Congratulations to our associate, Erica Brady, for the publishing of her article, Are Criminal Fines “Collected Proceeds”?, in the Summer 2011 edition of the ABA Section of Taxation NewsQuarterly. She has previously blogged about criminal fines as tax whistleblower proceeds, and we think that the discussion of this contentious issue has just begun.

  • Linda Williams

    Re. “Collected Proceeds” and Criminal Fines Penalties Restitution

    I’ve undertaken some research which confirms that the IRS has the authority to make partial interim payments to a whistleblowers before a final award offer based exclusively on criminal fines and prior to the completion of a civil audit into the same case. 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 before a final award based exclusively on criminal fines and penalties, prior to the completion of a civil audit.

    Is the IRS contradicting itself?

  • Treasury Regulation section 301.7623-1(c) pre-dates the 2006 amendments to section 7623. The IRS’s long-standing policy prior to amendment was that criminal fines were treated as part of collected proceeds. However, the IRS has reevaluated this policy and has taken the position that criminal fines are not part of collected proceeds. For a more complete discussion of the topic please see either my article linked above or my next article, which should be in TAXES in the next few months