In two recent cases, the United States Tax Court (Tax Court) has explored the bounds of the anonymity protection afforded to potential whistleblowers under the court’s rules and other authorities. Tax Court Rule 345 relates to privacy protections for filings in whistleblower actions. Under paragraph (a), a whistleblower may move the court for permission to proceed anonymously. In order to proceed anonymously, the whistleblower must provide a sufficient, fact-specific basis for anonymity. Specifically, the Tax Court has held that “[a] whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interest in knowing the whistleblower’s identity.” (Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-94, at 5). However, the balance of harm to societal interest may shift as the case progresses, thereby justifying disclosure after anonymity has been granted. See Tax Court Rule 345(b).

The Tax Court has only published six opinions addressing a whistleblower’s motion to proceed anonymously. Most recently, the Tax Court has addressed a whistleblower’s motion to proceed anonymously in Whistleblower 12568-16W v. Commissioner, 148 T.C. No. 7 (March 22, 2017) (“Case A”) and Whistleblower 14377-16W v. Commissioner, 148 T.C. No. 25 (June 28, 2017) (“Case B”).

In Case A, the whistleblower was a prior employee of a related entity of the taxpayer. The whistleblower obtained information regarding tax violations by the taxpayer and its affiliates in the normal course of his employment. The whistleblower made a motion under Rule 345 claiming that he may be subjected to retaliation, physical harm, social and profession stigma, and economic distress if his identity did not remain anonymous. Even though the Internal Revenue Service (IRS) had no objection to the court granting the whistleblower’s motion, the court still weighed the harm to the whistleblower against the social interest of the public in knowing the identities of persons using the courts. The court ultimately allowed the whistleblower to proceed anonymously, holding that he had a legitimate basis for fearing retaliation by the taxpayer if his identity was disclosed. The court noted that “[d]isclosing the petitioner’s identity would also likely cause severe damage to petitioner’s standing in his professional community, as well as embarrassment both professionally and personally.”

In Case B, the whistleblower, a retired CPA assisting his spouse in the management and operation of a registered investment advisory firm, moved under Rule 345 to proceed anonymously in his claim that a corporate taxpayer evaded $100 million in taxes. The whistleblower learned of the corporate taxpayer’s tax abuse from the public domain, including reviewing filings with the US Securities and Exchange Commission. Simultaneously, the same whistleblower had 11 claims pending before the Tax Court involving over two dozen taxpayers, none of which were his employers. The whistleblower claimed that disclosure of his identity would have a negative impact on his spousal relationship, domestic circumstances and professional practice. The court again noted that while it must resolve the competing societal interests at stake, the public has an interest in knowing the identity of persons using the courts. The court found that the whistleblower made no plausible claim that he would be threatened physically, nor that disclosure of his identity would severely damage his professional standing in the community in which he conducts himself professionally.

The Tax Court distinguished Case B from the previous five reports, including Case A, noting that the whistleblower in Case B had not identified a taxpayer who, upon learning his identity, would have the power or likelihood to retaliate against him. Without disregarding the likely embarrassment or annoyance the Case B whistleblower might suffer as a result of the court denying his motion, the Tax Court held against the whistleblower given his unusual position. Specifically, the court highlighted the Case B whistleblower’s lack of employment or close relationship to the taxpayers, suggesting a lack of familiarity with the taxpayer’s business or rationale for taking the claimed abusive positions.

Without discounting the need for anonymity in cases like Case A, the Tax Court reinforced the need for a whistleblower to have a legitimate and well-substantiated concern that disclosure would result in retaliation by the taxpayer.

Practice point: As these two cases demonstrate, anonymity protections for whistleblowers in tax cases are not absolute and may be denied in appropriate cases. In Case B, the Tax Court’s justification was potential abuse of the whistleblower process by the filing of possibly frivolous claims; however, this rationale could be applied more broadly in an appropriate case. For example, we have previously discussed the potential abuse of process involved with use of whistleblower information from privileged sources. Taxpayers facing whistleblower claims should be aware of the confidentiality protections afforded to potential whistleblowers and their limits when considering defenses to potential whistleblower claims.