IRS issues comprehensive final regs on whistleblower program
IRS issues comprehensive final regs on whistleblower program
T.D. 9687, 08/07/2014; Reg. § 301.6103(h)(4)-1, Reg. § 301.7623-1, Reg. § 301.7623-2 , Reg. § 301.7623-3, Reg. § 301.7623-4
IRS has issued final regs that provide comprehensive guidance for IRS’s Code Sec. 7623 award program (i.e., whistleblower awards). The final regs provide guidance 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 provide guidance on the definitions of key terms and the disclosure of return information.
Background. 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 amounts collected by reason of the information provided. Under Code Sec. 7623(b), individuals, in certain cases, 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.
In December of 2012, IRS issued comprehensive proposed regs on the whistleblower program (see Weekly Alert ¶ 7 12/20/2012). IRS has now finalized those regs, with minor changes.
Filing a claim. In large part, the final regs 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 regs also reaffirm IRS’s practice of safeguarding the identity of individuals who submit information under Code Sec. 7623 whenever possible. (Reg. § 301.7623-1)
The final regs include eligibility requirements for filing claims for awards and a list of ineligible claimants. In finalizing the regs, IRS has removed State and local government employees and members of a Federal or State body or commission from the categories of ineligible whistleblowers.
The final regs require individuals to file a formal claim for award, Form 211, Application for Award for Original Information. The regs allow IRS to specify an alternative submission method (such as electronic claim filing) pursuant to additional guidance.
Code Sec. 7623(b) provides that if IRS “proceeds” with an administrative or judicial action based on the information provided by a whistleblower, then the whistleblower will receive an award from the collected proceeds resulting from the action (including any “related actions”). Since IRS is required by statute to analyze the information provided by the whistleblower (in the Form 211 and otherwise, such as through debriefs) and investigate the matter, for it to “proceed” based on the information provided, IRS must do more than this analysis or investigation. The final regs adopt a general standard for when IRS proceeds based on information provided—when the information substantially contributes to the action. The final regs provide examples which illustrate that the whistleblower’s information substantially contributes to the underlying action if it leads to an examination, an expansion of an issue already being examined, an expansion of the examination to another year, or an additional adjustment. The examples also illustrate that the whistleblower’s information doesn’t substantially contribute to the underlying action if that information merely supports information obtained independently by IRS. (Reg. § 301.7623-2(b))
The final regs, like the proposed regs, retain the requirement of a clear link between the original action and any other “related actions,” which requires: (a) a substantial similarity between the specific facts contained in the information provided and the relevant facts of the other actions; and (b) a relationship between the person identified in the information provided and subject to the original action and the persons subject to the other actions. Actions that are merely factually similar to the original action aren’t related—for example, actions against unidentified taxpayers that merely engaged in substantially similar transactions to the transaction identified in the information provided. The relationship test in the second prong retains a one-step rule: the taxpayer subject to the related action can be no more than one step removed—in terms of identification by IRS—from a taxpayer identified in the information provided. In addition, the final regs provide that certain information submissions relating to pass-through entities and firms will be considered to have identified certain persons who were not explicitly identified in the information provided. (Reg. § 301.7623-2(c))
Reconsidering the approach in the proposed regs, the final regs provide that the Whistleblower Office will monitor the relevant taxpayer account or accounts until IRS receives collected proceeds as a result of a reduction in a tax attribute, or the taxpayer’s ability to apply that tax attribute expires unused. For example, if a net operating loss (NOL) is reduced as a result of actions taken based on whistleblower information, the Whistleblower Office will periodically review the taxpayer account to determine whether future year tax payments are made that would not have been made if the NOL had not been reduced. Under this approach, awards will be paid on any such post-determination collected proceeds. If the NOL carryforward period expires before the reduced NOL results in a tax payment, no award will be payable.
Administrative proceedings. 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 final regs, in cases in which the Whistleblower Office recommends payment of an award under Code Sec. 7623(a), the whistleblower administrative proceeding begins when the Whistleblower Office send a preliminary award recommendation letter to the claimant. The claimant has 30 days to respond with comments. This period may be extended at the sole discretion of the Whistleblower Office. (Reg. § 301.7623-3(b)(1))
The whistleblower administrative proceeding begins in cases under Code Sec. 7623(b) (other than in cases of rejections and denials) when the Whistleblower Office sends out the preliminary award recommendation letter. The preliminary award recommendation is not a determination letter and cannot be appealed to Tax Court. The preliminary award recommendation will notify the whistleblower that IRS cannot determine or pay any award until there is a final determination of tax. (Reg. § 301.7623-3(c)(1)) After the whistleblower’s participation in the administrative proceeding has concluded, and there is a final determination of tax, a Whistleblower Office official will determine the amount of the award under Code Sec. 7623(b) based on the official’s review of the administrative claim file. The Whistleblower Office will communicate the award to the whistleblower in a determination letter, stating the amount of the award. If, however, the whistleblower has executed an award consent form agreeing to the amount of the award and waiving his right to appeal the award determination, then the Whistleblower Office will not send him a determination letter and will make payment of the award as promptly as circumstances allow. (Reg. § 301.7623-3(c)(6))
Award computation. Generally, the final regs 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 then reviews any planning and initiating factors, if applicable. To compute an award, the Whistleblower Office will look to the administrative claim file to determine whether there are any positive factors present (such as identifying a transaction previously unknown to IRS) that would merit an increased award of 22% or 30%. It will also determine whether there are negative factors present that would merit a decreased award of 15%, 18%, 22%, or 26%. (Reg. § 301.7623-4(a), Reg. § 301.7623-4(c))
Under the final regs, the Whistleblower Office will make a threshold determination as to whether a claimant planned and initiated the underlying acts, but this determination won’t result in an automatic or fixed reduction of the award percentage or award amount. A claimant satisfies the threshold determination if he: (i) designed, structured, drafted, arranged or 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 a tax underpayment or a violation of the internal revenue laws could result. If the Whistleblower Office determines that a claimant meets the threshold, it then evaluates and categorizes (as primary, significant, or moderate) the extent of the claimant’s planning and initiating of the underlying acts, based on the application of factors listed in Reg. § 301.7623-4(c)(3)(iv), to determine the amount of the appropriate reduction, if any. The award percentage that would otherwise result is reduced by: 67% to 100% in the case of a primary planner and initiator; 34% to 66% in the case of a significant planner and initiator; or 0% to 33% in the case of a moderate planner and initiator. If the whistleblower is convicted of criminal conduct arising from his role in planning and initiating the underlying acts, then the Whistleblower Office will deny an award without regard to such categorization. (Reg. § 301.7623-4(c)(3))
Disclosure. The final 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. (Reg. § 301.6103(h)(4)-1(b))
Effective date. Reg. § 301.7623-1, Reg. § 301.7623-2, Reg. § 301.7623-3, and Reg. § 301.6103(h)(4)-1 apply to information submitted on or after Aug. 12, 2014, and to claims for award under Code Sec. 7623(a) and Code Sec. 7623(b) that are open as of Aug. 12, 2014. Reg. § 301.7623-4 applies to information submitted on or after Aug. 12, 2014, and to claims for award under Code Sec. 7623(b) that are open as of Aug. 12, 2014.