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Stats Show Active Tax Whistleblower Caseload

On January 6, 2020, the IRS Whistleblower Office released its annual report to Congress. The Office reported that it collected $616.8 million in fiscal year 2019 as a result of information provided by whistleblowers, out of which $120.3 million was paid out as whistleblower awards, for net collections of $496.5 million. This is a decrease from the $1.13 billion in net collections in fiscal year 2018 (which has been described as an outlier year), but an increase from the $156.6 million in net collections in fiscal year 2017. A total of 3,640 whistleblowers filed claims in fiscal year 2019, including 282 whistleblowers from outside of the United States.

Practice Point:  Whistleblower actions are a good reminder to make sure that your privileged and confidential tax information remains in the hands and minds of only those employees and officers who have a need to know. A disgruntled or terminated employee may take the opportunity to play the “whistleblower lottery,” removing sensitive and privileged material and handing it over to the IRS. With the start of the new year, it’s a worthwhile investment of time and resources to make sure your sensitive tax strategies and information are stored and protected.




Privileged Materials Provided Without Taxpayers’ Consent Should Not Waive Privilege

In today’s tax environment and with the potential monetary awards to whistleblowers under Internal Revenue Code (Code) Section 7623, taxpayers are facing the increased possibility that their confidential and privileged materials may be provided to the Internal Revenue Service (IRS) without the taxpayer’s consent. This raises serious privilege and ethical issues related to the attorney-client, work product and Code Section 7525 tax practitioner privileges.

In a welcome development, Drita Tonuzi, Associate Chief Counsel (Procedure & Administration), stated at a DC Bar Association event on September 8, 2016, that if someone who is not authorized to release a taxpayer’s documents turns them over to the government, they will first be reviewed to determine if the information is protected by federal laws or the Code. The Whistleblower Office will then redact confidential information before releasing it to examination agents. However, this leaves some unanswered questions.

Case law reflects that the unauthorized production of privileged materials by an ex-employee or by an employee without the authority to waive the privilege for the taxpayer should not be viewed as a waiver of the privilege. The problem is that taxpayers may not know that privileged materials have been provided to the IRS without the IRS’s consent and therefore would not be able to take steps to assert the privilege and request the return of such documents from the IRS. Taxpayers may want to make a request to the IRS at the beginning of an audit to provide it with a list of all materials received by third-parties so that the taxpayer can assess whether any privileged documents have been provided to the IRS without the taxpayer’s consent. If the IRS does not provide the list or refuses to acknowledge the taxpayer’s request, the taxpayer may have at least preserved its right to later assert privilege if it turns out privileged materials were provided to the IRS without the taxpayer’s consent.

If an IRS attorney receives privileged documents and does not return them to the taxpayer, this raises potential ethical issues. Attorneys who receive privileged documents where it is clear that such documents are privileged and were not intended to be disclosed by the taxpayer or the privilege was intended to be waived, may have a duty to not examine those materials and instead return them to the taxpayer. The IRS’s recent comment about reviewing and redacting what it believes is privileged before sending to the examining agent appears at odds with this duty.

In fact, since at least 2009, the IRS has demonstrated a growing awareness of the privilege concerns raised by whistleblowers that stand in a privileged relationship to a taxpayer, even while the IRS’s current policies have not fully addressed the problem. In August 2015, the Internal Revenue Manual was amended to provide that the IRS generally must assume that any “current employee whistleblower has access to information that may be subject to a privilege that has not been affirmatively waived by the taxpayer.” I.R.M. 25.2.2.4.4. That same section of the Manual and [...]

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