IRS has issued proposed regulations that would provide comprehensive guidance for the IRS whistleblower award program under Internal Revenue Code Sec. 7623. The proposed regs would provide guidance on issues relating to the whistleblower award program from the filing of a claim to the payment of an award, and would focus on: (1) the submission of information and filing of claims for award; (2) the administrative proceedings; and (3) the computation and payment of awards. They also would provide guidance on the determination and payment of awards, definitions of key terms, and the disclosure of return information.
Under Code Sec. 7623(a), IRS has discretionary authority to pay awards to informants (i.e., whistleblowers) in the sums it considers necessary for the detection of tax underpayments, or for the detection, trial, and punishment of tax law violators, payable from the proceeds of the amounts collected by reason of the information provided. The 2006 Tax Relief and Health Care Act added Code Sec. 7623(b), which provides that, in certain cases, individuals are entitled to receive an award of 15% to 30% of the “collected proceeds” resulting from an action based on information provided by the whistleblower. IRS has established a Whistleblower Office to administer the program.
Under Code Sec. 7623(b)(3), IRS may appropriately reduce a Code Sec. 7623(b) whistleblower award where the claim for the award is brought by an individual who planned and initiated the actions that led to the underpayment of tax or the violation of the tax laws.
Filing a claim
In large part, the proposed regs would track the previously issued guidance in the existing regs, Notice 2008-4, 2008-1 CB 253, and the Internal Revenue Manual, including the general information that individuals should submit to claim awards and the descriptions of the type of specific and credible information on taxpayers that should be submitted. An individual submitting a claim should identify a person and describe and document the facts supporting the claimant’s belief that the person owes taxes or violated the tax laws. The proposed regs would include eligibility requirements for filing claims for award and a list of ineligible claimants. The proposed regs would require individuals to file formal claims for award. The regs also reaffirm IRS’s practice of safeguarding the identity of individuals who submit information under Code Sec. 7623 whenever possible. (Prop Reg § 301.7623-1)
Under the proposed regs, IRS would consider an individual who identifies a pass-through entity as having identified the taxpayers with direct or indirect interests in the entity. If an individual identifies a member of a firm who promoted another identified person’s participation in an identified transaction, then IRS would consider the individual as having identified both the firm and all the other members of the firm. (Prop Reg § 301.7623-1(c)(1))
The proposed regs would clarify that IRS cannot pay an award under Code Sec. 7623 without taking some action beyond simply analyzing or investigating information submitted to it. IRS would have to initiate a new action that it wouldn’t have initiated, expand the scope of an ongoing action that it wouldn’t have expanded, or continue to pursue an ongoing action that it wouldn’t have continued but for the information provided. (Prop Reg § 301.7623-2(b))
The proposed regs would clarify which actions may be included for purposes of computing collected proceeds for purpose of an award by requiring a clear link between the original action and the other, related action. Such a link would require: (a) a direct relationship between the person identified in the information provided and subject to the original action and the person subject to the other action; and (b) a substantial similarity between the specific facts contained in the information provided and the relevant facts of the other action. Thus, related actions that were merely factually similar to the original action (e.g., taxpayers that engaged in substantially similar transactions) would not qualify. (Prop Reg § 301.7623-2(c))
The proposed regs would provide that if any portion of a refund claim that is substantively unrelated to the information provided is (1) allowed and (2) used to satisfy a tax liability attributable to the information provided instead of refunded to the taxpayer, then the allowed but non-refunded amount constitutes collected proceeds. (Prop Reg § 301.7623-2(d)(2)(i))
While the proposed regs doesn’t refer explicitly to net operating losses (NOLs), tax credits, or any other tax attributes that may factor into the computation of a taxpayer’s liability, they would provide a computational rule that reflects IRS’s position that tax attributes (such as NOLs) do not represent amounts credited to the taxpayer’s account that are directly available to satisfy current or future tax liabilities or that can be refunded. The disallowance of an NOL claimed by a taxpayer may affect the taxpayer’s liability and, in the context of a whistleblower claim, may result in collected proceeds. (Prop Reg § 301.7623-2(d)(4))
