Proposed Regs Expand Guidance on Whistleblower Awards
(Parker's Federal Tax Bulletin: December 19, 2012)

Under Code Sec. 7623, also referred to as the whistleblower rule, the IRS is authorized to pay such sums as it deems necessary for detecting underpayments of tax, or detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws. Any amount payable under this rule is paid from the proceeds of amounts collected by reason of the information provided, and any amount so collected must be available for such payments.

The IRS has now issued proposed regulations (REG-141066-09 (12/18/12)) that provide comprehensive guidance for the whistleblower award program. The regulations provide guidance on submitting information regarding underpayments of tax or violations of the internal revenue laws and filing claims for an award for such information, as well as on the administrative proceedings applicable to claims for an award. The regulations also provide guidance on the determination and payment of awards, and provide definitions of key terms used in Code Sec. 7623. Finally, the regulations 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.

When finalized, these regulations are proposed to apply to information submitted on or after the date these rules are adopted as final regulations in the Federal Register, and to claims for award under Code Sec. 7623(a) and Code Sec. 7623(b) that are open as of that date. Likewise, Prop. Reg. Sec. 301.7623-4 is proposed to apply to information submitted on or after that date, and to claims for award under Code Sec. 7623(b) that are open as of that date. Reg. Sec. 301.7623-4 is not proposed to apply to claims for award under Code Sec. 7623(a) that are open as of that date. This exception is intended to allow the IRS to continue to apply consistent rules to open claims for award under the discretionary award program of Code Sec. 7623(a).

Background

In 2006, the Tax Relief and Health Care Act of 2006 amended Code Sec. 7623. The law added Code Sec. 7623(b), which provides that qualifying individuals will receive an award of at least 15 percent, but not more than 30 percent, of the collected proceeds resulting from the action with which the IRS proceeded based on the information provided to the IRS by the individual.

In Notice 2008-4, the IRS provided guidance on filing claims for award under Code Sec. 7623, as amended. In the notice, the IRS recognized that the original award program authorized by Code Sec. 7623(a) had been previously implemented through Reg. Sec. 301.7623-1. The Internal Revenue Manual (IRM) provides additional guidance to IRS officers and employees on the award program under Code Sec. 7623(a). The notice provided that the IRS would generally continue to follow Reg. Sec. 301.7623-1 and the IRM provisions for award claims under Code Sec. 7623(a), subject to certain exceptions listed in the notice. Notice 2008-4 also provided, however, that the regulations would not apply to the new award program authorized under Code Sec. 7623(b). Instead, the notice provided interim guidance applicable to claims for award submitted under Code Sec. 7623(b).

In March 2008, the IRS issued Reg. Sec. 301.6103(n)-2T, and corresponding proposed regulations, describing the circumstances and process in and by which officers and employees of the Treasury may disclose return information to whistleblowers (and their legal representatives, if any) in connection with written contracts for services relating to the detection of violations of the internal revenue laws or related statutes. Under these regulations, whistleblowers and legal representatives who receive return information are subject to the civil and criminal penalty provisions of Code Secs. 7431, 7213, and 7213A for the unauthorized inspection or disclosure of return information. These regulations were finalized in 2011.

In December 2008, the IRS revised the IRM to update policies and procedures concerning the handling of information, processing of claims for awards, and payment of awards under Code Sec. 7623, as amended. The IRS also redelegated the authority to approve awards to the Director of the Whistleblower Office. In July 2010, the IRS further revised the IRM to provide detailed instructions to IRS officials and employees on the computation and payment of awards under Code Sec. 7623 and to describe the administrative procedures applicable to claims for award under Code Sec. 7623(b). The revised IRM introduced many guidance elements that the IRS has now developed in the proposed regulations, including definitions of key terms, the whistleblower administrative proceedings, the fixed percentage award framework and criteria for making award determinations, and rules on handling multiple and joint claimants.

In 2011, the IRS issued proposed regulations clarifying the definitions of the terms proceeds of amounts collected and collected proceeds for purposes of Code Sec. 7623 and providing that the provisions of Reg. Sec. 301.7623-1(a), concerning refund prevention claims, apply to claims under both Code Sec. 7623(a) and Code Sec. 7623(b). The proposed regulations further provided that the reduction of an overpayment credit balance constitutes proceeds of amounts collected and collected proceeds for purposes of Code Sec. 7623. Those proposed regulations were finalized in February 2012.

Key Provisions of the Proposed Regulations

The purpose of the proposed regulations is to provide comprehensive guidance for the whistleblower award program. The regulations provide guidance on issues relating to the award program from the filing of a claim to the payment of an award, focusing on three major elements of the program:

(1) the submission of information and filing of claims for award;

(2) the whistleblower administrative proceedings applicable to claims for award; and

(3) the computational determination and payment of awards.

The proposed regulations also provide definitions of key terms under Code Sec. 7623 and provide 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.

