Source: https://www.federalregister.gov/documents/2012/12/18/2012-30512/awards-for-information-relating-to-detecting-underpayments-of-tax-or-violations-of-the-internal
Timestamp: 2018-10-22 10:46:16
Document Index: 453437435

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A Proposed Rule by the Internal Revenue Service on 12/18/2012
74798-74814 (17 pages)
Administrative Proceedings for Awards Paid Under Section 7623(a)
Administrative Proceedings for Awards Paid Under Section 7623(b)
Administrative Proceedings for Denials of Awards Under Section 7623(b)
Information Disclosures in Whistleblower Administrative Proceedings
https://www.federalregister.gov/d/2012-30512 https://www.federalregister.gov/d/2012-30512
Send submissions to CC:PA:LPD:PR (REG-141066-09), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-141066-09), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC, or sent electronically, via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-141066-09).
Concerning the proposed regulation, Meghan M. Howard, at (202) 622-7950; concerning submissions of comments and requests for a public hearing, Oluwafunmilavaio Taylor, at (202) 622-7180 (not toll-free numbers).
Section 406 of the Tax Relief and Health Care Act of 2006, Public Law 109-432 (120 Stat. 2922), enacted on December 20, 2006, amended section 7623 of the Code on the payment of awards to certain persons who provide information to the Internal Revenue Service relating to the detection of underpayments of tax and violations of the internal revenue laws. Section 406 redesignated the existing statutory authority to pay awards at the discretion of the Secretary of the Treasury as section 7623(a), and it added a new provision regarding awards to certain individuals as section 7623(b). Generally, section 7623(b) provides that qualifying individuals will receive an award of at least 15 percent, but not more than 30 percent, of the collected proceeds resulting from the action with which the Secretary proceeded based on the information provided to the IRS by the individual. Section 406 also addressed several award program administrative issues and established a Whistleblower Office within the IRS, which operates at the direction of the Commissioner, analyzes information received under section 7623, as amended, and either investigates the information itself or assigns the investigation to the appropriate IRS office.
In Notice 2008-4, 2008-1 CB 253 (January 14, 2008) (see § 601.601(d)(2)(ii)(b) of this chapter), the IRS provided guidance on filing claims for award under section 7623, as amended. In the notice, the IRS recognized that the award program authorized by section 7623(a) had been previously implemented through regulations appearing at § 301.7623-1 of the Procedure and Administration Regulations. The Internal Revenue Manual (IRM) provided additional guidance to IRS officers and employees on the award program authorized by section 7623(a). The notice provided that the IRS would generally continue to follow section 301.7623-1 and the IRM provisions for claims for award within the scope of section 7623(a), subject to certain exceptions listed in the notice. The notice also provided, however, that the regulations would not apply to the new award program authorized under section 7623(b). Instead, the notice provided interim guidance applicable to claims for award submitted under section 7623(b).
On March 25, 2008, the Treasury Department (Treasury) and the IRS published Temp. Treas. Reg. § 301.6103(n)-2T, and corresponding proposed regulations, describing the circumstances and process in and by which officers and employees of the Treasury may disclose return information to whistleblowers (and their legal representatives, if any) in connection with written contracts for services relating to the detection of violations of the internal revenue laws or related statutes. Under these regulations, whistleblowers and legal representatives who receive return information are subject to the civil and criminal penalty provisions of sections 7431, 7213, and 7213A for the unauthorized inspection or disclosure of return information. The Treasury and the IRS finalized the proposed regulations on March 15, 2011 (TD 9516).
On January 18, 2011, Treasury and the IRS published proposed regulations (REG-131151-10) clarifying the definitions of the terms proceeds of amounts collected and collected proceeds for purposes of section 7623 and providing that the provisions of existing § 301.7623-1(a), concerning refund prevention claims, apply to claims under both section 7623(a) and section 7623(b). The proposed regulations further provided that the reduction of an overpayment credit balance constitutes proceeds of amounts collected and collected proceeds for purposes of section 7623. The Treasury and the IRS finalized the proposed regulations on February 22, 2012 (TD 9580).
The purpose of these regulations is to provide comprehensive guidance for the award program authorized under section 7623, as amended. Accordingly, these regulations provide guidance on issues relating to the award program from the filing of a claim to the payment of an award, focusing on three major elements of the program: (i) The submission of information and filing of claims for award; (ii) the whistleblower administrative proceedings applicable to claims for award under section 7623; and (iii) the computational determination and payment of awards. These proposed regulations also provide definitions of key terms under section 7623 and provide that the Director, officers, and employees of the Whistleblower Office are authorized to disclose return information to the extent necessary to conduct whistleblower administrative proceedings.
These proposed rules apply generally to claims for award under both section 7623(a) and section 7623(b), unless otherwise stated. Nonetheless, while the Whistleblower Office will, for example, conduct whistleblower administrative proceedings pursuant to the proposed rules of § 301.7623-3 for claims for award under both section 7623(a) and section 7623(b), the process applicable to claims under section 7623(a) differs from that applicable to claims under section 7623(b). The differences reflect the clear distinction the statute draws between awards under section 7623(a) and section 7623(b) and will avoid placing a heavy administrative burden on the IRS.
Section 301.7623-1 of these proposed rules provides guidance on submitting information to the IRS and filing claims for award with the Whistleblower Office. These rules are intended to clarify the process individuals should follow to be eligible to receive awards under section 7623. The proposed rules, in large part, track the rules that Treasury and the IRS have previously provided, as set forth in the existing regulations, Notice 2008-4, and the IRM. This includes, for example, the general information that individuals should submit to claim awards and the descriptions of the type of specific and credible information regarding taxpayers that should be submitted. Most notably, an individual submitting a claim should identify a person and describe and document the facts supporting the claimant's belief that the person owes taxes or violated the tax laws. The proposed rules clarify that the IRS will consider an individual who identifies a pass-through entity as having identified the taxpayers with direct or indirect interests in the entity. Furthermore, the proposed rules provide that if an individual identifies a member of a firm who promoted another identified person's participation in an identified transaction, then the IRS will consider the individual as having identified both the firm and all the other members of the firm. These clarifying provisions complement the proposed rules' definition of the term related action.
