The IRS has finally released the Final Treasury Regulations that we have all been waiting for. While, there were not as many in the Final Regulations as we would have liked to have seen; the changes that were made were important ones. Some of the pros and cons of the Final Regulations are:

Pros:

Change in the definition of “Proceeds based on.” The final definition is more inclusive and removes the word “only” that had been read in. The new definition provides examples of when the IRS proceeds based on, but does not limit when the IRS will have proceeded based on.

Change in the definition of “Collected Proceeds.” Now includes amounts on amended returns that are filed after the IRS proceeds with and administrative or judicial action based on a whistleblower’s information. The IRS will continue to monitor the taxpayer’s tax account for additional collected proceeds in cases where this is a possibility. This will allow for whistleblower to collect on tax assets that are reduced based on their information, but have not yet lead to additional payments at the time the WBO makes a final determination of tax. There is a downside to this change, the WBO will also monitor timing issues in future years to determine if there are offsetting reductions to collected proceeds.

There is now an administrative review process for the rejection or denial of claims for awards under section 7623(b) that are rejected or denied. Administrative Procedures for denied/rejected claims:

1. WBO sends a preliminary rejection letter that states the basis for the rejection or denial of the claim.

2. Whistleblower has 30 days from the date that the letter was sent to respond with comments.

3. WBO will review the comments and either (a) provide written notification to the whistleblower of the rejection of the claim, including the basis fro rejection; or (b) go through the administrative review process provided for in paragraph (c)(1) through (6) of Treasury Regulation section 301.7623-3.

The administrative review is of the items in the administrative claim file that are not privileged, before it was limited to the “pertinent information.”

Cons:

The Final Treasury Regulations kept the fixed percentage award structure and still start the evaluation at the statutory minimum.

The Final Regulations failed to adopt the “principal architect” standard for planned and initiated. This remained section of the Final Regulations remained largely unchanged from the Proposed Regulations. However, using this test is functionally reinventing the wheel.

In the general rule for “Administrative Record,” the administrative record definition is still limited to the information that is relevant to the award determination. By limiting the administrative record to what the IRS deems to be relevant, whistleblower and their representatives will forever be fighting about what is relevant and what they are not being provided when there is concern that monies or circumstances are not being properly considered.

Collected Proceeds still does not include criminal fines or FBAR penalties.

  • Bubba Shawn

    Erika,

    The proposed rules recommended that related actions where limited to the “one step” rule. I didn’t read that in the preamble. Is the IRS eliminating that in the final rules?

    The final rules also claim on average the WO has paid 25% awards. With so few awards paid thus far, one 28% award would bump that average up from a bunch of 15% awards paid.

    Also, the IRS has decided not to make partial payments on periods and taxpayers unless it is convenient to the WO.

  • David Haynes

    The administrative review process for the rejection or denial of claims is a very welcome change, but this limited definition of the administrative record is going to create headaches.

  • Disappointed Whistleblower

    The definition of the Adminstrative file was NARROWED under the new regulations with no discussion despite submitted comments of concern. This statute will be meaningless if the IRS is able to cherry pick documents that only support their position. They will continue their pervasive institutional prejudice to thwart payment of whistleblower claims . The IRS as an entity has condoned the misbehavior of field agents. Until there is full and transparent discovery of the facts I am very concerned that this program is dead on arrival and we are in for a very long fight. I hope there are many filings in District Court that will challenge these untenable regulations.

  • Disappointed Whistleblower

    David–Be careful. This review process is just a ruse for the IRS to claim deference in Tax Court. We will be sending in comments without knowing any of the facts. It’s a set up. Hopefully, the Tax Court will see through this feeble attempt to make the process legitimate.

  • Bubba Shawn:

    The “one step” rule is in the final regulations, but in a modified form Related action are in Treasury Regulation section 301.7623-2(c). The language in the preamble relating to the changes begins on page 25 of the PDF in the blog post. The preamble explains that:

  • Gaap Dino

    These statements on page 21 of TD 9687 are very important if a claim is rejected:

    Off-code provisions of the 2006 Act explicitly provide that the IRS will analyze information received under section 7623 and investigate the matter. Given that this requirement must be satisfied by the IRS with respect to all information provided,

  • Bubba Shawn

    Thank you, Erica.

    The sad commentary is that during the written comments period there were thoughtful excellent recommendations, yours among the most promising, made by whistleblower advocates that were not adopted in the final regulations.

    I suppose we can all take comfort in knowing that the IRS Commissioner is a “fan” of IRS whistleblowers. Too bad these final rules didn’t reflect that enthusiasm. Because if he was really a supporter of IRS whistleblowers, the IRS Commissioner would have insisted that those rules favored the whistleblowers more than token administrative reviews designed to keep IRS lawyers from US Tax Court litigation.

  • Linda Williams

    ‘Disappointed Whistleblower………………. you’re right on the money unfortunately the IRS Whistleblower Program Isn’t going to get any better any-time soon, if at all, with these Final Regs. Only litigation and legislative amendment will improve the program. I think its fair to say certain parties regret the way the legislation was drafted in 2006 leaving too much flexibility in the way in which the IRS Office of Chief Counsel interpret the implementation of of the legislation.

    My thoughts are with Joseph Insinga who has suffered greatly financially and is currently carrying on the fight as we all must. I wish him well.

    I stand by my statement of 4 weeks ago on this blog:

    “Looks like the long awaited ‘final whistleblower regs’ are ready on the launch pad. Allegedly, according to well placed insiders they’re worse than anyone could envisage. It explains the blank faces from the IRS panel at the IRS auditorium in Washington on the 10 April 2013 as they listened to the well intentioned speakers.

