Proposed Treasury Regulations for the IRS whistleblower program were released on December 14, 2012.  These regulations cover many issues and deserve a complete reading; however, below is a short outline of what each section of the proposed regulations covers.

§301.6103(h)(4)-1, Disclosure of returns and return information in whistleblower administrative proceedings.

This section of the proposed regulations establishes that that a whistleblower administrative proceeding (as described in §301.7623-3) is an administrative proceeding pertaining to tax administration within the meaning of section 6103(h)(4).  Therefore, the Director, officers, and employees of the Whistleblower Office may disclose returns and return information (as defined in section 6103(b)) to the whistleblower (or the whistleblower’s legal representative) to the extent necessary to conduct a whistleblower administrative proceeding.

§301.7623-1, General rules, submitting information on underpayments of tax or violations of the internal revenue laws, and filing claims for award.

This section of the proposed regulations provides the general rules for submitting information and filing claims for an award.  This is the “who, what, when, where, and how” of submitting a claim for an award.  A whistleblower must follow these rules to ensure that their claim for an award is appropriately filed to ensure that the IRS Whistleblower Office will consider their claim for an award.  The proposed regulations in section 301.7623-1(e) states that the IRS will use its best efforts to protect the identity of whistleblowers.

§301.7623-2, Definitions

This section of the proposed regulation defines key terms used in the statute and the regulations.  The proposed regulations build on definitions in the current regulations and define additional key terms for section 7623.  These definitions will affect how the IRS Whistleblower Office interprets section 7623 and ultimately will makes award determinations based on these definitions.  How “proceed based on,” “related action,” and “collected proceeds” are defined will greatly influence the number of awards issued and the amount of those awards. 

Particular attention should be paid to the definition of “proceed based on” and “collected proceeds.”  The definition of “proceed based on” in the proposed regulations seems to be reading the word “only” into the statute and requiring that the IRS take action that it would not have taken but for the information provided to be award eligible.  This reading goes beyond the language of section 7623, which simply requires that the IRS use the whistleblower’s information in an administrative or judicial action in order for the whistleblower to be able to collect an award.  The proposed regulations appear to assume that the IRS would discover an issue simply because the issue was listed generally in an audit plan.  Hopefully, this narrowing of the statute will be addressed in the final regulations after hearing comments from the public.  Either way, we are confident that this regulatory expansion would not survive judicial review.

The definition of “collected proceeds” continues to be an area that should be focused on.  The proposed regulations continue to claim that criminal fines are not part of collected proceeds; however, as discussed at length on this blog and elsewhere, this position goes against the language of the statute and the intent of Congress.  The definition of collected proceeds also touches on the inclusion of tax attributes in collected proceeds.  The preamble to the regulations goes into more detail illustrating that tax attributes that are used as of the date that the award computation is made will be counted as collected proceeds.  There does not appear to be a clear legal theory behind this cut off, but our discussions with various IRS personnel suggests this is an administrative compromise.

§301.7623-3, Whistleblower administrative proceedings and appeal of award determinations.

This section provides outlines of the administrative proceedings and appeal rights for award determinations.  The largest changes here are the creation of administrative proceedings for cases that do not meet the requirements of section 7623(b) (under §301.7623-3(b)) and claims that are denied (under §301.7623-3(c)(7)).  The creation of the administrative procedures for denied cases is likely to reduce the number of whistleblower cases filed in the United States Tax Court that are ultimately dismissed because the IRS did not use the information, did not detect an underpayment of tax based on the information, or collect proceeds based on the information.  The proposed regulations states that, “The Whistleblower Office will send to the claimant a preliminary denial letter that states the basis for the denial of the claim.”  §301.7623-3(c)(7).  This letter and administrative proceeding should provide claimants with a sense of closure as to what happened with the information that was provided. 

§301.7623-4, Amount and payment of award.