(1) The list of ineligible claimants provided in paragraph (b)(2) of § 301.7623-1 of these proposed regulations and whether other identifiable groups of individuals should be treated as ineligible to file claims for award.
(2) Whether electronic claim filing would be appropriate and beneficial to claimants, and, if so, what features should be included in an electronic claim filing system.
Section 301.7623-2 of these proposed regulations defines several key terms for purposes of determining awards under section 7623 and the proposed regulations. Two other key terms, planned and initiated and final determination of tax, are described and defined, respectively, in § 301.7623-4 of these proposed regulations. The definitions are intended to facilitate the IRS's administration of the award program in a manner that is consistent with the statutory language. As described below, several of the definitions, including the definition of the terms proceeds based on, related action, and collected proceeds, build on definitions contained in Notice 2008-4, TD 9580, and the IRM, while other definitions are new.
To enable the IRS to administer the award program, the proposed regulations' computational rule provides that, after there has been a final determination of tax, the IRS will compute the amount of collected proceeds taking into account all information known with respect to the taxpayer's account (including all tax attributes such as NOLs). 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, then 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 proposed regulations' 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 taxpayer's liability. Furthermore, the proposed regulations' computational rule does not attempt to assign a present value to these attributes, given that whether, when, or to what extent they may affect a taxpayer's liability or the amount of collected proceeds cannot be determined in advance of their actual use. Nor does the computational rule require the IRS to continue tracking these taxpayers, who may not be under examination, and attributes into future years, given the significant costs and heavy administrative burden that would be required.
These proposed regulations also provide that criminal fines that must be deposited into the Victims of Crime Fund do not constitute collected proceeds. Under the Victims of Crimes Act of 1984, criminal fines that are imposed on a defendant by a district court are deposited into the Victims of Crime Fund. See 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 Victims of Crime Fund are not available to the Secretary to pay awards under section 7623. These exclusions were previously explained in the preamble to TD 9580 and are further clarified in the text of these proposed regulations. Restitution ordered by a court to the IRS, however, is collected by the IRS as a tax and, therefore, is encompassed in the definition of collected proceeds.
Section 301.7623-2 of these proposed regulations also defines the terms action, administrative action, judicial action, amount in dispute, and gross income.
(2) Whether and how the IRS could determine any amount of collected proceeds that arise as a result of a taxpayer's use of tax attributes such as NOLs after the final determination of tax and the computation of collected proceeds, as provided in the proposed regulations.
Section 301.7623-3 of these proposed regulations describes the administrative proceedings applicable to claims for award under both section 7623(a) and section 7623(b). For purposes of applying these procedures, the IRS may rely on the claimant's description of the amount owed by the taxpayer(s). The IRS may, however, rely on other information as necessary (for example, when the alleged amount in dispute is below the $2 million threshold of section 7623(b)(5)(B), but the actual amount in dispute is above the threshold).
In cases under section 7623(a), these proposed regulations provide that the Whistleblower Office will send a preliminary award recommendation letter to the claimant. Sending this letter marks the beginning of the whistleblower administrative proceeding. The claimant will then have 30 days within which to provide comments to the Whistleblower Office. This approach is intended to provide claimants under section 7623(a) with an opportunity to participate in the award process, both to add transparency to the proceeding and to assist the Whistleblower Office in considering all potentially-relevant information in paying awards under section 7623(a), even though those awards are not subject to Tax Court review.
In cases in which the Whistleblower Office will determine an award under section 7623(b), the whistleblower administrative proceeding more closely resembles the whistleblower award determination administrative proceeding contained in the IRM, which only applies to awards determined under section 7623(b). In an effort to both streamline the process and provide information to whistleblowers as early as allowable under section 6103, however, the proposed regulations move the beginning of the proceeding forward. Under the proposed regulations, the whistleblower administrative proceeding begins when the Whistleblower Office sends out the preliminary award recommendation letter. Accordingly, whistleblowers may receive opportunities to participate in the award determination process at the administrative level even before there is a final determination of tax in the underlying taxpayer action. These opportunities will be provided in connection with all awards paid under section 7623(b), and they are in addition to opportunities a whistleblower may be afforded to assist the IRS in connection with the underlying taxpayer action, for example pursuant to §§ 301.6103(n)-2 and 301.7623-1(d) of the proposed regulations.
The Treasury and the IRS recognize that, while detailed administrative claim files assist the Whistleblower Office in making fair and accurate award determinations, steps should be taken to prevent potential redisclosure or misuse of the taxpayer's confidential return information contained in those files. Section 6103(h)(4) and § 301.6103(h)(4)-1 of the proposed regulations authorize the disclosures made by the Whistleblower Office in the course of the whistleblower administrative proceeding, but they provide neither redisclosure prohibitions nor penalties. Accordingly, the proposed regulations require claimants to execute confidentiality agreements before they may receive a detailed description of the factors that contributed to the preliminary award recommendation or view documents that support the recommendation. A claimant is not required to execute a confidentiality agreement before appealing an award determination to the Tax Court, and executing an agreement does not prevent a claimant from seeking Tax Court review. Moreover, a claimant's execution of a confidentiality agreement would not preclude the claimant from providing to Congress certain information about the preliminary award recommendation, but it would preclude the claimant from providing to Congress information disclosed to the claimant after the execution of the agreement and during the whistleblower administrative proceeding. Section 6103(f), however, provides a general framework for Congress to access taxpayer return information, and this general framework may also be used in connection with whistleblower award claims.
