IRS Tax Whistleblower Articles

Practitioners Note IRS Reversal on Paying Whistleblower Awards for Avoided Refunds

By Diane Freda

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The Internal Revenue Service officially reversed its position on paying whistleblower claims based on refunds that are avoided in final guidance issued Feb. 21, the Ferraro Law Firm told Bloomberg BNA.

“The IRS is now stating that they will pay an award based on the denial of refunds,” Gregory Lynam, partner with the Washington, D.C., law firm, said Feb. 22.

While IRS had alluded to consideration of refund claims in a chief counsel memorandum, and had sanctioned awards based on information that avoided refunds in proposed rules, the final rules (T.D. 9580) made it official (34 DTR G-3, 2/22/12).

The development means that if a company files an amended return seeking a refund, and the whistleblower provides information showing that the company is not entitled to that refund, IRS will now pay between 15 percent and 30 percent of the amount denied in an award to the whistleblower.

“It greatly opens the universe of taxes eligible for an award,” Lynam said.

The development is largely attributable to issues raised by Sen. Charles Grassley (R-Iowa), who in September 2011 wrote IRS complaining that the program was not operating as Congress had intended (179 DTR G-2, 9/15/11), Lynam said.

However, the new rule will only have an impact to the extent that IRS utilizes it, Lynam said. “If they don't use it, they might as well not have sought the regulation from the Treasury Department in the first place.”

Reduced Net Operating Losses Also Considered

“It's good news and it's bad news,” said Bryan Skarlatos, partner with Kostelanetz & Fink in New York. “It's only bad news to the extent that they rejected comments to expand the definition of collected proceeds to include a broader category of any overpayment or potential tax benefit to the government.”

It is good news, he said, to the extent that if a taxpayer has a net operating loss and the whistleblower's information only reduces the amount of the loss, the whistleblower office will still take that into account in determining the amount of collected proceeds for determining the award.

“Everybody was concerned the IRS would say there are no collected proceeds in that situation,” Skarlatos said.

Another positive development, he said, is that IRS has agreed to follow the net operating loss back to a prior year to see if the whistleblower information has led to a tax benefit to government.

Timing Raises Issues

One ambiguity in the rules, Skarlatos said, is that if the taxpayer's net operating loss position has been reduced as a result of whistleblower information, but still has produced no tax savings to the government as of the date of the award determination, there will be no award given to the whistleblower. The rules make no provision for IRS to recompute the award determination at a later date, Skarlatos said; the tax savings to the government must be as of the award date.

Michael Desmond of the Law Offices of Michael Desmond in Santa Barbara, Calif., said he could understand IRS's position on not allowing a reduction in net operating proceeds per se to be considered proceeds for purposes of calculating a whistleblower's award amounts. Several commenters had asked for that but Desmond said he did not see how a change in tax attributes could be factored into the award calculation.

The idea there is that if a whistleblower has information about a $50 million loss reported on a company return, and it ends up reducing the loss to $10 million, in theory that could lead to a collection of more tax. “But the problem is, it's only in theory,” he said. “There is no certainty it will ever be used to reduce taxes.”

IRS said it will take those situations into consideration, but will not call the reduction in losses per se collected proceeds.