    Perhaps worst of all is the proposed Interpretation of “collected proceeds” which now excludes any award being paid to a whistleblowers where it ends up with a criminal prosecution. On top of the exclusion of FBAR’s this would effectively rule out most whistleblowers in the offshore banking industry and others filing a form 211.

    If a whistleblower was foolish enough to get involved with the IRS Whistleblower program you’d be advised to remove any documents that would push a case towards a criminal prosecution or FBARS’s.

    Read below Dean Zerbe’s excellent rear guard action in a letter dated 6 June 2014 to Jack Lew Treasury Secretary

    http://whistleblowers.nonprofitsoapbox.com/storage/whistleblowers/docs/BlogDocs/irs%20rule
    %20comment.pdf

    At best this means the IRS Whistleblower Program will be tied up in litigation for years.

    That’s if the attorneys get a chance to challenge the regulations in court which if few awards are being made and the IRS continues to cull 250-450 submissions a year for no good reason other than the statute of limitation has run out or they’re short on resources……..seems very unlikely.

    Everyday how I wished I’d never got involved in the IRS Whistleblower Program 6 years ago.

  • The regs do not exclude awards being paid to a whistleblower where there is a criminal prosecution, the regs just exclude the criminal fines from collected proceeds. Other amounts are still included such as restitution and any civil collections. It should also be noted that the issue is being litigated.

  • Bubba Shawn

    Erica and Linda,

    The final rules as they are written ignored Dean Zerbe’s letter to Secretary Lew. The IRS had also ignored Senator Grassley’s concerns. Those final regulations are approved by both Commissioner Koskinen and Mark Mazur. Both who committed to support the IRS whistleblower Program and make that program “effective”. Both those men also unfairly paid a heavy price for the politics surrounding the IRS and the IRS Whistleblower Program.

    We now know what they meant by “effective”.

    The GAO report should come out this month. That will give whistleblowers some insight on what is happening in the WO and the program.

  • Linda Williams

    Finance Committee Chair Ron Wyden, D-Ore and ranking minority member Orrin G. Hatch, R-Utah wrote to GAO Comptroller General Gene L. Dodaro on June 20, 2014 with regards investigating the ‘lack of resources and timelines’ in processing IRS Whistleblower claims.

    As it took about 1 year to complete the last GAO report into the Whistleblower Program don’t expect to see a GAO report until spring 2015, at the earliest. I think Jim White completed the last one for the GAO so its a safe bet he’ll be doing the lastest investigation. He’s a very approachable guy so will listen to whistleblowers and their counsel if you want to make submissions to the GAO for the purposes of their report.

    Similarly, the TIGTA audit report into the IRS Whistleblower Program listed in the TIGTA 2014 Annual Audit Schedule won’t be published until summer 2015.

    Even the investigations into the lack of timeliness in processing Whistleblower claims take a very long time……………………ironic or what!!!

    Lets face it, even if you do get an award (subject to 8% sequestration) the benefits of an IRS Whistleblower submission are something the Whistleblower is never going to benefit from in his or her lifetime …….it’s just another unrealised asset you list in your will for the beneficiaries of your estate to wait for!!!!!!

  • Eric Rasmusen

    I’m pleasantly surprised by the final regulations. I see several places where changes from the draft regulations favor whistleblowing. I haven’t followed the issue of whether collected proceeds should include such things as criminal fines, so the IRS may get reversed on that— Mr. Zerbe’s article is persuasive on that point. Coming from an IRS that has been hostile to the whistleblower program in the past, this looks like a definite improvement.

  • Disappointed Whistleblower

    When I read these blog posts it seems that we all believe that the program will be run with honesty and integrity. Unfortunately, that is not the case with the IRS. There is a systematic and blatant attempt to not pay Whistleblowers. They have written the regulation to require that the information provided substantially contributes to the collection of proceeds. This is a complete misreading of the statute. The statute requires that if the information is USED to collect proceeds you are entitled to at least 15%. (Grassley agrees with this view) The substantial contribution test is whether you receive above 15% up to 30%. So they will deny 95% of all claims. All they need to show under the regulations is that they were already “looking into” the issue they will deny your award or if it was broadly defined in the audit plan they will deny your award. The Whistleblowers Office is a toothless paper pusher that will blindly take the opinion of the IRS field personnel that are already resentful of the extra work caused by the Whistleblower. If you are lucky enough that you get your denial letter within 6 years you can go to battle with the Office of the Chief Counsel that will try everything to limit you to the documents in the Administrative Claim file that only consists of cherry picked documents that support their position. Of course, they support the program they use your information and refuse to pay. They have created a license to steal. The truth will come out eventually. I feel sorry for all those people who will get denial letters and believe the IRS was fair and let the 30 day period to appeal lapse. There needs to be a challenge to the Regulations in District Court as soon as possible.

  • Decker Kirby

    My claim is being processed under 7623(a). Filed before the 2006 (b reg). A lot of my collections were processed and collected after 2006 into to 2011 . Are there any changes for 7623(a) that would make it more (b) like in its characteristics, or that would allow more transparent disclosure of how the basis of collected proceeds are totalled, or a tally for what basis the reward are calculated on / accounting?

  • Decker Kirby, I’m sorry but we cannot provide legal advice through this blog. This question and Treasury Regulation section 301.7623-3 should be discussed with your attorney.