The proposed regulations provide that the Whistleblower Office, in determining the award percentage, may treat a claimant's violation of the terms of the confidentiality agreement as a negative factor and, thus, as a basis for reducing the amount of an award. Further, while the proposed regulations provide claimants with an opportunity to view information in the administrative claim file that is not protected from disclosure by one or more common law or statutory privileges, the proposed regulations provide rules intended to safeguard the disclosure of information to a claimant (for example, supervised document review and no photocopying of documents).
Finally, the proposed regulations provide that in cases in which the Whistleblower Office will reject a claim under section 7623(b), pursuant to § 301.7623-1(b) or (c), or will deny a claim under section 7623(b), either because the IRS did not proceed with an action based on the information provided or because the IRS did not collect proceeds, the Whistleblower Office will send a preliminary denial letter to the claimant. Sending this letter marks the beginning of the whistleblower administrative proceeding. This notice will be provided as promptly as possible under the particular circumstances of a given case. The claimant will then have 30 days within which to provide comments to the Whistleblower Office. Again, this approach is intended to foster a transparent and accurate review process. Given the large administrative burden involved, however, the proposed regulations do not provide preliminary notice and comment procedures applicable to denials of claims for award under section 7623(a).
(3) Whether starting a whistleblower administrative proceeding before a final determination of tax in the underlying taxpayer action provides a meaningful benefit for whistleblowers.
Section 301.7623-4 of these proposed regulations provides the framework and criteria that the Whistleblower Office will use in exercising the discretion granted under section 7623 to make awards. The proposed regulations are consistent with, and build on, the award determination provisions provided in the IRM. The rules of this section are proposed to apply to claims for awards under both section 7623(a) and section 7623(b).
Generally, the proposed regulations adopt a fixed percentage approach pursuant to which the Whistleblower Office will assign claims for award to one of a number of fixed percentages within the applicable award percentage range. The fixed percentage approach provides a structure that will promote consistency in the award determination process by enabling the Whistleblower Office to determine awards across the breadth of the applicable percentage range based on meaningful distinctions among cases. In general, the Whistleblower Office will determine awards at the uppermost end of the applicable percentage range, for example, 30 percent of collected proceeds under section 7623(b)(1), only in extraordinary cases. The fixed percentage approach avoids having to draw fine distinctions that might seem unfair and arbitrary, given the differences among claims for award with respect to both the facts and law of the underlying actions and the nature and extent of the substantial contribution of the claimants.
Under these proposed regulations, the Whistleblower Office generally will assign the fixed percentages to claims for award by evaluating the substantial contribution of the claimant to the underlying action(s) based on the Whistleblower Office's review of the entire administrative claim file and the application of the positive factors and negative factors, listed in § 301.7623-4(b), to the facts. After the application of the positive and negative factors has been completed, the Whistleblower Office will review the planning and initiating factors, if applicable. The purpose of this criteria-based approach is to also promote consistency in the award determination process. In addition, this approach is intended to provide transparency in the process, and the publication of the criteria should provide helpful guidance to claimants when submitting their claims and in understanding the basis for award determinations. For claims involving multiple actions (regardless of the number of taxpayers involved), the proposed regulations enable the Whistleblower Office to determine and apply separate award percentages on an action-by-action basis in appropriate cases. The Treasury and the IRS recognize that a multiple-action determination may result in a lengthier award process, but it may be necessary in some cases.
If the Whistleblower Office determines that a claimant meets the threshold for planning and initiating, the Whistleblower Office will then categorize and evaluate the extent of the claimant's planning and initiating of the underlying acts, based on the application of factors listed in § 301.7623-4(c)(3)(iv) to the facts contained in the administrative claim file, to determine the amount of the appropriate reduction, if any. The proposed regulations' use of the categories primary, significant, and moderate, like the use of the fixed percentage and criteria approach for determining awards in substantial contribution and less substantial contribution cases, is intended to promote consistency, fairness, and transparency in an award determination process that is inherently subjective.
(5) The application of the eligible affiliated claimant rule.
Section 6103(h)(4) authorizes the disclosure of returns and return information in administrative or judicial proceedings pertaining to tax administration in certain circumstances. This rule provides the authority to disclose return information for purposes of a whistleblower administrative proceeding under section 7623. Section 301.6103(h)(4)-1 of these proposed regulations specifically authorizes the Director, officers, and employees of the Whistleblower Office to disclose return information to the extent necessary to conduct whistleblower administrative proceedings. To minimize the potentially adverse consequences of the disclosure, and possible redisclosure, of return information, these proposed regulations provide that the Whistleblower Office will use confidentiality agreements in section 7623(b) whistleblower award determination administrative proceedings, as well as other safeguards, to minimize possible redisclosures of return information while still providing meaningful opportunities for claimants to participate in whistleblower administrative proceedings.
Comments are specifically requested on whether the proposed regulations strike an appropriate balance between minimizing possible redisclosures of confidential return information and providing meaningful opportunities for claimants to participate in the administrative processing of their claims.
When finalized, §§ 301.7623-1, 301.7623-2, 301.7623-3, and 301.6103(h)(4)-1 are proposed to apply to information submitted on or after the date these rules are adopted as final regulations in the Federal Register, and to claims for award under sections 7623(a) and 7623(b) that are open as of that date. Likewise, § 301.7623-4 is proposed to apply to information submitted on or after that date, and to claims for award under section 7623(b) that are open as of that date. Section 301.7623-4 is not proposed to apply to claims for award under section 7623(a) that are open as of that date. This exception is intended to allow the IRS to continue to apply consistent rules to open claims for award under the discretionary award program of section 7623(a).
