The Internal Revenue Service has finalized its regulations on paying rewards to whistleblowers for up to 30 percent of the proceeds collected for helping the IRS detect underpayments and violations of the tax laws.

TD 9580, “Rewards and Awards for Information Relating to Violations of Internal Revenue Laws; Final Regulations,” went live on the Federal Register website Tuesday, with a Feb. 22, 2012, publication date. The guidance clarifies the definition of proceeds of amounts collected and collected proceeds under Section 7623 of the Tax Code, and provides needed guidance to the general public as well as officers and employees of the IRS who review whistleblower claims.

The Tax Relief and Health Care Act of 2006 provides that in certain cases individuals shall receive an award of at least 15 percent, but not more than 30 percent, of the collected proceeds based on information brought by a whistleblower. The law also created the IRS Whistleblower Office, which is responsible for administering a whistleblower program within the IRS.

On Jan. 18, 2011, a notice of proposed rulemaking (REG-131151-10) was published in the Federal Register clarifying the definitions of proceeds of amounts collected and collected proceeds, and providing that provisions concerning refund prevention claims are applicable. The proposed regulations further provide that the reduction of an overpayment credit balance is also considered proceeds of amounts collected and collected proceeds under Section 7623. 

The IRS received 17 written comments and held a public hearing last May 11. After considering the comments and hearing testimony, the IRS said the regulation will be adopted as proposed. Other issues concerning the whistleblower statute, including terminology, additional definitions, and implementation of the statute, all of which were beyond the scope of these regulations, have been deferred and will be considered and addressed, if appropriate, in future guidance.

Several commenters recommended removal of “overpayment” as a modifier of credit balance.  The commenters suggested that the term only applied to individual taxpayers, and would discourage claimants from coming forward with information about corporate taxpayers. Further, the commenters stated that “overpayment” unnecessarily limits the definition of collected proceeds as credit balances may arise in circumstances other than an overpayment.

However, the IRS noted that the use of the term “overpayment credit balance” was intended to include amounts that have been credited to a taxpayer’s account and that would have been refunded to the taxpayer under Section 6402 but for the information provided by the whistleblower. These amounts represent monies credited to the taxpayer’s account that are available to pay any tax liability or certain other liabilities, or to be refunded to the taxpayer. 

Overpayment credit balances are distinguishable from other types of balances shown on a taxpayer’s account, such as a cash deposit under Section 6603. Both individual and corporate taxpayers may have overpayment credit balances. Accordingly, the final regulations retain the term “overpayment credit balance” as consistent with the payment and refund provisions of the Tax Code.

A number of commenters recommended that the definition of collected proceeds specifically include net operating losses. In contrast to overpayment credit balances, NOLs and similar tax attributes 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. Tax attributes such as NOLs are instead component elements of a taxpayer’s tax liability. If an NOL claimed by a taxpayer is disallowed as a result of information provided by a whistleblower, the IRS will factor that disallowance into the computation of the taxpayer’s liability, which may, in turn, result in collected proceeds. The final regulation’s definition of collected proceeds, therefore, does not refer explicitly to NOLs, tax credits, or any other tax attributes that may factor into the computation of a particular taxpayer’s liability.  

Several commenters suggested that collected proceeds should include criminal fines. Under the Victims of Crimes Act of 1984, criminal fines that are imposed on a defendant by a district court are deposited into the Crime Victims Fund. Criminal fines imposed for Title 26 offenses are not exempt from this requirement. The fines imposed in criminal tax cases that are deposited into the CVF are not available to pay awards under Section 7623. As criminal fines deposited in the CVF are not available to pay awards, the final regulations do not include criminal fines in the definition of collected proceeds. However, restitution ordered by a court to the IRS is collected as a tax by the IRS and, therefore, is encompassed in the definition of collected proceeds.

Several commenters suggested that whistleblowers should be rewarded for the prevention of future tax avoidance based on the whistleblower’s information.  Whether the IRS has the authority to make such an award under section 7623 and, if so, how the amount of the award would be determined and paid, is beyond the scope of this regulation. The final regulations do not address awards relating to the prevention of future tax avoidance.

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