Tax Whistleblower Blog

The Expanding World of the Whistle Blower

The new (December 2006) IRS Tax Whistleblower Prgram appears to be successful beyond expectation.  The IRS is nearing 500 open cases (in excess of $2,000,000)since the program began 23 months ago.  In 2005 the IRS had only two cases that exceeded $2,000,000 under the informant reward program.  It appears that the public is lining up to make the world a better place. 

However, with respect to protection of the whistleblower with respect to a tax matter, it is important for the Whistleblower to recognize a number of points

1.  Is the Whistleblower somehow involved in the underreporting/underpayment of tax such that there could be criminal implications to the whistleblower?

2.  Is the Whistleblower somehow involved that they could be excluded from receiving the reward pursuant to IRC 7623?

3.  Is the Whistleblower somehow involved that they might be held liable for the underpayment of tax as a transferee/nominee/alter ego of the taxpayer? 

Certainly a good analysis by the Tax Whistleblower’s attorney is important before any case is submitted to the IRS. 

However, there are other concerns such as retaliation by the Employer, suit for breach of a confidentiality agreement or breach of the fiduciary duty of loyalty, perhaps the loss of a professional license, etc.

Recently The Consumer Product Safety Improvement Act of 2008 (”CPSIA”) was signed into law by President Bush in August 2008, and is merely the most recent of more that 100 federal statutes and regulations that contain whistleblower provisions protecting employees who “blow the whistle” on their employer. The most prominent of these in terms of publicity is the Corporate and Criminal Fraud Accountability Act of 2002, more commonly known as the Sarbanes-Oxley Act, or “SOX.” The more recent CPSIA’s prohibitions (which are typical of other whistleblower statutes) cover discharge or discrimination when an employee:

*     provided, caused to be provided or is about to provide or cause to be provided to the employer, the Federal Government, or the attorney general of a State information relating to any violation of, or any act or omission the employee reasonably believes to be a violation of any provision of this Act or any other Act enforced by the [Consumer Product Safety] Commission, or any order, rule, regulation, standard or ban under any such Acts;

*     testified or is about to testify in a proceeding concerning such violation;

*     assisted or participated or is about to assist or participate in such a proceeding; or

*     objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any provision of this Act or other Act enforced by the Commission, or any order, rule, regulation, standard, or ban under any such Act.

Many states have similar statutes or common law protection. For example, Michigan and Illinois have specific whistleblower statutes. Missouri and Texas have judicially created exceptions to the employment at will doctrine that provide remedies to employees who report violations of law or public policy to superiors or public authorities.

If a violation is proven, the employee is entitled to reinstatement with back pay and restoration of all the rights of that employment, compensatory damages, including all costs and expenses incurred in protecting his or her rights, including attorney and expert witness fees. If, on the other hand, the claim is found to be frivolous or in bad faith, the employer may be awarded its reasonable attorneys fees up to $1,000, or roughly the cost of the initial consultations with its counsel.

Claims brought under these whistleblower statutes are very much like retaliation claims brought under the federal and state discrimination laws. To prevail, the employee must prove (1) involvement in some activity protected by the statute or regulation such as reporting illegal activities, participating the proceedings concerning violations of the statutes or regulations, or opposing; (2) that the employer had knowledge of the protected activity by the employee; (3) adverse employment action by the employer; and (4) a causal connection between the protected activity and the adverse employment action.

Most of these statutes and regulations require that the employee had a reasonable belief that the activity at issue was illegal or in violation of the statute or regulation. Whether the belief is reasonable is both a subjective and objective determination: the employee has to demonstrate that he/she genuinely believed that the activity reported violated the statute under which the employee claims protection, and a reasonable person in his/her situation would have believed the activity violated the statute.