Comments are specifically requested on whether the proposed effective dates are appropriate.
It has been determined that these proposed rules are 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 has also 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 their impact on small businesses.
Before these proposed regulations are adopted as final regulations, consideration will be given to any electronic or written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. The Treasury and the IRS request comments on all aspects of the proposed regulations. All comments that are submitted by the public will be available for public inspection and copying at www.regulations.gov or upon request. A public hearing may be scheduled if requested in writing by a person who timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place of the hearing will be published in the Federal Register.
The principal authors of these regulations are Meghan M. Howard and Robert T. Wearing of the Office of the Associate Chief Counsel (Procedure and Administration).
Par. 2. Section 301.6103(h)(4)-1 is added to read as follows:
§ 301.6103(h)(4)-1
(a) In general. A whistleblower administrative proceeding (as described in § 301.7623-3) is an administrative proceeding pertaining to tax administration within the meaning of section 6103(h)(4).
(b) Disclosures in whistleblower administrative proceedings. Pursuant to section 6103(h)(4) and paragraph (a) of this section, the Director, officers, and employees of the Whistleblower Office may disclose returns and return information (as defined by section 6103(b)) to an individual (or the individual's legal representative, if any) to the extent necessary to conduct a whistleblower administrative proceeding (as described in § 301.7623-3), including but not limited to—
(c) Effective/applicability date. Section 301.6103(h)(4)-1 will be effective on the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. When finalized, this section is proposed to apply with respect to whistleblower administrative proceedings beginning on or after the date of publication of the Treasury Decision adopting these rules as final regulations in the Federal Register.
Par. 3. Section 301.7623-1 is revised to read as follows:
(a) In general. In cases in which awards are not otherwise provided for by law, the IRS's Whistleblower Office may pay an award under section 7623(a), in a suitable amount, for information necessary for detecting underpayments of tax or detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same. In cases that satisfy the requirements of section 7623(b)(5) and (b)(6) and in which the Internal Revenue Service (IRS) proceeds with an administrative or judicial action based on information provided by an individual, the Whistleblower Office must determine an award under section 7623(b)(1), (2), or (3). The awards provided for by section 7623 and this paragraph must be paid from collected proceeds, as defined in § 301.7623-2(d).
(b) Eligibility to file claim for award—(1) In general. Any individual, other than an individual described in paragraph (b)(2) of this section, is eligible to file a claim for award and to receive an award under section 7623 and §§ 301.7623-1 through 301.7623-4.
(2) Ineligible claimants. The Whistleblower Office will reject any claim for award filed by an ineligible claimant and will provide written notice of the rejection to the claimant. The following individuals are not eligible to file a claim for award or receive an award under section 7623 and §§ 301.7623-1 through 301.7623-4:
(3) Ineligible affiliated claimants. If the Whistleblower Office determines that an affiliated claimant, as defined in § 301.7623-2(f), filed a claim for award based on information obtained from an ineligible individual for the purpose of avoiding the rejection of the claim that would result if the claim was filed by the ineligible individual, then the Whistleblower Office may treat the claim as if it had been filed by the ineligible individual. See § 301.7623-4(c)(4) for rules regarding eligible affiliated claimants.
(c) Submission of information and claims for award—(1) Submitting information. To be eligible to receive an award under section 7623 and §§ 301.7623-1 through 301.7623-4, an individual must submit to the IRS specific and credible information that the individual believes will lead to collected proceeds from persons whom the individual believes have failed to comply with the internal revenue laws. In general, an individual's submission should identify the person(s) believed to have failed to comply with the internal revenue laws and should provide substantive information, including all available documentation, that supports the individual's allegations. Information that identifies a pass-through entity will be considered to also identify all persons with a direct or indirect interest in the entity. Information that identifies a member of a firm who promoted another identified person's participation in a transaction described and documented in the information provided will be considered to also identify the firm and all other members of the firm. Submissions that provide speculative information or that do not provide specific and credible information regarding tax underpayments or violations of internal revenue laws do not provide a basis for an award. If documents or supporting evidence are known to the individual but are not in the individual's control, then the individual should describe the documents or supporting evidence and identify their location to the best of the individual's ability. If all available information known to the individual is not provided to the IRS by the individual, then the individual bears the risk that this information might not be considered by the Whistleblower Office for purposes of an award.
(2) Filing claim for award. To claim an award under section 7623 and §§ 301.7623-1 through 301.7623-4 for information provided to the IRS, an individual must file a formal claim for award by completing and sending Form 211, “Application for Award for Original Information,” to the Internal Revenue Service, Whistleblower Office, at the address provided on the form, or by complying with other claim filing procedures as may be prescribed by the IRS in other published guidance. The Form 211 should be completed in its entirety and should include the following information:
(3) Under penalty of perjury. No award may be made under section 7623(b) unless the information on which the award is based is submitted to the IRS under penalty of perjury. All claims for award under section 7623 and §§ 301.7623-1 through 301.7623-4 must be accompanied by an original signed declaration under penalty of perjury, as follows: “I declare under penalty of perjury that I have examined this application, my accompanying statement, and supporting documentation and aver that such application is true, correct, and complete, to the best of my knowledge.” This requirement precludes the filing of a claim for award by a person serving as a representative of, or in any way on behalf of, another individual. Claims filed by more than one individual (joint claims) must be signed by each individual claimant under penalty of perjury.
(d) Request for assistance—(1) In general. The Whistleblower Office, the IRS or IRS Office of Chief Counsel may request the assistance of an individual claimant or the individual claimant's legal representative. Any assistance shall be at the direction and control of the Whistleblower Office, the IRS, or the IRS Office of Chief Counsel assigned to the matter. See § 301.6103(n)-2 for rules regarding written contracts among the IRS, whistleblowers, and legal representatives of whistleblowers.
