Tax Court Protects Rights of IRS Whistleblowers to Retain Anonymity

In a decision that will be welcomed by Internal Revenue Service (“IRS”) whistleblowers, the United States Tax Court ruled on Thursday in Whistleblower 14106-10W v. Commissioner of Internal Revenue that the court would allow individuals reporting serious tax underpayments under U.S.C. § 7623 to appeal IRS award determinations anonymously.  This is a very important holding: given that § 7623 does not include an anti-retaliation provision, the potential outing of a whistleblower could have a serious chilling effect  on the chances that an individual would report someone, particularly an employer, for underpayment of taxes.  Without anonymity or anti-retaliation provisions in the law, whistleblowers who wished to appeal an award determination would have no protection against the subject of their tip to the IRS.

In a thorough and well-reasoned opinion, the Court first stated, quoting Anonymous v. Commissioner, 127 T.C. 89, 94 (2006), that “a party may generally proceed anonymously when the trial court reasonably determines that the need for anonymity outweighs the prejudice to the opposing party and the general presumption that the parties’ identities are public information.”  The Court listed a number of different factors to weigh in determining whether the need for anonymity was sufficient.  These included the information released being private or highly sensitive; the whistleblower’s risk of physical harm; or their risk level of “other significant harm,” including social or professional stigma, or economic retaliatory harm.  The Court also felt there was a significant public interest in protecting confidential informants.

The Court found that the whistleblower report in this case reasonably supported the “conclusion that disclosing petitioner’s identity could adversely affect not merely petitioner’s current employment but also petitioner’s future employability. … Revealing petitioner’s status as a tax whistleblower in these circumstances would likely cause severe damage to petitioner’s standing in the professional community.”  The Court concluded that “petitioner has demonstrated a risk of harm that far exceeds in severity mere embarrassment or annoyance.”

The IRS argued that by pursuing judicial review, the whistleblower had “chosen to relinquish the confidentiality accorded by the Whistleblower Office.”  However, the court rightly held that the result of such a policy “would be a chilling effect on some claimants who have a compelling need to proceed anonymously.  This result would be at odds with the ostensible legislative purpose of encouraging tax whistleblower claims.”

“We are thrilled about the Tax Court’s holding,” said David J. Marshall of Katz, Marshall& Banks, a whistleblower law firm located in Washington, DC.  “There is no reason that whistleblowers should have to choose between the protection of anonymity and the ability to appeal an unfavorable determination.  We are pleased to see this unfair choice abolished.”