The Internal Revenue Service posted to its website June 17 long-awaited award procedures for tax whistleblowers under Internal Revenue Code Section 7623, contained in an update to the Internal  Revenue Manual.

The procedures, dated June 18, create an initial award recommendation on which the whistleblower will have the opportunity to comment before the service makes a final determination, said Gregory Lynam, a tax partner at the Ferraro Law Firm.

IRS will send the whistleblower a letter stating the amount of tax that was attributable to his or her information, the percentage award they are applying from the 15 percent to 30 percent scale, and the total award they are proposing for the whistleblower, he said. ‘‘That in and of itself should result in fewer Tax Court cases being filed,’’ Lynam said.

The letter will provide whistleblowers with three options:

• to agree with the amount recommended by IRS;
• to disagree with the determination and offer comments as to why; or
• to disagree, ask to receive a copy of the full recommendation, and ask to enter into a confidentiality agreement so the whistleblower and his or her counsel may look at the supporting documents and determine how IRS came up with the award amount, after which the whistleblower will comment.

Rules Afford Access to Full Record. The last option allows whistleblowers access to the full report on the taxpayer about whom they notified the service, Lynam said. ‘‘You’re basically getting just about everything that would be in the audit file,’’ he said.

The full amount of tax collected and any adjustments made are essential items in determining the amount of an award, Lynam said, and a whistleblower and his or her counsel will be able to see that information so they can determine whether or not they have been fully paid. The tax base, not just the percentage applied, is important in award determinations, he said. Since the procedures provide that whistleblowers will not be allowed to make copies of any documents they examine, it behooves them to have legal representation who can help determine whether or not any tax was improperly excluded from the initial award determination, Lynam said.

Bryan Skarlatos, Kostelanetz & Fink, LLP, New York, said he anticipates the IRS Whistleblower Office will now move quickly to make award determinations and announce them in the near future since the procedures constitute the ‘‘last piece of the puzzle’’ that has been holding up award payments under the program, which was established by a 2006 law. The IRM update provides the guidelines for how the Whistleblower Office will determine awards and the guidelines the Tax Court will be reviewing when taxpayers contest the awards, he said.

‘‘It sort of provides the skeleton around which the award can be paid and the whistleblower can choose to contest,’’ Skarlatos said.

Criminal Fine Exclusion Questioned. Lynam said he thinks one aspect of the procedures runs contrary to the law—the exclusion of criminal penalties for use in making whistleblower award payments. Criminal fines are excluded from IRS’s definition of ‘‘collected proceeds’’ in the IRM, but if one reads Section 7623(b)(1) in conjunction with Section 7623(a), he said, ‘‘there is no rationale for the IRS to exclude criminal fines from the definition of collected proceeds.’’

Section 7623(b)(1) states that the treasury secretary may award an individual 15 percent to 30 percent of the collected proceeds—including penalties, interest, and additions to tax—resulting from the administrative or judicial action, or any settlement in response to such action. Section 7623(a) states that the secretary is authorized to pay awards for detecting tax underpayments or detecting and bringing to trial and punishment individuals guilty of violating the tax laws.

Lynam said he is sure the first Tax Court case to address the criminal penalties issue will ‘‘knock that one out of the park.’’ He added that some may think this IRM provision has a connection to the UBS AG whistleblower case, as UBS fines would not be included in the collected proceeds definition. ‘‘It’s a tiny little statement that makes a lion’s roar,’’ Lynam said.

An interesting question the procedures leave unanswered is how long it will take IRS to pay whistleblowers once the final award amount is decided, Lynam said. The IRM says the director of the Whistleblower Office will ‘‘initiate payment action,’’ but it is not clear what that means and how long that will take, he said.

The update to the Internal Revenue Manual is available at http://www.irs.gov/irm/part25/irm_25-002-002.html.