(2) No agency relationship. Submitting information, filing a claim for award, or responding to a request for assistance does not create an agency relationship between a claimant and the Federal government, nor does a claimant or the claimant's legal representative act in any way on behalf of the Federal government.
(f) Effective/applicability date. When finalized, § 301.7623-1 is proposed to apply to information submitted on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register and to claims for award under sections 7623(a) and 7623(b) that are open as of the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.
Par. 4. Section 301.7623-2 is added to read as follows:
(a) Action—(1) In general. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the term action means an administrative or judicial action.
(2) Administrative action. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the term administrative action means all or a portion of an IRS civil or criminal proceeding against any person that may result in collected proceeds, as defined in paragraph (d) of this section, including, for example, an examination, a collection proceeding, a status determination proceeding, or a criminal investigation.
(3) Judicial action. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the term judicial action means all or a portion of a proceeding against any person in any court that may result in collected proceeds, as defined in paragraph (d) of this section.
(b) Proceeds based on—(1) In general. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the Internal Revenue (IRS) proceeds based on information provided by an individual only when the IRS:
(2) Example. The provisions of paragraph (b)(1) of this section may be illustrated by the following example:
Information provided to the IRS by an individual, under section 7623 and § 301.7623-1, identifies a taxpayer, describes and documents specific facts relating to the taxpayer's foreign sales in Country A, and, based on those facts, alleges that the taxpayer was not entitled to a foreign tax credit relating to its foreign sales in Country A. The IRS receives the information after having already initiated an examination of the taxpayer. The IRS's audit plan does not include consideration of the amount of the foreign tax credit relating to the taxpayer's foreign sales in Country A but, based on the information provided, the IRS expands the examination to include the foreign tax credit issue. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the portion of the IRS's examination of the taxpayer relating to the foreign tax credit issue is an administrative action with which the IRS proceeds based on the information provided by the individual. If the examination of the taxpayer included the foreign tax credit issue before the individual provided the information, then no portion of the IRS's examination of the taxpayer is an administrative action with which the IRS proceeds based on the information provided, unless the IRS would not have continued to pursue the examination but for the information provided.
(c) Related action—(1) In general. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the term related action is limited to:
Information provided to the IRS by an individual, under section 7623 and § 301.7623-1, identifies a taxpayer, describes and documents specific facts relating to the taxpayer's activities, and, based on those facts, alleges that the taxpayer owed additional taxes in Year 1. The IRS proceeds with an examination of the taxpayer for Year 1 based on the information provided by the individual. The IRS discovers that the taxpayer engaged in the same activities in Year 2 and expands the examination to Year 2. In the course of the examination, the IRS obtains, through the issuance of IDRs and summonses, additional facts that are unrelated to the activities described in the information provided by the individual. Based on these additional facts, the IRS expands the scope of the examination of the taxpayer for both Year 1 and Year 2. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the portion of the IRS's examination of the taxpayer in Year 2 relating to the activities described and documented in the information provided (with respect to Year 1) is a related action because it satisfies the conditions of paragraph (c)(1)(i) of this section. The portions of the IRS's examination of the taxpayer in both Year 1 and Year 2 relating to the additional facts obtained through the issuance of IDRs and summonses are not related actions (nor are they administrative actions based on the information provided).
Information provided to the IRS by an individual, under section 7623 and § 301.7623-1, identifies a taxpayer (Taxpayer 1), describes and documents specific facts relating to Taxpayer 1's activities, and, based on those facts, alleges tax underpayments by Taxpayer 1. The information provided also identifies an accountant (CPA 1) and describes and documents specific facts relating to CPA 1's contribution to the activities of Taxpayer 1 that the individual alleges resulted in tax underpayments. The IRS proceeds with an examination of Taxpayer 1 based on the information provided by the individual. Using only the information provided, the IRS obtains CPA 1's client list and identifies two taxpayer/clients of CPA 1 (Taxpayer 2 and Taxpayer 3) that appear to have engaged in activities similar to Taxpayer 1. The IRS proceeds with an examination of Taxpayer 2 and finds that Taxpayer 2 engaged in the same activities as those described in the information provided with respect to Taxpayer 1. The IRS proceeds with an examination of Taxpayer 3 and finds that Taxpayer 3 engaged in different activities from those described in the information provided with respect to Taxpayer 1. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the examination of Taxpayer 2 is a related action because it satisfies the conditions of paragraph (c)(1)(ii) of this section. The examination of Taxpayer 3 is not a related action because the relevant facts are not substantially the same as the facts relevant to the examination of Taxpayer 1.
Same facts as Example 2. Using only the information provided, the IRS identifies a co-promoter of CPA 1 (CPA 2) that appears to have engaged in activities similar to CPA 1. CPA 2 is not a member of CPA 1's firm. The IRS subsequently obtains the client list of CPA 2 and identifies a taxpayer/client of CPA 2 (Taxpayer 4) that appears to have engaged in activities similar to Taxpayer 1. The IRS proceeds with an examination of Taxpayer 4 and finds that Taxpayer 4 engaged in the same activities as those described in the information provided with respect to Taxpayer 1, and that CPA 2 contributed to the activities in the same way as described in the information provided with respect to CPA 1. The IRS proceeds with an examination of CPA 2's liability for promoter penalties under section 6700 in connection with the activities described in the information provided with respect to Taxpayer 1 and CPA 1. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the examination of CPA 2 is a related action because it satisfies the conditions of paragraph (c)(1)(ii) of this section. The examination of Taxpayer 4 is not a related action because Taxpayer 4 was not related to a person identified in the information provided. CPA 2 was not identified in the information provided and the IRS first had to identify CPA 2 before identifying Taxpayer 4 and proceeding with the examination of Taxpayer 4.
