The IRS announced that whistleblower awards paid under section 7623 on or after October 1, 2017 and on or before September 30, 2018, will continue to be reduced by the “sequestration reduction rate”, which has now been lowered slightly to 6.6 percent.  The 6.6 percent fiscal 2018 sequestration reduction rate represents a .3 percent decrease from fiscal 2017’s 6.9 percent.  The sequestration reduction will unfortunately continue to be applied to whistleblower payments unless and until a law is enacted that cancels or changes the sequester or a court decides that it is improper.

The IRS and OMB have taken the position that whistleblower award payments are subject to the sequestration reductions required by the Balanced Budget and Emergency Deficit Control Act (“Budget Control Act”).  We have asserted that reducing awards under section 7623(b) is contrary to the letter of the law and also makes little if any fiscal sense as awards are paid from collected proceeds.  The IRS believes that reducing whistleblower awards is part of spending caps that are imposed on defense and non-defense spending by the Budget Control Act.  If those caps are exceeded, spending is cut across-the-board, a consequence that neither Republicans nor Democrats want.

This is a year that we could see some meaningful change in or even elimination of the sequester because President Trump has called for substantial increases in military spending in his budget request.  The House and the Senate passed their respective versions of the annual National Defense Authorization Act (“NDAA”) which authorizes budget appropriations for the Department of Defense.  Both houses passed bills that exceed the President’s budget request and smash through the statutory caps on defense spending established by the Budget Control Act.  Breaking these statutory caps triggers the across the board cuts commonly referred to as “sequestration.”  Congress must either raise the spending caps or eliminate sequestration altogether to avoid the cuts that are despised by both parties.

In fact, Senator Tom Cotton (R-AK) attempted to repeal the sequester spending cuts for both defense and non-defense discretionary spending back in September but his amendment to the 2018 NDAA failed to receive votes and eventually died due to a lack of quorum.  Democrats are taking the position that they didn’t support Cotton’s amendment because it only applied to discretionary spending and would not have repealed the automatic sequester of mandatory spending.

In early September the House and Senate voted on a continuing resolution which funds the federal government through December 8, 2017.  As with years passed, we are likely to see increased political maneuvering between the parties as December approaches and the Senate and House budgets are reconciled.  We are watching this year very closely with the hope that reduction of whistleblower awards becomes a thing of the past.  We further understand that there are docketed cases in the U.S. Tax Court that are challenging the legality of the sequestration reductions to whistleblower award, but these cases have not been resolved yet.  Stay tuned.

Today the Tax Court issued an opinion, Whistleblower 4496-15W v. Commissioner of Internal Revenue, granting the IRS’s motion for summary judgement.  In this case, the informant had received a preliminary award determination for an award of $2,954,933.  Congratulation to the informant in this case on the receipt of an award.  The award was computed as follows in the Summary Report, which is attached to the Preliminary Award Determination letter:

  1. Tax, Penalties, interest, and other amounts collected based on information provided by Whistleblower: $14,489,227
  2. Recommended Award Percentage: 22%
  3. Collected proceeds (Line 1) x recommended award percent (Line 2): $3,187,630
  4. Budget Control Act reduction (Line 3 amount x 7.3 percent): $232,697
  5. Award after Budget Control Act Reduction (Line 3 less Line 4): $2,954,933

The informant in this case ultimately chose to accept the award amount in the preliminary award recommendation by checking the box captioned:

I agree with the preliminary award recommendation and accept it as the award determination.  I waive all of my administrative and judicial appeal rights with respect to the award determination, including my right to petition the United States Tax Court.

The petitioner made this choice after his counsel consulted with the IRS for options of receiving the award but keeping the option to appeal just the Budget Control Act Reduction (more commonly referred to as the “sequester cut”).  The IRS Whistleblower Office processed the paperwork and sent the informant a check for $2,135,826 ($2,954,933 – $819,107 of withheld taxes).  Within 30 days of receiving the check the informant filed a petition with the Tax Court.

The IRS filed a motion to dismiss for lack of jurisdiction, which the Court found that it had because the petition was timely filed within 30 days of the IRS making an award determination in this case.  The motion also urged the Court to dismiss because the petitioner had agreed to waive their right to appeal the award when they accepted the preliminary award recommendation.  The Court treated the acceptance of the preliminary award recommendation as a settlement where the right to further administrative or judicial appeal has been waived.  The Court pointed to the fact that the informant could have elected not to accept the award and when a final award determination was made by the IRS Whistleblower Office, they could have appealed to the Tax Court then.  However, this would have delayed the receipt of the award.