The Internal Revenue Service has expanded its awards to whistleblowers, allowing tipsters to claim a potentially greater share of the proceeds the IRS collects on extra tax revenue.
The final regulations released Thursday provide guidance for the whistleblower award program for information relating to detecting underpayments of tax or violations of tax laws, under Section 7623 of the Tax Code. The regulations provide guidance on submitting information regarding underpayments of tax or violations of the tax laws and filing claims for an award, along with the administrative proceedings applicable to claims for whistleblower awards. The regulations also provide guidance on the determination and payment of awards, and provide definitions of some key terms used in Section 7623.
The regulations also confirm that the director, officers and employees of the IRS Whistleblower Office are authorized to disclose return information to the extent necessary to conduct whistleblower administrative proceedings. The regulations provide needed guidance to the general public as well as officers and employees of the IRS who review claims under Section 7623.
Collected proceeds can include tax, penalties, interest, additions to tax, and additional amounts collected by reason of the information provided; amounts collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.
Under the final regulations, the IRS is expanding the definition of “collected proceeds” to include not only how much revenue the IRS collects from the whistleblower tip, but also the impact of other tax attributes such as net operating losses, potentially bringing the whistleblower far larger awards. Generally, Section 7623(b) provides that qualifying whistleblowers will receive an award of at least 15 percent, but not more than 30 percent, of the collected proceeds resulting from the action on which the Treasury proceeded, based on the information provided to the IRS by the whistleblower.
Section 7623 provides for the payment of awards from collected proceeds, but it does not specifically address the treatment of claims that involve tax attributes that do not result in collected proceeds for many years, if ever. Originally, the proposed regulations provided a computational rule that reflects a discussion contained in the preamble to the 2012 regulations, in which the Treasury and the IRS noted that tax attributes such as NOLs do not represent amounts credited to the taxpayer’s account that are directly available to satisfy current or future tax liabilities or that can be refunded. Instead, tax attributes such as NOLs are component elements of a taxpayer’s liability.
The disallowance of an NOL claimed by a taxpayer could affect the taxpayer’s liability and, in the context of a whistleblower claim, could result in collected proceeds or could be carried forward 20 years and expire, thus never resulting in collected proceeds. To enable the IRS to administer the Whistleblower Program, the proposed regulations’ computational rule provided that, after there had been a final determination of tax, the IRS would compute the amount of collected proceeds, taking into account all the information known with respect to the taxpayer’s account (including all tax attributes such as NOLs).
Under the proposed regulations, any tax attributes that have been used at the time of the final determination of tax could affect the award amount. The proposed regulations reflected the Treasury and the IRS’s attempt to make an award determination and pay any resulting award as soon as possible after proceeds are collected. The proposed regulations also reflected the Treasury and the IRS’s determination that tracking tax attributes into the future after payment of an award would impose significant costs and a heavy administrative burden. Thus, the proposed rule attempted to balance the whistleblower’s interest in receiving a timely award determination and payout with the government’s interest in maintaining an administrable program.
Several commenters, however, suggested that the proposed regulations did not strike the appropriate balance and recommended that tax attributes, specifically NOLs, should be included in the definition of collected proceeds. The commenters generally expressed concern that under the proposed regulations, a whistleblower might not receive credit for proceeds collected after the final determination of tax, as a result of tax attributes being carried forward to reduce a later liability.
Some commenters also suggested that the IRS should attempt to calculate and apply a present value to determine an award amount for any unused tax attributes. Other commenters recommended that, in the final regulations, the IRS should agree to track tax attributes for a specific period of time, for example, 10 years. One commenter suggested that after the period of time that the IRS had agreed to track, the whistleblower and the IRS could enter into a settlement agreement wherein the whistleblower could agree to the amounts computed as of that date and waive any rights to a future appeal. Finally, one commenter recommended that the IRS should allow whistleblowers to submit a new claim for award when the whistleblower was aware of subsequently collected proceeds.
In light of the comments received, the Treasury and the IRS said they have reconsidered the original approach in the proposed regulations. The final regulations provide that the Whistleblower Office will monitor the relevant taxpayer account or accounts until the IRS receives collected proceeds as a result of a reduction in the tax attribute, or the taxpayer’s ability to apply the tax attribute expires unused. For example, if a net operating loss is reduced as a result of actions taken based on whistleblower information, the Whistleblower Office will periodically review the taxpayer account to determine whether future year tax payments are made that would not have been made if the NOL had not been reduced. Under the approach in the final regulations, awards will be paid on any such post-determination collected proceeds.
If the NOL carry-forward period expires before the reduced NOL results in a tax payment, no award will be payable.
The decision to monitor future year activities for an impact on the amount of collected proceeds will apply to all claims, not just claims involving NOLs. As a result, in some cases, the Whistleblower Office may defer action on an award claim. For example, whistleblower information may result in an IRS action to disallow a taxpayer’s treatment of the purchase of an asset as an expense in Year 1, because the asset should be capitalized and depreciated in accordance with the applicable depreciation schedule. As a result, taxable income in Year 1 is increased by the purchase price of the asset, less allowable Year 1 depreciation. Taxable income in future years would be reduced by the allowable depreciation for each year, until the asset is fully depreciated (or sold or otherwise disposed of). When this occurs, the Whistleblower Office will monitor the taxpayer’s account to determine whether future-year offsetting reductions in liability related to the Year 1 tax liability occur, and will reduce the amount of collected proceeds accordingly.
Sen. Chuck Grassley, R-Iowa, who authored the 2006 whistleblower improvements, said the IRS had taken some positive steps in the latest guidance, but he also expressed disappointment about other aspects. “Today’s guidance takes some positive steps, such as treating net operating losses so the whistleblower gets credit as increased taxes are paid going forward,” Grassley said in a statement Thursday. “However, the guidance is disappointing in some other key areas. I wanted to see a lot more definitive language on communication with whistleblowers. I’ve heard from the IRS that better communication is important but I’m not seeing much progress there so far. I’m also disappointed that the IRS continues to limit the categories of awards that are eligible. My intent in drafting the law was simple. If the whistleblower gives information that’s useful to the government and improves tax collection, the whistleblower should benefit. The more barriers in place, the less law-abiding taxpayers will benefit from the whistleblower function.”
Grassley pledged to continue to work with the IRS, the Government Accountability Office, and the Treasury Inspector General of Tax Administration, and in Congress, to keep making progress in getting the whistleblower office working at full capacity.