Same facts as Example 2. An accountant (CPA 3) is a member of CPA 1's firm. Using only the information provided, the IRS obtains the client list of CPA 3 and identifies a taxpayer/client of CPA 3 (Taxpayer 5) that appears to have engaged in activities similar to Taxpayer 1. The IRS proceeds with an examination of Taxpayer 5 and finds that Taxpayer 5 engaged in the same activities as those described in the information provided with respect to Taxpayer 1, and that CPA 3 contributed to the activities in the same way as described in the information provided with respect to CPA 1. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the examination of Taxpayer 5 is a related action because Taxpayer 5 is related to CPA 3, a person considered to be identified in the information provided under § 301.7623-1(c)(1), and the facts relating to Taxpayer 5 are substantially the same as the facts described and documented in the information provided. An IRS examination of CPA 3's liability for promoter penalties under section 6700, based on the facts described and documented in the information provided with respect to Taxpayer 1 and CPA 1, is an administrative action based on the information provided.
Information provided to the IRS by an individual, under section 7623 and § 301.7623-1, identifies a taxpayer (Taxpayer 1), describes and documents specific facts relating to Taxpayer 1's activities, and, in particular, Taxpayer 1's participation in a transaction. Based on those facts, the individual alleges that Taxpayer 1 owed additional taxes. The IRS proceeds with an examination of Taxpayer 1 based on the information provided by the individual. The IRS identifies the other parties to the transaction described in the information provided (Taxpayer 2 and Taxpayer 3). The IRS proceeds with examinations of Taxpayer 2 and Taxpayer 3 relating to their participation in the transaction described in the information provided. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the IRS's examinations of Taxpayer 2 and Taxpayer 3 relating to the activities described and documented in the information provided are related actions because they satisfy the conditions of paragraph (c)(1)(ii) of this section.
(d) Collected proceeds—(1) In general. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the terms proceeds of amounts collected and collected proceeds (collectively, collected proceeds) include: tax, penalties, interest, additions to tax, and additional amounts collected because 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. Collected proceeds are limited to amounts collected under the provisions of title 26, United States Code.
Information provided to the IRS by an individual, under section 7623 and § 301.7623-1, identifies a corporate taxpayer (Corporation), describes and documents specific facts relating to Corporation's activities, and, based on those facts, alleges that Corporation owed additional taxes. Based on the information provided by the individual, the IRS proceeds with an examination of Corporation and determines adjustments that would result in an unpaid tax liability of $500,000. During the examination, Corporation informally claims a refund of $400,000 based on adjustments to items of income and expense that are wholly unrelated to the information provided by the individual. The IRS agrees to the unrelated adjustments. The IRS nets the adjustments and determines a tax deficiency of $100,000. Thereafter, Corporation makes full payment of the $100,000 deficiency. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the collected proceeds include the $400,000 informally claimed as a refund and netted against the adjustments attributable to the information provided, as well as the $100,000 paid by Corporation.
(4) Computation of collected proceeds—(i) In general. The Whistleblower Office will monitor each case for collection of proceeds. Pursuant to § 301.7623-4(d)(1), the IRS cannot make an award payment until there has been a final determination of tax. For purposes of determining the amount of an award under section 7623 and §§ 301.7623-1 through 301.7623-4, after there has been a final determination of tax as defined in § 301.7623-4(d)(2), the IRS will compute the amount of collected proceeds based on all information known with respect to the taxpayer's account, including with respect to all tax attributes, as of the date the computation is made.
(2) Amount in dispute—(i) In general. For purposes of section 7623(b)(5) and §§ 301.7623-1 through 301.7623-4, the term amount in dispute means the maximum total of tax, penalties, interest, additions to tax, and additional amounts that could have resulted from the action(s) with which the IRS proceeded based on the information provided, if the formal positions taken by the IRS had been sustained. The IRS will compute the amount in dispute, for purposes of award determinations described in § 301.7623-3(c)(6), when there has been a final determination of tax as defined in § 301.7623-4(d)(2).
(ii) Example. The provisions of paragraph (e)(2)(i) of this section may be illustrated by the following example:
Information provided to the IRS by an individual, under section 7623 and § 301.7623-1, identifies a corporate taxpayer, describes and documents specific facts relating to the taxpayer's activities, and, based on those facts, alleges that the taxpayer owed additional taxes. The IRS proceeds with an examination of the taxpayer based on the information provided by the individual; makes adjustments to items of income and expense and allows certain credits; and, ultimately, determines a deficiency against the taxpayer of $2,100,000 and issues the taxpayer a statutory notice of deficiency. The taxpayer petitions the notice to the United States Tax Court. The Tax Court sustains the IRS's position, in part, resulting in a deficiency of $1,500,000. The IRS also computes, however, that the total of tax, penalties, interest, additions to tax, and additional amounts that could have resulted from the action, if the court had sustained the IRS's position, in full, was $2,500,000. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the amount in dispute is $2,500,000.
(3) Gross income. For purposes of section 7623(b)(5) and §§ 301.7623-1 through 301.7623-4, the term gross income has the same meaning as provided under section 61(a). The IRS will compute the individual taxpayer's gross income, for purposes of award determinations described in § 301.7623-3(c)(6), when there has been a final determination of tax as defined in § 301.7623-4(d)(2).
(f) Affiliated claimant. For purposes of §§ 301.7623-1 through 301.7623-4, the term affiliated claimant means an individual that files a claim for award on behalf of another individual. See § 301.7623-1(b)(3) for rules regarding ineligible affiliated claimants and § 301.7623-4(c)(4) for rules regarding eligible affiliated claimants.
