Paul L. Caron

Monday, December 2, 2019

Lesson From The Tax Court: How The Court Reviews Whistleblower Office Decisions

Everyone, myself included, tends to refer to “the” IRS as if it is a sentient being.  We all know, however, that there is no such being.  Rather, the IRS is composed of many employees grouped together in different offices that perform different functions with various degrees of elan or despair.  It is the connections and coordination between these offices that make up “the” IRS.

Normally that distinction in not important.  But proved critical in last week’s case of Richard E. Lacey v. Commissioner, 153 T.C. No. 8 (Nov. 25, 2019).  There the Tax Court was asked whether it had jurisdiction to review the refusal of the IRS Whistleblower Office (WBO) to send whistleblower information to the Exam function.  The majority said yes.  The language of §7623(b)(4) gives the Tax Court jurisdiction to review any work product produced by the WBO.  Four Judges disagreed.  In their view, the statute does not permit review of decisions on whether or not to open exams in the first place, and that is true regardless of whether such decision is made by the WBO or by the relevant Exam function.  To the dissent, Tax Court review power turns on the functional nature of the work product and not the formality of the issuing office.   To the dissent, the IRS is the IRS.  To the majority, the IRS is sometimes discrete offices.


When you read the Tax Code you will discover that most of the statutes requiring actions are directed to “the Secretary.”  That is, if you took the statutory language literally, Congress is requiring one single person (“the Secretary”) to do all the work of tax administration.  This is a typical way that Congress writes statutes delegating power to agencies.  The power is delegated to the head of the agency.  Here “the Secretary” refers to the Secretary of Treasury.  This way of drafting statutes is a holdover from the days when everyone thought that Congress had to lodge power in particular persons.  Call it the “great man” theory of delegation.  Then the Secretary re-delegates various powers down the chain to other officials.  You find a list of all the tax delegation orders in IRM 1.11.4

In more recent years, Congress has begun writing statutes that lodge power or require action from particular offices within an agency.  If you go look at §7803(c)(2), for example, you will see that Congress has created the Office of the Taxpayer Advocate and has allocated powers directly to that office.

Similarly, Congress created the WBO in the Tax Reform and Health Care Act of 2006, 120 Stat. 2922, 2959.  Paragraphs (1), (2), and (3) in 7623(b) allocate power directly to the WBO to make decisions about the amount of awards whistleblowers should receive.  Section §7623(b)(4) then gives the Tax Court the power to review those decisions, with this language:  “Any determination regarding an award under paragraph (1), (2), or (3) may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).”

Not all disputes that arise between whistleblowers and the IRS can be the subject to judicial review.  In particular, as we learned in this Lesson from two weeks ago, whistleblowers do not get the work the case.  That Lesson involved a whistleblower who did not believe the IRS properly used the information he had provided.  But there, at least, the IRS used his information.  A more common disappointment to whistleblowers is when the IRS simply refuses to use the information at all! 

The Tax Court has repeatedly held—with the blessing of the D.C. Circuit—that it cannot review IRS refusals to take action based on the whistleblower information.  The leading case is Cohen v. Commissioner, 139 T.C. 299, (2012) aff’d without reported opinion, 550 Fed.Appx. 10 (D.C. Cir. 2014).

In Cohen, the WBO denied Mr. Cohen’s claim on the grounds that no proceeds were collected based on the information he provided.  That was true because the IRS exam function had simply declined to open an exam, despite Mr. Cohen’s information.  Neither the exam function nor the WBO explained why Mr. Cohen’s information was spurned.  Mr. Cohen asked the Tax Court to either compel the IRS to open an examination or else make the IRS give him a good reason why it was refusing to open an examination.  The Court denied both requests. 

As to the first it said “[o]ur jurisdiction under section 7623(b) does not contemplate that we review the Commissioner's determinations of the alleged tax liability to which the claim pertains.  Nor does section 7623 confer authority to direct the Commissioner to commence an administrative or judicial action.” Id. at 302 (internal citations omitted).

As to the second, it held because it had no power to force the IRS to initiate an administrative proceeding, it had no power to compel the IRS to explain a refusal to initiate a proceeding.  The D.C. Circuit said “yup, that’s right.”

Thus, the Tax Court says it “can provide relief under section 7623(b) only after the Commissioner has initiated an administrative or judicial action and collected proceeds.” In Cohen, “Petitioner has not alleged the section 7623(b) threshold requirements have been met.”

Today’s lesson puts an asterisk on that seemingly absolute statement.  As it turns out, the Tax Court will review a decision not to make any use of whistleblower information, if that decision is made by the WBO and not by Exam.  The IRS is not a monolithic entity.


Mr. Lacey initially submitted a one page whistleblower claim to the WBO, alleging that a taxpayer's claimed expenses for pollution remediation expenses were actually used for illegal purposes and not for the claimed deduction.  The WBO rejected the claim without even sending it forward to the IRS Exam function.  The basis for the rejection was that the information was too speculative to be useful.  Mr. Lacey then re-submitted the claim, this time with 21-pages of supporting documentation and analysis.  The day after receiving the 21-pager, the WBO again rejected the claim, using the exact same language it has used in the first rejection.  Hmmm, kinda makes you wonder if the WBO employees even read the additional 21-pager.

Mr. Lacey petitioned the Tax Court, arguing that the WBO’s rejection of his 21-pager was arbitrary and asking the Court to remand his claim to the WBO and order it to actually analyze, process, and take action on the claim.

The IRS argued that the Tax Court did not have jurisdiction to review the WBO’s decision because “the IRS” had not initiated an administrative action and, relying on that absolute statement in Cohen, initiating an administrative action was a necessary predicate to Tax Court review under §7623(b).  Thus, the WBO’s decision to refuse to initiate administrative action was simply not reviewable.