The whistleblower administrative proceeding generally consists of four steps: (i) a preliminary award recommendation; (ii) a detailed award report; (iii) an opportunity to review documents supporting the preliminary award recommendation; and (iv) an award determination. Under the proposed regs, the first three steps may occur before the final determination of tax in the underlying taxpayer matter. (Preamble to Prop Reg12/14/2012)
Under the proposed regs, the whistleblower administrative proceeding would begin in cases under Code Sec. 7623(a) when the Whistleblower Office send a preliminary award recommendation letter to the claimant, marking the beginning of the whistleblower administrative proceeding. The claimant would have 30 days to respond with comments. (Prop Reg § 301.7623-3(b)(1))
Under the proposed regs, the whistleblower administrative proceeding would begin in cases under Code Sec. 7623(b) when the Whistleblower Office sends out the preliminary award recommendation letter. The Whistleblower Office would issue an appealable determination or make payment, if a whistleblower had waived the determination, as soon as possible after there has been a final determination of tax (i.e., the statutory period for the taxpayer to claim a refund has expired or the underlying taxpayer action is otherwise final). (Prop Reg § 301.7623-3(c))
Where a claim is rejected either because IRS didn’t proceed with an action based on the information provided or IRS didn’t collect proceeds, the Whistleblower Office would send a preliminary denial letter to the claimant, marking the beginning of the whistleblower administrative proceeding. This notice would be provided as promptly as possible. The claimant would then have 30 days within which to provide comments. (Prop Reg § 301.7623-3(c)(7))
Claimants would have to execute confidentiality agreements before they could receive a detailed description of factors that contributed to the preliminary award recommendation or view documents that support the recommendation. A claimant wouldn’t have to do so before appealing an award determination to the Tax Court. Executing such an agreement also wouldn’t prevent a claimant from seeking Tax Court review. A claimant’s violation of the confidentiality agreement would be a negative factor (considered in whether to reduce the award). (Prop Reg § 301.7623-3(c)(2))
Generally, the proposed regs would adopt a fixed percentage approach under which the Whistleblower Office assigns award claims to one of a number of fixed percentages by evaluating the claimant’s substantial contribution to the underlying action based on a review of the entire administrative claim file and the application of the positive factors and negative factors. It would then review any planning and initiating factors, if applicable. In general, awards at the uppermost end of the applicable percentage range (i.e., 30%) of collected proceeds would be awarded only in extraordinary cases. (Prop Reg § 301.7623-4(a), Prop Reg § 301.7623-4(c))
Under the proposed regs, the Whistleblower Office will make a threshold determination as to whether a claimant planned and initiated the underlying acts, but this determination wouldn’t result in an automatic or fixed reduction of the award percentage or award amount. A claimant would only satisfy the threshold determination if he: (i) designed, structured, drafted, arranged, formed the plan leading to, or otherwise planned an underlying act, (ii) took steps to start, introduce, originate, set into motion, promote or otherwise initiate an underlying act, and (iii) knew or had reason to know that there were tax implications to planning and initiating the underlying act. If the Whistleblower Office determines that a claimant meets the threshold, it would then categorize and evaluate the extent of the claimant’s planning and initiating of the underlying acts, based on the application of factors listed in Prop Reg § 301.7623-4(c)(3)(iv) to determine the amount of the appropriate reduction, if any. (Prop Reg § 301.7623-4(c)(3))
The proposed regs also confirm that the Director, officers, and employees of the Whistleblower Office are authorized to disclose return information to the extent necessary to conduct whistleblower administrative proceedings. (Prop Reg § 301.6103(h)(4)-1(b))
The proposed regs are generally proposed to apply to information submitted on or after the regs are finalized. Prop Reg § 301.7623-4 (dealing with the amount and payment of an award) is proposed to apply to information submitted on or after that date, and to award claims under Code Sec. 7623(b) that are open as of that date. Prop Reg § 301.7623-4 isn’t proposed to apply to award claims under Code Sec. 7623(a) that are open as of that date. (Preamble to Prop Reg12/14/2012)