Submitting Information and Filing Claims for Award

With respect to submitting information to the IRS and filing claims for award with the Whistleblower Office, the proposed regulation are intended to clarify the process individuals should follow to be eligible to receive awards. The proposed rules, in large part, track the rules that the IRS has previously provided, as set forth in the existing regulations, Notice 2008-4, and the IRM. This includes, for example, the general information that individuals should submit to claim awards and the descriptions of the type of specific and credible information regarding taxpayers that should be submitted. Most notably, 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 rules clarify that the IRS will consider an individual who identifies a pass-through entity as having identified the taxpayers with direct or indirect interests in the entity. Further, the proposed rules provide that if an individual identifies a member of a firm who promoted another identified person's participation in an identified transaction, then the IRS will consider the individual as having identified both the firm and all the other members of the firm. These clarifying provisions complement the proposed rules' definition of related action.

The proposed rules also include eligibility requirements for filing claims for award and a list of ineligible claimants. The list of ineligible claimants restates the list published in Notice 2008-4 in its entirety. For example, the proposed rules provide that individuals who are or were required by federal law or regulation to disclose information are not eligible to file claims for award based on the information.

Whistleblower Administrative Proceedings

The proposed regulations describe the administrative proceedings applicable to claims for award under both Code Sec. 7623(a) and Code Sec. 7623(b). For purposes of applying these procedures, the IRS may rely on the claimant's description of the amount owed by the taxpayer(s). The IRS may, however, rely on other information as necessary (for example, when the alleged amount in dispute is below the $2 million threshold of Code Sec. 7623(b)(5)(B), but the actual amount in dispute is above the threshold).

Determining the Amount of Awards and Paying Awards

The proposed regulations provide the framework and criteria that the Whistleblower Office will use in exercising the discretion granted under Code Sec. 7623 to make awards. The proposed regulations are consistent with, and build on, the award determination provisions provided in the IRM. The rules are proposed to apply to claims for awards under both Code Sec. 7623(a) and Code Sec. 7623(b).

Generally, the proposed regulations adopt a fixed percentage approach under which the Whistleblower Office will assign claims for award to one of a number of fixed percentages within the applicable award percentage range. According to the IRS, the fixed percentage approach provides a structure that will promote consistency in the award determination process by enabling the Whistleblower Office to determine awards across the breadth of the applicable percentage range based on meaningful distinctions among cases. In general, the Whistleblower Office will determine awards at the uppermost end of the applicable percentage range, for example, 30 percent of collected proceeds under Code Sec. 7623(b)(1), only in extraordinary cases. The fixed percentage approach avoids having to draw fine distinctions that might seem unfair and arbitrary, given the differences among claims for award with respect to both the facts and law of the underlying actions and the nature and extent of the substantial contribution of the claimants.

Under these proposed regulations, the Whistleblower Office generally will assign the fixed percentages to claims for award by evaluating the substantial contribution of the claimant to the underlying action(s) based on the Whistleblower Office's review of the entire administrative claim file and the application of the positive factors and negative factors, listed in the proposed regulations, to the facts. After applying the positive and negative factors has been completed, the Whistleblower Office will review the planning and initiating factors, if applicable. The purpose of this criteria-based approach, the IRS stated, is to also promote consistency in the award determination process. In addition, this approach is intended to provide transparency in the process, and the publication of the criteria should provide helpful guidance to claimants when submitting their claims and in understanding the basis for award determinations. For claims involving multiple actions (regardless of the number of taxpayers involved), the proposed regulations enable the Whistleblower Office to determine and apply separate award percentages on an action-by-action basis in appropriate cases. The IRS said it recognizes that a multiple-action determination may result in a lengthier award process, but that it may be necessary in some cases.

Code Sec. 7623(b)(3) provides for an appropriate reduction of awards to claimants who planned and initiated the actions that led to the underpayment of tax or actions described in Code Sec. 7623(a)(2) (the underlying acts). Code Sec. 7623(b)(3), unlike Code Sec. 7623(b)(1) and Code Sec. 7623(b)(2), provides no direction to the Whistleblower Office on what to consider in exercising this grant of discretion. Accordingly, the proposed regulations provide slightly more flexibility to determine the amount of an appropriate reduction under this section than they provide under the respective frameworks for determining awards for substantial and less substantial contributions.

Under the proposed regulations, the Whistleblower Office will make a threshold determination of whether a claimant planned and initiated the underlying acts, but this determination will not result in an automatic or fixed reduction of the award percentage or award amount. A claimant will satisfy the threshold determination only if the claimant:

(1) designed, structured, drafted, arranged, formed the plan leading to, or otherwise planned an underlying act;

(2) took steps to start, introduce, originate, set into motion, promote or otherwise initiated an underlying act; and

(3) 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 for planning and initiating, the Whistleblower Office will 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. Sec. 301.7623-4(c)(3)(iv) to the facts contained in the administrative claim file, to determine the amount of the appropriate reduction, if any. The proposed regulations' use of the categories primary, significant, and moderate, like the use of the fixed percentage and criteria approach for determining awards in substantial contribution and less substantial contribution cases, is intended to promote consistency, fairness, and transparency in an award determination process that is inherently subjective.

(Staff Editor at Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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