During tax season, a tax professional can be placed in the difficult position of trying to stop tax fraud after uncovering their employer or client committing fraud.
In a healthy workplace culture, dissent is tolerated and indeed encouraged. But where an accountant, tax professional or tax attorney suffers retaliation for raising concerns about tax fraud or violations of IRS regulations, does the worker have a remedy? And does a whistleblower reporting fraud to the IRS Whistleblower Office have any recourse if they suffer retaliation? Until recently, there was no federal law protecting whistleblowing about tax fraud and scant protection at the state level. In 2019, however, Congress enacted a robust law protecting tax whistleblowers. This article summarizes the whistleblower protection provision of the Taxpayer First Act.
TFA’s broad scope of protected whistleblowing
The TFA protects a broad range of disclosures about potential violations of IRS rules or tax fraud. It protects not only disclosures to the IRS, but also internal disclosures, including an employee’s disclosure to a supervisor or “any other person working for the employer who has the authority to investigate, discover, or terminate misconduct.” In particular, protected conduct includes:
- Providing information to a supervisor regarding underpayment of tax or any conduct which the employee reasonably believes constitutes a violation of the internal revenue laws or any provision of federal law relating to tax fraud;
- Participating in an internal investigation about tax fraud or other violations of internal revenue laws;
- Reporting tax fraud or other violations of internal revenue laws to the IRS, Comptroller General, Congress, Treasury Secretary or TIGTA; or
- Testifying, participating in or otherwise assisting in any administrative or judicial action taken by the IRS relating to an alleged underpayment of tax or any violation of the internal revenue laws or any provision of federal law relating to tax fraud.
TFA whistleblower protection is not limited to disclosures of actual tax fraud. The whistleblower, however, must demonstrate that they had an objectively reasonable belief that the conduct disclosed constituted a violation of IRS rules or other federal tax fraud laws, which is assessed based on the knowledge available to a reasonable person in the circumstances with the employee’s training and experience.
Protected disclosures would include reporting:
- Abusive tax schemes, such as the use of multiple flow-through entities intended to conceal the true nature and ownership of taxable income;
- Claiming false deductions;
- Keeping two sets of books;
- Making false entries in books and records;
- Claiming personal expenses as business expenses; and
- Deliberately underreporting or omitting income.
Prohibited acts of retaliation
The TFA prohibits a wide range of retaliatory acts, including discharging, demoting, suspending, threatening, harassing or in any other manner discriminating against a whistleblower in the terms and conditions of employment. The catch-all category of retaliation (“in any other manner” discriminating against a whistleblower) includes non-tangible employment actions, such as “outing” a whistleblower in a manner that forces the whistleblower to suffer alienation and isolation from work colleagues. See Menendez v. Halliburton, Inc., ARB Nos. 09-002, -003, ALJ No. 2007-SOX-5 (ARB Sept 13, 2011). An employment action can constitute actionable retaliation if it “would deter a reasonable employee from engaging in protected activity.” Id. at 20.
Favorable burden of proof
To prevail in a TFA retaliation claim, the whistleblower must demonstrate their protected whistleblowing was a contributing factor in the unfavorable personnel action taken by the employer. The contributing factor standard is favorable for whistleblowers; it is met by showing that the protected disclosure played some role in the decision to take a retaliatory personnel action. Examples of evidence that can establish “contributing factor” causation include:
- Close temporal proximity between the protected whistleblowing and the adverse action;
- The falsity of an employer’s explanation for the adverse action taken;
- Inconsistent application of an employer’s policies;
- An employer’s shifting explanations for its actions;
- Animus or antagonism toward the whistleblower’s protected activity; and
- A change in the employer’s attitude toward the whistleblower after they engaged in protected activity.
Once the whistleblower proves their protected conduct was a contributing factor in the adverse action, the employer can avoid liability only if it proves by clear and convincing evidence that it would have taken the same adverse action in the absence of the whistleblower engaging in protected conduct.
Remedies for tax whistleblowers
A prevailing TFA whistleblower is entitled to make-whole relief, which includes:
- Reinstatement;
- Double back pay with interest;
- Uncapped “special damages,” which courts have construed as encompassing damages for emotional distress and reputational harm; and
- Attorney’s fees, litigation costs and expert witness fees.
Although the TFA does not authorize an award of punitive damages, double back pay and uncapped special damages can be a potent remedy.
Filing a TFA retaliation claim
The statute of limitations for a TFA whistleblower retaliation claim is 180 days from the date that the employee is first informed of the adverse action. The claim must be filed initially with OSHA, which will investigate the claim. If OSHA determines there is reasonable cause to believe a violation occurred, OSHA can order relief, including reinstatement of the whistleblower.
Either party can appeal OSHA’s determination by requesting a de novo hearing before the Department of Labor’s Office of Administrative Law Judges, but an employer’s objection to an order of preliminary relief will not stay the order of reinstatement. Once a TFA retaliation claim has been pending before the Labor Department for more than 180 days, the whistleblower can remove the claim to federal court and try the case before a jury.
As the annual tax gap is approximately $400 billion, it is critical to ensure whistleblowers are protected against retaliation when they report tax fraud or other violations of IRS rules. The recently enacted whistleblower protection provision in the TFA will provide a potent remedy for tax fraud whistleblowers.
