applaud that. But this whole story is about failed communication. Judge Foley is calling for more openness from the IRS — and he’s absolutely right.”

The Company X whistleblowers filed their original tips in 2009; the IRS denied their award claims, saying it had taken no action based on the reports. The agency later opened an investigation into Company X, but claimed the action was unrelated.

As the whistleblowers tried to get their claims reinstated by the Tax Court, the IRS resisted at each step—and eventually won a motion for summary judgment late last year. In that order, Judge Foley questioned the agency’s claim that its investigation wasn’t triggered by the whistleblowers’ tips, but said there was no legal mechanism to challenge it.

The parties continued to trade documents in court, with the IRS standing its ground through late March 2013 — more than a month after it had informed the whistleblowers, in writing, that it would consider their claims after all.

Clearly irked, Judge Foley vacated his earlier order for the IRS and, on his own initiative, ejected the case from Tax Court entirely.

The whistleblowers may return, he said, if they get denied again.

Tagged: Enforcement Bodies, Fraud Types, Internal Revenue Service (IRS), Tax Fraud