This section outlines the procedures that the Whistleblower Office uses to determine the award amount, including what factors are considered in determining the award percentage, what happens when there are multiple independent claimants, and when payment of an award is made.  In particular whistleblowers will want to look at §301.7623-4(c)(3), which discusses the Whistleblower Office’s application of “planned and initiated” for purposes of reduction or denial of an award.  If the Whistleblower Office determines that a claim for award is brought by an individual who planned and initiated the actions, transaction, or events that led to the underpayment of tax, the Whistleblower Office may appropriately reduce the amount of the award percentage that would otherwise result under section 7623.  Section 301.7623-4(c)(3)(ii) of the proposed regulations states when the IRS Whistleblower office is determining whether a whistleblower planned or initiated the scheme that the IRS Whistleblower Office will look at whether the individual “(A) Designed, structured, drafted, arranges, formed the plan leading to, or otherwise planned, an underlying act, (B) Took steps to start, introduce, originate, set into motion, promote or otherwise initiate an underlying act, and (C) Knew or had reason to know that there were tax implications to planning and initiating the underlying act.” 

  • Bubba Shawn

    Erica:

    Thank you for summarizing the important points of Deputy Commissioner’s proposed regulations. The definition of “related actions” followed by the five scenarios exemplifying the wall being erected between the whistleblower’s information and the IRS examiners finding additional violations not contained in the form 211, is very alarming.

    I disagree with the regulation’s definition on “related actions” and interrupt that definition as another effort to dilute the IRS’s requirement to pay and reduce the amount of the 7623(b) award.

    How effective do you believe submitted comments on the new proposed regulations will be to change those definitions to favor whistleblowers rather than continuing to punish 7623(b) whistleblowers?

    Merry Christmas!

  • David Myers

    It seems as though the IRS is doing everything they can to destroy the whistleblower program. Any kid who graduated middle school would never interpret such a simple and clearly stated 7623 law. Can you tell me if all collected proceeds, even money that the IRS collects for non tax issue offenses ( anti-trust, conflicts of interest, market manipulation etc..) are included in the administrative award determination review? If not, how can a person find out if money was collected for non tax offenses and not reported? I think every whistleblower should be very concerned with the ill intentions of the the IRS, how can you possibly trust anything about them!

  • The IRS is currently only paying awards on title 26 proceeds they collect. Someone with a case where the government collects funds under another title based on their information should be consulting counsel about what their appeal options are.

  • Linda Williams

    Hi Erica and Scott,

    Thank-you for all the work you do supporting the cause of IRS Whistleblowers.

    6 months after Steve Miller’s face saving memo of the 20 June 2012, which promised so much, are you still putting your faith in Steve Miller to improve the failed IRS Whistleblower Program?

    4-6 awards during the last 6 years from 1500+ IRS Whistleblowers is a very bleak statistic at the 6 year anniversary of the 2006 Whistleblower legislation.

    I note Scott’s recent comment to Reuters news agency with regards the impact of the IRS’s new whistleblower regulations which Steve Miller put his name to, rather than Stephen Whitlock:

    “It could narrow the scope of what is award-eligible,”

  • Disappointed Whistleblower

    It took almost a year to finalize the definition of collected proceeds. How long do you think it will take to finalize these regulations? Hopefully, many of the provisions can be changed that are not consistent with the statute. What is Plan B? When will this be ripe for challenge under the APA? Can you rally the Whistleblower community to get something filed in District Court? Are you seeking help from Grassley? Its all now in writing and quite troubling to say the least.

  • Bubba Shawn

    After six long years of periodic 7623(b) rule changes that chip away at the award amounts due to unpaid whistleblowers, the reality from last July’s events is that currently, the 7623(b) award payments are driven by the U,S, Senate politics surrounding the new IRS Commissioner selection.

    I wish Ferraro Law firm the most prosperous of New Years in 2013. Ferraro Law Firm is the ONLY whistleblower law firm that is honestly and competently assessing the continuous erosion of 7623(b) award payments.

  • Anonymous Tax Amateur

    Is there anywhere to look to find the comments people are submitting? They’ll all be made public by the agency once the deadline is passed and they’re filed away, but it would be useful for the IRS and for everybody else to get some discussion going among commentors while they can still revise their comments. Something like a comment thread on this blog could be used, with some way to get documents posted.

