On March 4, the IRS announced through a two-paragraph statement posted to its website, that under the automatic sequester cuts, any section 7623 whistleblower awards paid between March 1, 2013, and September 30, 2013, will be reduced by a “sequestration reduction rate.” The IRS said that in conjunction with the Office of Management and Budget, it has determined that whistleblower awards will be reduced by 8.7 percent.  

Reducing the amount of any whistleblower awards is a step in the wrong direction and makes little sense if the IRS is looking to attract whistleblowers. However for the purposes of reducing discretionary spending, this position would make sense if it was limited to awards paid under the old Informant Rewards Program of section 7623(a). Because awards under the old Informant Rewards Program of section 7623(a) are discretionary, the reduction in the award amount would be a reduction in discretionary spending. However, award payments under the new Whistleblower Program as enacted by section 7623(b) are not discretionary, they are mandated by statute, and not available for reduction.

Section 7623(b) says that the Commissioner SHALL pay 15-30% awards to whistleblowers who meet the threshold requirements of that section. The problem with this sequestration reduction policy can be seen clearly by analyzing the effect of this policy on awards which are determined to be at the top and bottom of the statutorily required 15-30% scale. A 15% award determination that is then reduced 8.7% is a 13.7% award. The Commissioner has no more authority to pay 13.7% to a section 7623(b) whistleblower than he has to reduce a taxpayer’s child tax credit. On the top end of the scale a 30% award reduced by 8.7% is 27.4%. By effectively announcing that under no circumstance will the IRS pay an award above 27.4%, any award determination made under the sequestration reduction policy is on its face arbitrary, capricious, and unreasonable.

The Ferraro Law Firm will counsel any client whose award is reduced under the sequestration guidelines to challenge the unlawful reduction in the United States Tax Court. With respect, I suggest the IRS focus on using whistleblower information and collect the billions owed rather than waste time on invalid pronouncements that will only cost the government time and money in court.