(g) Effective/applicability date. When finalized, § 301.7623-2 is proposed to apply to information submitted on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register and to claims for award under sections 7623(a) and 7623(b) that are open as of the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.
Par. 5. Section 301.7623-3 is added to read as follows:
(a) In general. The Whistleblower Office will pay awards under section 7623(a) and determine awards to individuals under section 7623(b) in whistleblower administrative proceedings pursuant to the rules of this section. The whistleblower administrative proceedings described in this section are administrative proceedings pertaining to tax administration for purposes of section 6103(h)(4). See § 301.6103(h)(4)-1 for additional rules regarding disclosures of return information in whistleblower administrative proceedings. The Whistleblower Office may determine awards for claims involving multiple actions in a single whistleblower administrative proceeding. For purposes of applying the rules of this section, the Internal Revenue Service (IRS) may, however, rely on other information as necessary (for example, when the alleged amount in dispute is below the $2 million threshold of section 7623(b)(5)(B), but the actual amount in dispute is above the threshold).
(b) Awards under section 7623(a)—(1) Preliminary award recommendation. In cases in which the Whistleblower Office recommends payment of an award under section 7623(a), the Whistleblower Office will communicate a preliminary award recommendation under section 7623(a) and §§ 301.7623-1 through 301.7623-4 to the claimant by sending a preliminary award recommendation letter that states the Whistleblower Office's preliminary computation of the amount of collected proceeds, recommended award percentage, recommended award amount (even in cases when the application of section 7623(b)(2) or section 7623(b)(3) results in a reduction of the recommended award amount to zero), and a list of the factors that contributed to the recommended award percentage. The whistleblower administrative proceeding described in paragraphs (b)(1) and (2) of this section begins on the date the Whistleblower Office sends the preliminary award recommendation letter. If the claimant believes that the Whistleblower Office erred in evaluating the information provided, the claimant has 30 days from the date the Whistleblower Office sends the preliminary award recommendation to submit comments to the Whistleblower Office. The Whistleblower Office will review all comments submitted timely by the claimant (or the claimant's legal representative, if any) and pay an award, pursuant to paragraph (b)(2) of this section.
(2) Decision letter. At the conclusion of the process described in paragraph (b)(1) of this section, and when there is a final determination of tax, as defined in § 301.7623-4(d)(2), the Whistleblower Office will pay an award under section 7623(a) and §§ 301.7623-1 through 301.7623-4. The Whistleblower Office will communicate the amount of the award to the claimant in a decision letter.
(3) Denials. If the Whistleblower Office rejects a claim for award under section 7623(a), pursuant to § 301.7623-1(b) or (c), or if the IRS either did not proceed with an action, as defined in § 301.7623-2(b), or did not collect proceeds, as defined in § 301.7623-2(d), then the Whistleblower Office will not apply the rules of paragraphs (b)(1) or (2) of this section. The Whistleblower Office will provide written notice to the claimant of the denial of any award.
(c) Awards under section 7623(b)—(1) Preliminary award recommendation. The Whistleblower Office will prepare a preliminary award recommendation based on the Whistleblower Office's review of the administrative claim file and the application of the rules of section 7623 and §§ 301.7623-1 through 301.7623-4 to the facts of the case. See paragraph (e)(2) of this section for a description of the administrative claim file.
(iv) A confidentiality agreement. The whistleblower administrative proceeding described in paragraphs (c)(1) through (6) of this section begins on the date the Whistleblower Office sends the preliminary award recommendation letter. The preliminary award recommendation is not a determination letter within the meaning of paragraph (c)(6) of this section and cannot be appealed to Tax Court under section 7623(b)(4) and paragraph (d) of this section. The preliminary award recommendation will notify the individual that the IRS cannot determine or pay any award until there is a final determination of tax, as defined in § 301.7623-4(d)(2).
(C) An award consent form. The detailed report is not a determination letter within the meaning of paragraph (c)(6) of this section and cannot be appealed to Tax Court under section 7623(b)(4) and paragraph (d) of this section. The detailed report will notify the individual that the IRS cannot determine or pay any award until there is a final determination of tax, as defined in § 301.7623-4(d)(2).
(6) Determination letter. After the individual's participation in the whistleblower administrative proceeding, pursuant to paragraph (c) of this section, has concluded, and there is a final determination of tax, as defined in § 301.7623-4(d)(2), a Whistleblower Office official will determine the amount of the award under section 7623(b)(1), (2), or (3), and §§ 301.7623-1 through 301.7623-4, based on the official's review of the administrative claim file. The Whistleblower Office will communicate the award to the individual in a determination letter, stating the amount of the award. If, however, the individual has executed an award consent form agreeing to the amount of the award and waiving the individual's right to appeal the award determination, pursuant to section 7623(b)(4) and paragraph (d) of this section, then the Whistleblower Office will not send the individual a determination letter and will make payment of the award as promptly as circumstances permit.
(7) Denials. If the Whistleblower Office rejects a claim for award under section 7623(b), pursuant to § 301.7623-1(b) or (c), or if, with respect to a claim for award under section 7623(b), the IRS either did not proceed with an action, as defined in § 301.7623-2(b), or did not collect proceeds, as defined in § 301.7623-2(d), then the Whistleblower Office will not apply the rules of paragraphs (c)(1) through (6) of this section. The Whistleblower Office will send to the claimant a preliminary denial letter that states the basis for the denial of the claim. The whistleblower administrative proceeding described in this paragraph begins on the date the Whistleblower Office sends the preliminary denial letter. If the claimant believes that the Whistleblower Office erred in evaluating the information provided, the claimant has 30 days from the date the Whistleblower Office sends the preliminary denial letter to submit comments to the Whistleblower Office. The Whistleblower Office will review all comments submitted timely by the claimant and, following that review, the Whistleblower Office will either provide written notice to the claimant of the denial of any award or apply the rules of paragraphs (c)(1) through (c)(6) of this section.