    It seems the IRS has not been happy with the whistleblower law, but it might process claims quicker and more responsively if it had regulations written to make its job clearer and easier.

  • I believe that http://www.regulations.gov allows you to see public comments that have been submitted.

  • Interested Party

    You correctly observe that “The proposed regulations [‘proceeds based on’] appear to assume that the IRS would discover an issue simply because the issue was listed generally in an audit plan.” This is clearly one of the principal eroding factors in these proposals.

    Yet at the same time, the Service in its IRM lists the following as a “Positive Factor” for award enhancement:

    25.2.2.9.2 (06-18-2010)
    Award Computation
    Positive Factors
    10. B
    “The whistleblower submits information that identifies an issue of a type previously unknown to the Government or a taxpayer behavior that the Government was unlikely to identify or was especially difficult to detect through the exercise of reasonable diligence.”

  • Frank Watson

    You say that section 7623(b) simply requires that the IRS “use” the whistleblower’s information in an administrative or judicial action in order for the whistleblower to be able to collect an award.

    While I agree with you, how do you square this idea of mere “use” with the statutory language that seems to require some sort of “initiation of action?” What quantum of “use” is required before one is eligible for an award? This is a very unclear area, in my opinion.
    Thank you.

  • In order for the information to have been used by the IRS there would have been an administrative or judicial action by the IRS. The IRS could have an administrative or judicial action where the whistleblower’s information was not used, if for example the information was not passed along to the field because the information was protected by privilege. But the information cannot be used if there is not an administrative or judicial action.

  • Anonymous tax Amateur
  • Bubba Shawn

    Everybody contributing to the Ferraro Blog please submit comments to the IRS proposed final regulations. The more the IRS hears from 7623(b) whistleblowers the better.

    The “related actions” definition and examples unfairly limit award payments. Additionally, the IRS requests advice on a single award percentage. The only fair percentage would be 30% paid on all collected proceeds from all administrative and judicial actions to all 7623(b) whistleblowers.

    If more stakeholders make that case, we may be able to increase the percentage and speed the payments.

    Please spread the word.

  • Disappointed Whistleblower

    1. The most problematic issue is Section d. (2) Final Determination of Tax which requires the aggregation of all taxpayers and tax years before a claim can be paid. As Scott Knott has said so accurately in his blog; “Most of the hundreds of submissions made by The Ferraro Law Firm to the IRS Whistleblower Office involve more than one tax year of a taxpayer, and many involve multiple taxpayers. If a tax whistleblower outlines five years of tax cheating by a taxpayer and the IRS is auditing on two-year audit cycles, when does the award determination get made? In all other areas of tax law the rule is clear that each tax year stands on its own. Following that line of thinking, whenever a year is closed and tax collected, the IRS should make an award determination for that year. To take a different position could cause decades of delays. Consider an amortization case, will the IRS wait 20 years until all of the years with improper amortization play out? The even more egregious position would be that in a case involving multiple taxpayers, all taxpayers identified must have all tax years at issue closed before an award determination can be made. It simply cannot be that case that this is the proper way to make award determinations. If 999 out of 1000 identified taxpayers close and pay and one tax cheat has one tax year open for unrelated issues the IRS cannot delay payment on the 999 taxpayers it collected from – to do so would be arbitrary, capricious, and unreasonable.”
    The approach adopted in these proposed regulations is clearly contrary to the intent of the statute and should never hold up in a court of law as a reasonable interpretation. Steven Whitlock has stated in public fora that his office does not want to flood the tax courts with Whistleblower claims on separate taxpayers or tax years. The simple answer would be that if Whistleblowers are paid in a fair and straightforward manner, there will be no incentive for them to go to court. Second, assume that the claim is a multiple year case, if the first year is litigated, it would be highly unlikely that additional years would be challenged as it would arise from the same issue. It is also quite likely that the tax court would dismiss subsequent matters on an estoppel theory. Whitlock’s concern is not reasonable in theory or fact. Even more shocking is that proposed regulations in Section (a)(2) state the exact opposite of (d)(2)– that the WO may determine separate award percentages for multiple actions. This is administrative convenience taken to the extreme and prioritizing it above all else. Perhaps the real reason is articulated in a recent brief filed by the Office of the Chief Counsel in Tax Court which states, “Under other statutes, Congress has provided for payment of interest to private parties when the Government does not pay within a specified amount of time. See Contracts Disputes Act, 41 U.S.C.§7109. However, Congress did not choose to include a similar provision under Section 7623 (b).” It is clear that the Chief Counsel’s Office believes that monies owed to the Whistleblower can sit on the coffers interest free for perpetuity. Such a position is untenable and cannot be a reasonable interpretation of the statute.

