By Sung Woo “Matt” Hu. Full text here.
Under the Internal Revenue Code, tax whistleblowers can be rewarded up to thirty percent of the collected proceeds when the IRS successfully collects delinquent amounts from tax evaders based on the information provided by those whistleblowers. However, whistleblowers are left with no remedy if the IRS decides not to act upon their tips. Even though the Tax Code provides a right to appeal the IRS’s decision to the Tax Court as to the proper amount of the reward, the Tax Court has continuously refused to compel the IRS to start an investigation based upon the informant’s tips. Consequently, some tax commentators have argued for adopting a private enforcement mechanism similar to the qui tam provisions in the federal False Claims Act (FCA). A qui tam litigation provision would allow private individuals to sue a person violating the Tax Code on behalf of the government. Although the current version of the FCA explicitly prohibits a qui tam action based upon a tax claim, these commentators argue for circumventing the Tax Bar by inserting a qui tam provision in the Tax Code itself.
This Note critiques the idea of importing the qui tam process to the Tax Code based on four grounds: (1) lack of Article III standing of a tax relator; (2) concerns about the public disclosure of the taxpayer’s private information; (3) private parties’ frivolous law suits causing interference with the IRS’s long-term enforcement scheme; and (4) difficulties in finding an appropriate forum for such lawsuits. In addition, this Note offers a set of alternative remedies in case the IRS fails to proceed with the whistleblowers’ meritorious claims: (1) reinforcing the existing Tax Court appeal right by allowing the Tax Court to reexamine the IRS’s administrative decision not to pursue a whistleblower’s tips; and (2) permitting submission and use—albeit limited—of taxpayers’ confidential information in handling whistleblower claims so as to avoid delays in processing time.