Late on November 16th, the Senate Finance Committee voted to approve its iteration of the Tax Cuts and Jobs Act, passing the measure on a party-line 14-12 vote.  The full version can be found here.  Of particular interest to our readers here is one of the amendments that was added to this in committee.  Senator Grassley submitted a number of amendments to this bill including an amendment that:

modifies section 7623 to define collected proceeds eligible for awards to include: (1) penalties, interest, additions to tax, and additional amounts, and (2) any proceeds under enforcement programs that the Treasury has delegated to the IRS the authority to administer, enforce, or investigate, including criminal fines and civil forfeitures, and violations of reporting requirements.  This definition would also be used to determine eligibility for the enhanced reward program under which proceeds and additional amounts in dispute exceed $2,000,000.  Collected proceeds amounts would be determined without regard to whether such proceeds are available to the Secretary. 

This is the latest step by Senator Grassley to ensure that the IRS Whistleblower Program is administered as he intended when he initially drafted and stewarded the 2006 amendments to section 7623 through Congress.  Senator Grassley has consistently stated that this has been his understanding of the term and the intent of Congress in enacting the amendments to section 7623(b).  In fact, Senator Grassley has gone so far as to file an amicus brief in the appeal of Whistleblower 21276-13W v. Commissioner, in which he makes the case that at the time of the 2006 amendments the term collected proceeds was used broadly and the IRS had been interpreting the base on which it could pay award broadly and the amendments sought to further broaden the amounts on which an award could be paid, not restrict the payments.

The mark up made it out of committee, but there is not guarantee that the Senate will pass the bill, as written or at all.  Then it will have to go to conference due to differences with the version from the House.  So stay tuned because there is a LONG way to go before the law actually changes.  

The IRS Whistleblower Office has released its Annual Report to Congress for Fiscal Year 2013.  We had a good year with the IRS Whistleblower Program because they paid one of our clients a $38 million award, but overall the report certainly shows that there is a lot of room for improvement.  While fiscal year 2012 gave many whistleblowers a lot of hope for the program with its first big award payout, fiscal year 2013 was somewhat flat.  Some of the highlights from the Fiscal Year 2013 Whistleblower Office Report are:

  • The number of submissions in fiscal year 2013 (355) remained relatively stable from fiscal year 2012 (332).  

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  • Four awards were paid under section 7623(b) in fiscal year 2013.  However, one award was $38 million, leaving $15 million to be shared among all other award recipients (including those receiving awards under 7623(a)).

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  • The IRS planned to finalize the proposed regulations in the second quarter of fiscal year 2014, which ended on March 31, 2014.  We are expecting these to be finalized shortly.
  • The IRS Whistleblower Office increased the number of senior analysts in fiscal year 2013 by three and is actively recruiting four additional staff members.  This increase in staff for the Whistleblower Office is good news for the IRS Whistleblower Program because it shows that the IRS believes that by increasing the staff of the Whistleblower Office it can increase collection of tax in other operating units which are still suffering from hiring freezes.
  • There has been an overall decrease in “collected proceeds” last year from $592 million in FY2012 to $367 million in FY2013.  However, we are aware of much larger cases working their way through the process and those kinds of large corporate cases often take longer than that to resolve.  This is consistent with what the Whistleblower Office has said many times before: it takes on average five to seven years to analyze, investigate and/or audit, and collect proceeds; and that the larger the amount at issue the greater the incentive is for the taxpayer to exercise all of their rights to challenge the IRS determinations.  However, even $367,042,420 of collected proceeds is a drop in the bucket compared to the $385 billion tax gap, or the $191.7 billion of tax reserves for uncertain tax positions set aside only by the top 500 U.S. companies, which demonstrates that the IRS still needs all the help with enforcement of the law that it can get.
  • The Fiscal Year 2013 Whistleblower Office Report indicates that the IRS has developed a communications plan to address outreach to both the public and IRS personnel on changes to the program.  It states that the communication plan “includes efforts to identify opportunities for improvement and potential barriers to change.”  Hopefully the communication plan will allow the IRS staff in the operating divisions to become more comfortable with whistleblowers in general.  Additionally, this may improve the relationship between the public and the IRS and give the public an opportunity to have their concerns heard and addressed by the Whistleblower Office.  
  • The Fiscal Year 2013 Whistleblower Office Report outlines some areas that are likely ripe for litigation, including the definition of “collected proceeds” and amount in dispute.  The report also outlines some areas that need additional guidance or legislative changes, such as providing statutory protection for whistleblowers that provide information to the IRS.
  • The Fiscal Year 2013 Whistleblower Office Report states that Subject Matter Expert review is still on average 190 days.  This means that more than 6 months is lost on average before the field even sees the information.  Depending on the years at issue, this delay could cause the field not to open an audit due to lack of time. 

