IRS Tax Whistleblower Articles

ABA Meeting: Whistleblower Regs' Tax Attribute Rule Is a 'Double-Edged Sword'

By Andrew Velarde
Tax Analysts, Tax Notes Today, September 22, 2014

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A new requirement in the final whistleblower regulations (T.D. 9687 ) that the IRS track tax attributes when determining the amount of a whistleblower award is a "double-edged sword," a Treasury official said September 19.

Speaking at the Administrative Practice session of the American Bar Association Section of Taxation meeting in Denver, Alexandra Minkovich, Treasury associate tax legislative counsel, said that in some cases the new rule would make it more difficult for the IRS Whistleblower Office to pay an award, because there is a lack of finality for collected proceeds.

The final whistleblower regs, released August 7, provide comprehensive guidance for the award program, authorized under section 7623. Several commentators on previously released proposed regs (REG-141066-09 ) had suggested that the tax attributes -- specifically net operating losses -- should be included in the definition of collected proceeds. The final regs provide that the Whistleblower Office will monitor the relevant taxpayer account until either the IRS receives collected proceeds as a result of a reduction in the tax attribute, or the taxpayer's ability to apply the tax attribute expires unused.

Awards will be paid on any such post-determination collected proceeds. The decision to monitor future-year activities for impact on the amount of collected proceeds will apply to all claims, not just claims involving NOLs. As a result, the Whistleblower Office may defer action on an award claim in some cases.

Drita Tonuzi, IRS associate chief counsel (procedure and administration), added that she doesn't think the Whistleblower Office would keep a claim open for the entire period.

"I think they'll make the determination at the front end and continue to track," Tonuzi said. "The Whistleblower's Office may make a subsequent determination in addition to [the front-end determination], so they are not going to keep it open for 20 years." Tonuzi said interim payments could be made. She said the Whistleblower Office would provide further procedural provisions on tracking, although she did not give a timeline for that guidance.

Speaking at the Court Procedure and Practice session, Stephen Whitlock, director of the IRS Whistleblower Office, said the revised tracking rule will pay partial awards with subsequent determinations as more information becomes available, but that when the case involves timing adjustments, it will be kept open "to see if the taxpayer claws it back in a future year."

"This seems like an innocuous little point, but it is really the exception that swallows the rule," Gregory S. Lynam of the Ferraro Law Firm said. Whitlock and Lynam disagreed over how much the IRS was focused on timing adjustments in audits.

Whitlock also said that the new regs require a complete rewrite of the Internal Revenue Manual's whistleblower provisions, which he said is a high priority. He did not predict when it would be released.

"As we work through those issues, we will address some of the timing questions," Whitlock said.

Section 7623 was amended in 2006 with the addition of a mandatory "shall pay" provision, dictating payouts to whistleblowers of 15 to 30 percent of collected proceeds when specific thresholds are met. Section 7623(b) also added an option for whistleblowers to appeal award decisions to the Tax Court.

New Whistleblower Employees

Whitlock said the 31 new employees set to join the Whistleblower Office, which would increase the staff to 75, are temporary positions "which may be made permanent without additional competition." Such a classification allows the office flexibility in adjusting its personnel needs in the future and was more a sign of a prudent hiring process than a lack of commitment to the positions, he said. Whitlock said the new hires would include clerks and analysts, including mid-level analysts.

Whitlock Defends Award Policy

Whitlock defended the Whistleblower Office's award policy, which has been criticized by practitioners. The final regs adopt a general standard for when the IRS proceeds and thus when a whistleblower would be eligible for an award: when the information provided substantially contributes to the IRS action.

"When I see a whistleblower submission on a matter that the IRS had in its audit plan, has issued [information document requests], has begun to take a position . . . how much did the whistleblower really contribute?" Whitlock asked. "There are whistleblowers that come in and think they are giving us the keys to the kingdom and not only did we have the keys, but we were in the kingdom and we were already shaking down the king."

Lynam said it was "the hubris of the large agency" to think that the IRS would have found issues on its own when historically it has dropped large issues.

"Instead of focusing on the significant contribution of the whistleblower, it focuses on the significant contribution of the IRS. We can all pat the IRS on the back for collecting tax, but that is not what this program is supposed to be about," Lynam said. He added that he suspected courts would likely end up determining what constitutes a significant contribution.

Another important matter not provided by the statute and still yet to be decided by the courts is the scope and standard of review of award decisions, said Holly Styles, senior counsel, IRS Office of Associate Chief Counsel (General Legal Services).

The IRS's position on scope and standard is abuse of discretion and an administrative record review as opposed to the de novo standard, Styles said, adding, "Both sides are waiting with bated breath to see how the court addresses those issues."