  • Anonymous Tax Amateur

    It may be of interest to see how the Feb. 2012 final regulations for some of the features of the whistleblower process summarizes the 17 comments they got then:

    https://www.federalregister.gov/articles/2012/02/22/2012-3989/rewards-and-awards-for-information-relating-to-violations-of-internal-revenue-laws

    Those proposed regulations were not changed at all, it looks like, but it also looks as if the IRS paid close attention, since the issues raised are discussed in these new proposed regulations.

    http://www.regulations.gov/#!docketDetail;D=IRS-2011-0003

    I hope and trust that all the law firms making comments then will do so in the two weeks too. It might be wise to send in comments earlier rather than later, to build on each others’ efforts. But the whistleblower bar no doubt has thought about that. Simple repetition of the comments would be useful, if new documents aren’t prepared, so as to get all those arguments into the administrative record.

  • Anonymous

    The 2011 docket at

    http://www.regulations.gov/#!docketDetail;D=IRS-2011-0003

    didn’t have any comments that I noticed that support the IRS positions, giving additional reasons for them or suggesting that they go more in the “disliked by whistleblower” direction. Why not? Aren’t there any interest groups supporting the IRS on this? (tax accounting and tax law firms, perhaps?) Or are they using ex parte, pre-comment-period, communications?

    If anyone wants to discuss off-list, I’m at n17147781@gmail.com .

  • Linda Williams

    Hi Scott,

    Back on the 31 July 2012 you expressed the sincere belief in the Ferraro blog that more awards (plural ) were finally on the way, with the implication that somehow the IRS Whistleblower had turned the corner.

    Over 6 months later do you still hold this belief?

    How was Steve Miller in his 20 June 2012 memo able to hoodwink so many in the Whistleblower community for the last 7 months?

    Senator Grassley’s letter to Steve Miller and the acting Treasury Secretary last week seems to be acknowledging that in year 7 of the program things are getting worse not better with the IRS Whistleblower Program.

    Would you agree that only amended legislation will fix the broken program?

  • We said “awards” (plural) because we are working on more than one award for our clients to be paid this fiscal year.

    We don’t agree that only a legislative change will fix any aspects of the program that we believe are contrary to the current statute or legislative intent. Court decisions can also have the effect of statutory law in forcing changes of erroneous legal positions currently being taken by IRS Chief Counsel.

  • Bubba Shawn

    The period for comments and request to speak at the April 10 hearing are over. There are more than ten lawyers who will voice opposition to the regulations as proposed. The proposed rules that are opposed include definitions on “related actions” and “collected proceeds”.

    I believe the public hearing is just a legal formality and the IRS will finalize the rules in May. I also believe , IRS will only move from the proposed regulations on “related actions” and the award percentage starting percentage.

    Am I correct? What are your insights on the timing of the final rules going into the Federal Register?

  • The timing for these Proposed Treasury Regulations to be finalized is unknown, there are some instances where Proposed Regulations either never get finalized or take a really long time to get finalized. For example, the proposed amendment to Treasury Regulation section 1.167(a)-11 was published in the Federal Register on February 16, 1984, and still only exists in its proposed form.

  • Bubba Shawn

    Thank you, Erica:

    Do you believe, as I do, that the politics surrounding Mr. Miller’s forthcoming Commissioner appointment and Senate approval combined with the two year SOL expiring on 2007 and 2008 claims that are impacted by the proposed final regulations, instills a sense of urgency for finalization to occur in weeks not months?