The IRS on June 17 posted to its website guidelines for handling tax whistleblower claims, a necessary step before the agency can begin making award determinations under a recently revised law. The procedures, set out in Internal Revenue Manual section 25.2.2, outline how the IRS will work with cases submitted on a Form 211, “Application for Award for Original Information.” (For the IRM guidance, see Doc 2010-13536 .)

As part of the Tax Relief and Health Care Act of 2006, Congress amended section 7623 to increase the amount that the IRS can pay out for whistleblower claims when requirements are met. Although the IRS Whistleblower Office has been flooded with new submissions since the enactment of the revised statute, the office has been waiting to issue guidance establishing the administrative process the IRS would use in evaluating a claim before notifying new whistleblowers whether they will receive any monetary compensation. (For prior coverage, see Doc 2010-1711 or 2010 TNT 15-7.)

Generally, for whistleblowers whose claims meet the criteria of section 7623(b), when a successful final determination has been made by the IRS Whistleblower Office, the informant is eligible for a monetary award between 15 and 30 percent of the tax amounts collected by the government. However, the IRM guidance says that under statutory exceptions in subsection (b), the office will give an award amount of only up to 10 percent for claims that are based on information derived from judicial or administrative hearings. Also, claimants who “planned and initiated” the actions leading to a taxpayer’s tax deficiency are only eligible for a reduced award, while criminal convictions arising from their involvement will block any award.

In discussing what collected proceeds a reward will be based on, the IRS said a whistleblower could be entitled to an award arising from specific facts, code sections, or legal theory, even if the government eventually prevailed in collection based on other grounds. However, a claimant providing only a single issue will collect based on that issue only if the IRS later discovers other issues that lead to tax deficiencies.

The IRM details the process a whistleblower must follow in submitting a claim, how the IRS will review the claim, and the steps for the IRS Whistleblower Office director to determine the reward amount. Positive factors for increasing the award amount beyond the 15 percent minimum threshold for a section 7623(b) claim include prompt reporting of tax noncompliance and information identifying parties or transactions. Negative factors include delayed reporting, the claimant’s culpability in the noncompliance, and compromising the confidentiality of the case.

Whistleblowers will be informed of the director’s preliminary reward determination, and the process allows them to respond if they disagree. Once a final reward determination is made, a claimant has 30 days in which to appeal the decision to the U.S. Tax Court.

Practitioners told Tax Analysts they were impressed with the procedures the IRS developed under section 7623. “We love the positive factors in the procedures, as every submission we make hits nearly all of them; this is an area we feel the IRS gets right,” Gregory S. Lynam and Scott A. Knott, tax partners of the Ferraro Law Firm, said in an emailed statement.

“The IRS has created a process which should reduce the need for most cases to go to Tax Court,” said Lynam. “One thing that is clear from these procedures is that if you don’t have counsel now, you better get counsel,” he added, arguing that tax whistleblowers’ “best chance of increasing their award is before the IRS decides to take action.”

The IRM guidelines give tax whistleblowers a chance “to really show during the administrative process the value they added, and therefore increase the amount they get paid,” said Knott.

Lynam and Knott also praised the IRS for classifying whistleblowers as confidential informants. “Being a confidential informant is a big deal to the IRS, and it is nice to see them take this extra step to protect tax whistleblowers,” said Knott.

But Lynam took issue with the IRS’s position that criminal penalties are not subject to tax whistleblower awards. “This is clearly contrary to section 7623(b)(1), which requires that whistleblowers receive 15 to 30 percent of any amount collected for the underpayment of tax or the punishment of persons guilty of violating the internal revenue laws,” he said. “To claim that ‘criminal fines’ are not the collected proceeds of the punishment of persons guilty of violating the internal revenue laws is just wacko.”

Lynam speculated that the Tax Court would quickly strike down that provision if it is challenged.

Tax Analysts Information

Code Section: Section 7623 — Expenses of Detecting Frauds

Jurisdiction: United States

Subject Areas: Fraud, civil and criminal

Information disclosure

Tax system administration issues

Author: Coder, Jeremiah

Institutional Author: Tax Analysts

Tax Analysts Document Number: Doc 2010-13529

Tax Analysts Electronic Citation: 2010 TNT 117-2