[Federal Register Volume 77, Number 35 (Wednesday, February 22, 2012)]
[Rules and Regulations]
[Pages 10370-10371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3989]



[[Page 10370]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9580]
RIN 1545-BJ89


Rewards and Awards for Information Relating to Violations of 
Internal Revenue Laws

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
payment of rewards under section 7623(a) of the Internal Revenue Code 
for detecting underpayments or violations of the internal revenue laws 
and whistleblower awards under section 7623(b). The guidance is 
necessary to clarify the definition of proceeds of amounts collected 
and collected proceeds under section 7623. This regulation provides 
needed guidance to the general public as well as officers and employees 
of the IRS who review claims under section 7623.

DATES: Effective Date: This final regulation is effective on February 
22, 2012.
    Applicability Date: For dates of applicability, see Sec.  301.7623-
1(g).

FOR FURTHER INFORMATION CONTACT: Kirsten N. Witter, at (202) 927-0900 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 7623(a) provides the Secretary with the authority to pay 
such sums as he deems necessary from proceeds of amounts collected 
based on information provided to the Secretary when the information 
relates to the detection of underpayments of tax or the detection and 
bringing to trial and punishment persons guilty of violating the 
internal revenue laws or conniving at the same. Section 7623(b) 
provides the Secretary with the authority to pay awards to individuals 
if the Secretary proceeds with an administrative or judicial action 
described in section 7623(a) that results in collected proceeds based 
on information provided by the individuals. Section 301.7623-1(a) of 
the regulations on Procedure and Administration currently provides that 
proceeds of amounts (other than interest) collected by reason of the 
information provided include both amounts collected because of the 
information provided and amounts collected prior to receipt of the 
information if the information leads to the denial of a claim for 
refund that otherwise would have been paid. 63 FR 44777.
    Section 301.7623-1(a) was promulgated prior to amendments of 
section 7623 as part of the Tax Relief and Health Care Act of 2006, 
division A, section 406, Public Law 109-432, 120 Stat. 2958. The 
amendments designated existing section 7623 as section 7623(a). Before 
the 2006 amendments, section 7623 provided that rewards shall be paid 
``from the proceeds of amounts (other than interest) collected by 
reason of the information provided * * *.'' The 2006 Act struck the 
``other than interest'' language. The Act also added section 7623(b), 
which provides that in certain cases individuals shall receive an award 
of at least 15% but not more than 30% of the collected proceeds 
resulting from the action with which the Secretary proceeded based on 
information brought to the attention of the Secretary by the 
individual. The Act also created the IRS Whistleblower Office, which is 
responsible for administering a whistleblower program within the IRS.
    On January 18, 2011, a notice of proposed rulemaking (REG-131151-
10) was published in the Federal Register (76 FR 2852) clarifying the 
definitions of proceeds of amounts collected and collected proceeds for 
purposes of section 7623, and providing that the provisions of Treas. 
Reg. Sec.  301.7623-1(a) concerning refund prevention claims are 
applicable to claims under section 7623(a) and (b). 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.
    Seventeen written comments responding to the notice of proposed 
rulemaking were received. A public hearing was held on May 11, 2011. 
After consideration of the comments and hearing testimony, the 
regulation is 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.

Summary of Comments

    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.
    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 Code.
    A number of commenters recommended that the definition of collected 
proceeds specifically include net operating losses (NOLs). 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. Rather, tax attributes such as NOLs are 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. 
For example: A taxpayer reports an NOL of $10 million for 2009 and a 
whistleblower's information results in a reduction of the NOL to $5 
million. If the NOL is unused as of the date the IRS computes the 
amount of collected proceeds, there are no collected proceeds. If, 
however, the 2009 NOL was partially carried back to 2008, initially 
generating a $3 million refund, and the whistleblower's information 
reduced the carryback amount, resulting in a $1.5 million reduction in 
the refund for 2008, then the amount of the erroneous refund recovered 
and collected would be 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

[[Page 10371]]

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 (CVF). 42 U.S.C. 10601(b)(1). 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 the Secretary 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.

Special Analysis

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations, and, because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) of the Code, these regulations have been submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small businesses.

Drafting Information

    The principal author of this regulation is Kirsten N. Witter, 
Office of the Associate Chief Counsel (General Legal Services).

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 is amended by adding 
an entry in numerical order to read as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 301.7623-1 also issued under 26 U.S.C. 7623. * * *


0
Par. 2. Section 301.7623-1 is amended by revising the section heading, 
and paragraphs (a) and (g) to read as follows:


Sec.  301.7623-1  Rewards and awards for information relating to 
violations of internal revenue laws.

    (a) In general--(1) Rewards and awards. When information that has 
been provided to the Internal Revenue Service results in the detection 
of underpayments of tax or the detection and bringing to trial and 
punishment persons guilty of violating the internal revenue laws or 
conniving at the same, the IRS may approve a reward under section 
7623(a) in a suitable amount from the proceeds of amounts collected in 
cases when rewards are not otherwise provided by law, or shall 
determine an award under section 7623(b) from collected proceeds.
    (2) Proceeds of amounts collected and collected proceeds. For 
purposes of section 7623 and this section, both proceeds of amounts 
collected and collected proceeds 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.
* * * * *
    (g) Effective/applicability date. Paragraph (a) is effective on 
February 22, 2012. This section is applicable with respect to rewards 
paid after January 29, 1997, except the rules of paragraph (a) of this 
section apply with respect to rewards and awards paid after February 
22, 2012.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: February 14, 2012.
Emily S. McMahon,
(Acting) Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-3989 Filed 2-21-12; 8:45 am]
BILLING CODE 4830-01-P