PMTA 2010-60, Criminal Fines and Whistleblower Awards [PDF], is a line in the sand signaling that the IRS is willing to litigate whether criminal fines are properly included in “collected proceeds.”  The Proposed Treasury Regulations [PDF] are silent on the issue of both criminal fines and restitution payments.  However, the Internal Revenue Manual states, “Criminal fines, which must be deposited into the Victims of Crime Fund [sic], cannot be used for payment of whistleblower awards.”  The IRS has been silent on whether restitution payments are included in collected proceeds.  Restitution payments should be included in “collected proceeds” because restitution payments are assessed and collected as a tax according to section 6201(a)(4).  After researching this issue in preparation of an article on the topic, I believe that criminal fines and restitution payments should be included in the definition of collected proceeds (and from some phrasing in the memorandum, it seems there is a receptive audience in the Whistleblower Office to this position).

In PMTA 2010-60, the IRS reasons that criminal fines are excluded from collected proceeds because all criminal fines collected for offenses against the United States, unless statutorily exempted, are required to be deposited into the Crime Victims Fund under the Victims of Crime Act of 1984 (42 U.S.C. § 10601).  The memorandum acknowledges that criminal prosecutions as one of the actions that can result in a payment of an award; yet still concludes that the Victims of Crime Act and section 7623 can be read harmoniously, giving full effect to Congressional intent for both statutes.  It is disingenuous to say that the Victims of Crime Act and section 7623(b) can be read harmoniously because each statute mandates that monies collected go to different places. 

The IRS simply dismisses criminal fines from being part of collected proceeds “because the IRS does not collect fines imposed by a court in connection with a criminal prosecution, [the IRS does] not think that these fines can be considered ‘collected proceeds’. [sic]”  Section 7623 does not require that the IRS collect the proceeds for there to be an award.  The award is based on collections resulting from the detection of underpayments of tax, or detection and bringing to trial and punishment persons guilty of violating the internal revenue laws.

Additionally, from a policy prospective, the conclusion that criminal fines are outside of collected proceeds undermines the entire whistleblower program.  The whistleblower program was established to incentivize the public to come forward with information about tax underpayments.  Excluding criminal fines from collected proceeds will have the contrary effect on those coming forward with information regarding the most egregious violations of internal revenue laws.  Claims that involve an allegation of fraud are referred to the Criminal Investigation Division of the IRS after the initial review of the whistleblower claim.  Excluding criminal fines from collected proceeds would result in fewer claims involving fraud because there less of an incentive to come forward with the information. 

I am currently working on an article that explores this topic and will continue to write on the subject.  In the mean time, I encourage the IRS to reexamine its position on criminal fines as part of collected proceeds.  If the IRS does not reexamine its position on collected proceeds, it will likely result in litigation and a loss in faith in the whistleblower program.

  • Linda Williams

    I’ve undertaken some research which confirms that the IRS has the authority to make partial interim payments to a whistleblowers based exclusively on criminal fines prior to the completion of a civil audit. That authority is pursuant to 26 CFR § 301.7623-1(c), which states in relevant part:

    “Partial reward payments, without waiver of the uncollected portion of the taxes, penalties, or fines involved, may be made when a criminal fine has been collected prior to completion of the civil aspects of a case, and also when there are multiple tax years involved and the deficiency for one or more of the years has been paid in full.”

    There seems to be an inherent contradiction in the IRS’s thinking. Clearly in the IRS manual and 11 May 2011 public consultation they’re saying criminal fines are not part of the “collected proceeds”. However, in the above regulation the IRS are required to pay partial interim payments on awards that are based exclusively on criminal fines and penalties.

    Is the IRS contradicting itself?

  • A whistleblower may appeal any section 7623(b) award determination, including denial of an award, to the United States Tax Court. Currently, it appears as if the question of whether criminal fines are part of “collected proceeds” will ultimately be a question to be decided by the Tax Court. The contradiction between the guidance published prior to the enactment of the enhanced whistleblower provisions found at section 7623(b) and the guidance published after the enactment highlights the change in the IRS’s position regarding the treatment of criminal fines as collected proceeds.

    For a more complete discussion of why criminal fines should be part of collected proceeds, please see my soon to be published article, Are Criminal Fines “Collected Proceeds”?, published in the Summer 2011 issue of the ABA Section of Taxation NewsQuarterly. We’ll post a link to it here as soon as it is available.

  • Linda Williams

    Hi Erica,
    Any news on a publication date and link to your article which you mentioned in your blog of the 5 July?

    “Are Criminal Fines “Collected Proceeds”?, published in the Summer 2011 issue of the ABA Section of Taxation NewsQuarterly.”

  • Thank you for you continued interest in this topic. Here is a link to the article, Are Criminal Fines “Collected Proceeds”? [ ]

  • FCA Aficionado

    Hello Erica,

    From the time your well researched and well reasoned articles, on the topic of IRS rewards (not-)including proceeds recovered or levied due to criminal-related statutes, appeared around the time period this blog entry was written, we’ve seen the Service promulgate final regulations that, contrary to everybody’s then contemporary hopes, excluded criminal fines in addition to other “reward exclusion and minimization” language.

    In a later blog post, Scott was confident the Service’s exclusion and minimization approach would not survive a simple challenge in Tax Court.

    Since we are several years along now, and the Tax Court appears increasingly willing to accept and assert jurisdiction, to challenge the IRS’ positions, demand the IRS define, document and improve its WB-related procedures & operations (much likely Sen Grassley), as well as display a growing sense of frustration with the IRS’ sloppy and seemingly overall bad faith dealing with WB’s, is there any indication of these exclude, minimize and delay tactics being challenged in Tax Court? If so, what has been the result??

    Folks sitting on a pile of fraud allegations can’t feel comfortable in coming forward until the IRS abandons both its bad-faith approach to WBs as well as pays rewards on both the criminal and civil proceeds.

    The Service in general and the Chief Counsel and WBO in particular should be doing everything to encourage shaky-kneed folks like me to come in and the best way to do that is to assertively replace an air of stinginess and indifference at best and an air of deceit and animus at worst with a red white and blue “Open for Business” sign and inclusive maximized rewards being quickly paid.

    I can’t fathom why earlier as ranking member, and now Chair of the Senate Judiciary Committee, Sen. Grassley has not instigated a Senate Investigation and a TIGTA investigation for the counter-productive way in which the IRS WB program is being mis-managed. (Who is the beneficiary of the current situation, as it sure isn’t the public fisc.)

    Thank you for your feedback.

  • It is our belief that this issue is likely pending with the United States Tax Court given the facts in several opinions indicate criminal action was taken. To date we are unaware of any ruling by the United States Tax Court on the issue.