The Tax Court rejected the IRS argument and decided it could review the WBO’s decision, but it also refused to remand to the WBO to force the WBO to articulate its decision any further.  Instead, it directed that the parties forward the entire administrative record so that the Court could see whether “the [WBO] issued its rejection letter without actual attention to the whistleblower’s submission.” (Judge Thornton, concurring).

The Opinions

No one opinion commanded a majority of the Court.  Judge Gustafson wrote a 44 page opinion for the Court, joined by six judges; Judge Thornton wrote a short concurrence joined by four of those judges, plus three others; and Judge Urda, who had joined both of the first two opinions, also penned an additional concurrence, joined by some of the same judges who had joined on or the other of Gustafson and Thornton’s opinions, and one additional judge who joined only his plain language analysis.  Judge Buch wrote a dissent, joined by three other judges.

Putting all that together, there are three opinions that reject the IRS argument and find that the Tax Court did have jurisdiction to review the WBO’s rejection of Mr. Lacey’s 21-pager.  The three opinions all share the same understanding of the plain language of §7623(b): it permits Tax Court review over any determination regarding an award under (1), (2), or (3).”  To these judges, the word “any” means “any.”  And that word refers to all work product that comes from the WBO because Congress specifically made the WBO—and not "the Secretary"—solely responsible for making the determinations authorized by §7623(b)(1), (2), and (3).

In addition to the plain language argument, the three opinions show a concern about the practical consequences of not reviewing the WBO’s decision here.  They emphasize that what the WBO did here was not simply reject an award but refused, as a threshold matter, to send the whistleblower claim forward to the relevant Exam function so that the Exam function could evaluate what use to make of the information.  For example, Judge Gustafson notes that unlike Mr. Cohen, “Mr. Lacey does not challenge a decision by IRS examination personnel declining to audit...returns on the basis of his information (since no such decision was ever made)....” (p. 33).

Judge Urda’s dissent also invokes the plain language of the statute to support its view that the Court had no jurisdiction to review the WBO’s rejection of Mr. Lacey’s 21-pager.  Rather than focus on the word “any” the dissent highlights the phrase “determination regarding an award under (1), (2), or (3).”  The dissent notes that the two requirements for review established in Cohen derive from the plain language in §7623(1), (2), and (3).  For example, §7623(b)(1) provides that the WBO’s determination is only supposed to be about the “amount” of an award, and that determination is only triggered, says the statute itself, “if the Secretary proceeds with any administrative or judicial action.  Therefore, without the triggering “administrative or judicial action” there is no reviewable decision.

Similar to other opinions, the dissent is also concerned about the practical results of the decision.  It wants to limit Tax Court review to just WBO decisions about award amounts once there is some administrative or judicial action linked to the whistleblower information.  Function over form is how I read the concern.  The dissent is concerned that the Tax Court will suddenly start having to review the substantive decisions about opening exams simply because the decision to not open an exam is now being made by the WBO and not by the Exam function.  Just as the whistleblower is not supposed to work the case, neither is the Tax Court.


To me, the majority of judges have both the better technical argument and the better practical argument.  I would go even further and say that the Tax Court does indeed have the authority to review the merits a WBO threshold decision to not forward whistleblower information to the appropriate exam or collection function.

As a technical matter, I would note that the WBO decision authorized by §7623(b)(1) is triggered only “if the Secretary proceeds with any administrative or judicial action.”  So long as decision of “the Secretary” to proceed or not proceed is delegated to the exam or collection functions, it is a true predicate to a decision made by the WBO.  Therefore, the predicate works to prevent Tax Court review.  That is what the Tax Court has repeatedly said, in Cohen and in other cases.  Today’s case is not to the contrary.

But when the decision on whether to proceed or not is delegated to the WBO, then the predicate no longer blocks review because that predicate becomes just another WBO “determination regarding an award under (1), (2), or (3).”  The majority of judges thus properly recognize that “the IRS” is not a monolithic agency.  Different offices perform different functions.

The dissent is understandably concerned that the majority view will entangle the Tax Court in substantive exam and collection decisions.  Judge Thornton addresses this concern nicely by pointing out that the review contemplated is very, very narrow: it is just whether the WBO actually considered Mr. Lacey’s 21-pager.

I agree with the dissent’s concern, but I think the answer to it is broader.  It is IRS management that controls the function of each formal office.  IRS management decides how to divvy up the workload.  As illustrated by this case, those management decisions can have legal consequences.  Here, for example, it was critically important to the majority of the judges that it was not the Exam function rejecting use of the information, it was the WBO.  Sure, IRS management might want the WBO to perform a threshold evaluation function, but by gosh if that function is assigned to the WBO, then the Tax Court gets to review it.  If IRS management does not like that, it can change the function.  It can require the WBO to mechanically forward ALL whistleblower claims to the appropriate Exam or Collection function for a determination on whether to proceed or not.

So I do not see danger that the Tax Court will get involved in working the cases any more than whistleblowers can work the case.  IRS management can prevent that by delegating the authority to decide what use, if any, to make of whistleblower information to the relevant exam or collection function and take that decision out of the hands of the WBO.

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law

Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink


I haven't read anything except this good analysis, adn htis not carefully, but is the upshot that the Whisteblower Office, like agencies generally, has to take at least a minimal look at a submission, and can't just bounce it back without reading it--- that is, without a reasoned decision, even if the reasoning is simply," This submission doesn't contain enough information"?

Posted by: Eric B Rasmusen | Dec 3, 2019 8:57:36 PM