IRS Can Disclose Return Information to Tax Court in Whistleblower Case

(Parker Tax Publishing July 2022)

The Tax Court held, in a case involving a review of a denial by the IRS Whistleblower's Office of a whistleblower's claim, that the IRS was not prohibited under Code Sec. 6103 from providing the court with a copy of the unredacted administrative record, which included returns and return information of the target taxpayers. The court found that it had jurisdiction over the whistleblower's petition and that an exception from the general rule of confidentiality applied because the case arose "in connection with" determining the tax liabilities of the target taxpayers. Whistleblower 972-17W v. Comm'r, 159 T.C. No. 1 (2022).

Background

A whistleblower provided information to the IRS regarding three individuals (Taxpayers 1, 2, and 3). The government pursued actions against all three individuals (targets), including criminal actions with respect to two of the targets and ultimately collected proceeds from each of them. But the IRS Whistleblower Office (WBO) denied the whistleblower's claim for an award under Code Sec. 7623(b) because it determined that the whistleblower's information did not result in the assessments against the target taxpayers. The whistleblower petitioned the Tax Court to review the WBO's decision.

In general, the Tax Court reviews whistleblower cases based on the administrative record. Accordingly, the Tax Court ordered the IRS to file with the Court redacted and unredacted copies of the administrative record compiled by the WBO. The IRS filed a redacted copy of the administrative record and requested that the Tax Court excuse it from filing an unredacted copy in order to protect confidential returns and return information as required by Code Sec. 6103. The Tax Court ordered the IRS to submit, for review in camera (i.e., in private), any documents that the IRS wished to redact to preserve a privilege or protect taxpayer information.

In response, the IRS asked the Tax Court to modify its order, requesting that it strike the portion of the order that directed the IRS to submit the entire unredacted administrative record for review in camera. The IRS argued that there is no exception in Code Sec. 6103 that would permit it to disclose the redacted information to the Tax Court. The whistleblower filed a response opposing the IRS's motion.

Under Code Sec. 6103, the IRS generally must keep tax returns and return information confidential unless disclosure is specifically authorized by the Code. One such authorization is provided in Code Sec. 6103(h)(4), which permits disclosure in a judicial or administrative proceeding pertaining to tax administration. However, this authorization applies only if (1) "the taxpayer is a party to the proceeding or the proceeding arose out of or "in connection with" determining the taxpayer's civil or criminal tax liability (Code Sec. 6103(h)(4)(A)); (2) the treatment of an item reflected on such return is "directly related to the resolution of an issue" in the proceeding (Code Sec. 6103(h)(4)(B)); or (3) the return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding (Code Sec. 6103(h)(4)(C)).

The IRS argued that portions of the returns and return information included in the administrative record fell within Code Sec. 6103(h)(4)(B) because they were directly related to the resolution at issue in the proceeding - i.e., whether the WBO erred when it denied the whistleblower's claim for an award. The IRS did not redact these "directly related" items, but did redact other information that it determined was not directly related to the proceeding. The IRS asserted that disclosure of the redacted information was not authorized under any of the three subparagraphs of Code Sec. 6103(h)(4).

Analysis

The Tax Court held that Code Sec. 6103(h)(4)(A) authorized disclosure of the redacted information because the case arose "in connection with" determining the civil or criminal liabilities of the target Taxpayers 1, 2 and 3. However, before addressing the disclosure issue the Tax Court considered, of its own accord, whether it had jurisdiction over the whistleblower's petition. The court concluded that it did have jurisdiction.

Under Code Sec. 7623(b)(4), the Tax Court has jurisdiction to review "any determination regarding an award" under Code Sec. 7623(a)(1), (2), or (3). Determinations under those provisions generally are made by the WBO, which reviews whistleblower claims to determine whether an award will be paid and, if so, decides the amount of the award. In Li v. Comm'r, 2022 PTC8 (D.C. Cir. 2022), the D.C. Circuit held that the Tax Court does not have jurisdiction to review a threshold decision by the WBO to reject a whistleblower claim, because a threshold rejection is not an "award determination" under Code Sec. 7623(b)(1), (2), or (3). The D.C. Circuit explicitly did not decide whether the Tax Court would have jurisdiction over a case in which the IRS proceeded against a target taxpayer based on a whistleblower's information, but the WBO wrongly denied the whistleblower's application for an award. In the view of the Tax Court, this essentially was what the whistleblower alleged took place in this case. Therefore, the Tax Court concluded that it had jurisdiction to review the WBO's determination.

Turning to the disclosure issue, the Tax Court found that the exception provided in Code Sec. 6103(h)(4)(A), for disclosures in proceedings arising "in connection with" determining a taxpayer's tax liability, should be construed broadly. The court looked to the ordinary meaning of "in connection with" (a phrase which is not defined by the statute) and determined that the term "connection" means any link, association, or relationship. This broad definition, the court found, was consistent with interpretations of the phrase "in connection with" by various courts over time, including the Tax Court, which in Adams Challenge (UK) Ltd. v. Comm'r, 154 T.C. 37 (2020), interpreted the phrase as meaning "related to." Considering the statute's purpose, the court reasoned that Code Sec. 6103 reflects Congress's balancing of competing interests - taxpayers' interest in the confidentiality of their returns and return information and the interests of others whose rights might be affected by the information. In the court's view, Congress chose to add exceptions in Code Sec. 6103, demonstrating that confidentiality must sometimes give way to other interests.

Thus, the court found no difficulty in concluding that this case arose "in connection with" (i.e., in relation to) determining the civil or criminal liabilities of the target taxpayers and was therefore within the scope of Code Sec. 6103(h)(4)(A). In the court's view, when (as here) a whistleblower provides information to the IRS on a target taxpayer and the IRS proceeds with an action and collects proceeds from that target taxpayer, the decision whether to grant the whistleblower an award - as well as the Tax Court's eventual review of that decision - is inextricably linked with determining the target taxpayer's civil or criminal liability for at least two reasons.

First, the court found that the IRS's action in determining the target taxpayer's liability and the outcome of that action (including the collection of additional tax) are clear but-for causes of the proceeding before the Tax Court. The court noted that, under Li, the existence of an IRS action against the target taxpayer is a prerequisite to the Tax Court's jurisdiction to hear a whistleblower case. Second, the court said that what the IRS determined with respect to the target taxpayers and what it collected from them were key inquiries in analyzing the merits of this case, which was focused on evaluating the extent to which the whistleblower substantially contributed to the IRS's actions in detecting and pursuing violations of the internal revenue laws. The court said that essentially, the particulars of the IRS's actions that determined the target taxpayer's liabilities would decide the outcome of the whistleblower's case.

The court concluded that Code Sec. 6103 considerations did not warrant an in camera review of the redacted materials. In the court's view, Congress has already made a determination with respect to such materials as far as Code Sec. 6103 is concerned. Therefore, the materials could be disclosed unless the IRS determined that providing the unredacted information would identify a confidential informant or seriously impair a civil or criminal tax investigation.

For a discussion of appealing an IRS Whistleblower Office determination, see Parker Tax ¶262,340.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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