One of the numbers in the Fiscal Year 2013 Whistleblower Office Report that may require some explanation is the number of claims listed with a current status of “Whistleblower Office – Case Suspended: Whistleblower Litigation Regarding Award Determination” found in Table 4 of the report.  The report shows that only five 7623(b) claims are in suspended status while the whistleblower challenges their award determination in the U.S. Tax Court, but in reality more than 50 whistleblowers have sued the IRS so far.  Many more than five cases are still active, and even more cases have been filed that are still under seal by the Court and will therefore be invisible until they become unsealed by the Court.  We are representing whistleblowers in both sealed and unsealed cases before the Tax Court, and there are a lot of interesting things going on in discovery, but we’ll save that discussion for another day.  The five cases in Table 4 are apparently those cases where the whistleblower is contesting the amount of the award, rather than contesting the denial of an award.  Hopefully, the administrative review process for denied claims in the proposed regulations will be in the final version.  We believe that this administrative review will save the IRS, the whistleblower, and the U.S. Tax Court time and resources by not having cases filed in the U.S. Tax Court that are dismissed once the parties exchange discovery.

Fiscal Year 2014 looks as though it will be a more productive year for the IRS Whistleblower Program.  The Tax Court is preparing for what is supposed to be the first whistleblower case to determine if the whistleblower’s information should result in an award.  The proposed regulations are expected to be finalized soon.  These are both large milestones that will help shape the program.  The IRS Whistleblower Program is taking shape and, hopefully, fiscal year 2014 will bring better news than fiscal year 2013. 

We had a good client ask us the other day about the status of case we had filed together about two years ago. I thought the question was a very good one, so with names omitted I’d like to share both the question and my answer. First some background: the whistleblower client is not an insider of the taxpayer, so we have no visibility into what the IRS is currently doing with the case after two years – other than that the claim is still open with the Whistleblower Office – because the IRS is prohibited from telling us those “confidential taxpayer information” details pursuant to section 6103.

 

Question:

If you had to make an educated guess, where do you think things are in the process?

 

My Answer:

By the Submission + 2 year date the IRS has had more than adequate time to evaluate a claim and determine whether or not they want to use the information in an audit of the taxpayer. If they decide not to use it after that evaluation, which averages a just under year in duration from the Submission date, then the claim is typically rejected within a couple months. We obviously did not get a claim rejection in that timeframe, which makes us believe they made a decision to use the information . When they decide to use the information, from that point they have to either add the issue/information to an existing audit, or schedule a new audit of the taxpayer. When that audit actually commences is highly variable depending on the taxpayer, when their last return was filed, what the applicable periods of limitations are, how busy the agents are who would do the case, etc. Figure it will take at least a couple months for them to start a new audit, probably more though.

 

IRS Audits – once they have commenced – regularly take a year or two, and I’ve seen some take much longer. Note that most business audits cover multiple years, so they have a lot of ground to cover and that’s also how the IRS stays “current” … meaning that they get audits done before the section 6501 statute of limitations expires. If they don’t get the audit done before the statute is set to expire for one or more of the years, then they will ask the taxpayer for an extension of the statute on a Form 870. I put “current” in quotes because in practice these extensions happen all the time. In my prior job representing Fortune 500 taxpayers I’d regularly be working on an audit for a year for which the return was filed more than 3 years prior (that’s the end of the normal section 6501 assessment statute of limitations). If and when I took those taxpayers to IRS Appeals or litigation, we were then usually 3-6 years out from when the return was filed. The moral of the story is that tax cases can be a long road, and even at the Submission +2 year date we’re probably still closer to the beginning then we are to the end.

Today the Treasury Department issued the finalized Treas. Reg. Section 301.7623-1(a) and (g) relating to the definition of “collected proceeds” for purposes of section 7623 tax whistleblower awards.  Although the language of the final whistleblower regulation was unchanged from the proposed regulation, the supplementary information to the final regulation reveals that the Treasury Department shares our view that section 7623‘s definition of “collected proceeds” should be read broadly.  Treasury affirmatively responded to our hearing testimony with respect to the question of whether restitution payments are award eligible and whether the reduction of a tax attribute in one year can result in an award from proceeds collected in another year.  The unchanged final regulation confirmed that awards can be paid on information that that leads to the “denial of a claim for refund that otherwise would have been paid” – which is a huge victory for whistleblowers because the IRS initially sought to make these amounts ineligible for awards.