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that they didn’t support Cotton’s amendment because it only applied to discretionary spending and would not have repealed the automatic sequester of mandatory spending.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.

As we have written about in the past, for the last few years IRS whistleblower awards under section 7623 have been subject to sequestration reductions of between 7.2% and 8.7% (currently 7.3% for fiscal year 2015 awards) pursuant to the Balanced Budget and Emergency Deficit Control Act.  We believe these cuts are contrary to law, and furthermore make bad fiscal sense, much like cuts to the IRS enforcement budget.  However, the budget that President Obama released today would put an end to these automatic across-the-board spending cuts.  He said:  “I’m not going to accept a budget that locks in sequestration going forward. It would be bad for our security, and bad for our growth.” 

Now a budget proposal is pretty far from law, and with the Republicans in control of both chambers of Congress they are really calling the shots on the budget, but it is a good sign that an end to sequestration is on the table.  We believe that the legality of sequestration cuts to whistleblower awards under section 7623 is currently being disputed in the US Tax Court, but it would be great if that issue became moot through legislation.

October 1st 2014 marks the beginning of fiscal year 2015 and a new sequestration reduction rate for whistleblower awards.  According to an OMB Report on the reductions for fiscal year 2015, every award payment made to a whistleblower under section 7623 on or after October 1, 2014, and on or before September 30, 2015, will be reduced by the sequestration rate of 7.3 percent.  That reduction rate is up slightly from fiscal year 2014’s reduction rate of 7.2 percent.

It has been and continues to be the position of The Ferraro Law Firm that whistleblower awards should not be reduced by sequestration.  As a technical matter, the reduction of award amounts paid to whistleblowers is in direct conflict with the statutory language of section 7623(b) which unambiguously states that a whistleblower “shall” receive as an award “at least 15 percent” of the collected proceeds.  The sequestration reduction is illegally defying the language and intent of the statute.  As a practical matter, reducing the amount paid to whistleblowers makes zero sense.  The entire purpose of sequestration is to ensure that tax dollars are saved and the nation’s debt is reduced.  Because whistleblower awards are paid directly from collected proceeds; proceeds that in all likelihood would not have been collected absent the whistleblower’s information; these award payments do not have a negative effect on the nation’s debt.  The whistleblower is actually assisting the government in raising money, not causing government to spend money.  As a matter of equity, whistleblowers came forward in reliance on the 2006 law and trusted that the statute would apply to them as written. The fact that the sequestration reduction can arbitrarily impact awards relating to claims made by whistleblowers many years ago, to us, is a prohibited retroactive change in the law.

Unfortunately, the IRS will continue to apply the sequestration reduction rate unless and until a law is enacted by congress that cancels or otherwise impacts the sequester.  A bi-partisan budget agreement has not yet been reached by congress.  The government will be funded through a Continuing Resolution that was passed by the House and Senate which generally maintains current spending at fiscal 2014 levels until December 11, 2014.    

The IRS Whistleblower Office renewed its position that awards under section 7623 are subject to the automatic sequester cuts, on its website, stating that:

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, whistleblower award payments issued under Internal Revenue Code section 7623 are subject to sequestration. This means that every award payment made to a whistleblower under Section 7623 on or after October 1, 2013, and on or before September 30, 2014, will be reduced by the fiscal year 2014 sequestration rate of 7.2 percent. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.

The sequestration reduction will be applied after the Whistleblower Office determines the amount of collected proceeds and the applicable award percentage to be paid under section 7623. Whistleblowers will be advised of the sequestration reduction in correspondence from the Whistleblower Office concerning a proposed award amount and an award determination.

As discussed previously, we believe that ANY sequestration rate that reduces a 7623(b) award is illegal.  The IRS is confusing its discretion under section 7623(a) with their “shall pay” mandate under section 7623(b) and will almost certainly be successfully challenged by a whistleblower in tax court.  Awards paid under section 7623(a) are discretionary and, therefore, may be reduced by the sequestration reduction rate.  However, awards under section 7623(b) are not discretionary, as their payment is mandated by statute, and are not available for reduction.  Section 7623(b) states that the Commissioner shall pay whistleblowers, who meet the threshold requirements, 15 to 30 percent of collected proceeds.  Under the Fiscal Year 2014 sequestration reduction rate cuts these awards would be limited to between 13.92 and 27.84 percent, effectively precluding the Commissioner from paying an award of 30 percent. 

We hope that the battle over the budget ends soon and the issue of sequestration reduction cuts becomes moot; however, in the mean time we will continue to counsel any client whose award is reduced under these guidelines to challenge the reduction in the United States Tax Court.  

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.