(f) Effective/applicability date. When finalized, § 301.7623-3 is proposed to apply to information submitted on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register and to claims for award under sections 7623(a) and 7623(b) that are open as of the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.
Par. 5. Section 301.7623-4 is added to read as follows:
(a) In general. The Whistleblower Office will pay all awards under section 7623(a) and determine all awards under section 7623(b). For all awards under section 7623 and §§ 301.7623-1 through 301.7623-4, the Whistleblower Office will—
(vi) The individual (or the individual's legal representative, if any) violated the terms of the confidentiality agreement described in § 301.7623-3(b)(2).
(vii) The individual (or the individual's legal representative, if any) violated the terms of a contract entered into with the IRS pursuant to § 301.6103(n)-2.
(viii) The individual provided false or misleading information or otherwise violated the requirements of section 7623(b)(6)(C) or § 301.7623-1(c)(3).
(iii) Example. The operation of the provisions of paragraph (c)(1)(ii) of this section may be illustrated by the following example. The example is intended to illustrate the operation of the computational framework. It is not intended to provide a standard against which the substantial contribution of an individual submitting a claim for award may be compared. The example provides a simplified description of the facts relating to the claim for award, the information provided, and the facts relating to the underlying tax case(s). The application of section 7623(b)(1) and paragraph (c)(1)(ii) of this section will depend on the specific facts of each case.
Individual A, an employee in Corporation's sales department, submitted to the IRS a claim for award under section 7623 and information indicating that Corporation improperly claimed a credit in tax year 2006. Individual A's information consisted of numerous non-privileged documents relevant to Corporation's eligibility for the credit. Individual A's original submission also included an analysis of the documents, as well as information about meetings in which the claim for credit was discussed. When interviewed by the IRS, Individual A clarified ambiguities in the original submission, answered questions about Corporation's business and accounting practices, and identified potential sources to corroborate the information. Some of the documents provided by Individual A were not included in Corporation's general record-keeping system and their existence may not have been easily uncovered through normal IRS examination procedures. Corporation initially denied the facts revealed in the information provided by Individual A, which were essential to establishing the impropriety of the claim for credit. IRS examination of Corporation's return confirmed that the credit was improperly claimed by Corporation in tax year 2006, as alleged by Individual A. Corporation agreed to the ensuing assessments of tax and interest and paid the liabilities in full. In this case, Individual A provided specific and credible information that formed the basis for action by the IRS. Individual A provided information that was difficult to detect, provided useful assistance to the IRS, and helped the IRS sustain the assessment. Based on the presence and significance of these positive factors, viewed against all the specific facts relevant to Corporation's 2006 tax year, the Whistleblower Office could increase the award percentage to 22 percent of collected proceeds. If Individual A violated instructions provided by the IRS and the violation caused the IRS to expend additional resources, then the Whistleblower Office could, based on this negative factor, reduce the award percentage to 18 percent or 15 percent (but not to lower than 15 percent of collected proceeds).
(ii) Computational framework. The Whistleblower Office will analyze the administrative claim file to determine whether any of the information provided by the individual contained public source information and, if it did, whether the action described in paragraph (c)(1) of this section was based principally on the public source information. The Whistleblower Office will make this determination based on the extent to which the public source information described a tax violation or facts and circumstances from which a tax violation reasonably may be inferred. If the Whistleblower Office determines that the action was based principally on public source information, then, starting at 1 percent, the Whistleblower Office will analyze the administrative claim file using the factors listed in paragraph (b)(1) of this section to determine whether the individual merits an increased award percentage of 4 percent, 7 percent, or 10 percent. The Whistleblower Office will then determine whether the individual merits a decreased award percentage of zero, 1 percent, 4 percent, or 7 percent using the factors listed in paragraph (b)(2). The Whistleblower Office may increase the award percentage based on the presence and significance of positive factors and may decrease the award percentage based on the presence and significance of negative factors. Like the analysis described in paragraph (c)(1)(ii) of this section, the Whistleblower Office's analysis cannot be reduced to a mathematical equation. The factors are not exclusive and are not weighted and, in a particular case, one factor may override several others. The presence and significance of negative factors may offset the presence and significance of positive factors or result in a zero award, but the absence of negative factors does not mean that an award percentage will be greater than 1 percent.
(iii) Example. The operation of the provisions of paragraph (c)(2)(ii) of this section may be illustrated by the following example. The example is intended to illustrate the operation of the computational framework. It is not intended to provide a standard against which the substantial contribution of an individual submitting a claim for award may be compared. The example provides a simplified description of the facts relating to the claim for award, the information provided, and the facts relating to the underlying tax case(s). The application of section 7623(b)(2) and paragraph (c)(2)(ii) of this section will depend on the specific facts of each case.
Individual A submitted to the IRS a claim for award under section 7623 and information indicating that Taxpayer B was the defendant in a criminal prosecution for embezzlement. Individual A's information further indicated that evidence presented at Taxpayer B's trial revealed Taxpayer B's efforts to conceal the embezzled funds by depositing them in bank accounts of entities controlled by Taxpayer B. In this case, Individual A's information is based principally on disclosures of specific allegations resulting from a judicial hearing. Absent information demonstrating that the investigation leading to the embezzlement charge was based on information provided by Individual A, section 7623(b)(2) and paragraph (c)(2) of this section applies to the determination of Individual A's award. In this case, there is no reason for the Whistleblower Office to increase the applicable award percentage above 1 percent, the starting point for its analysis, given the absence of positive factors. Accordingly, Individual A may receive an award of 1 percent of collected proceeds.
(v) Examples. The operation of the provisions of paragraphs (c)(3)(ii) and (iii) of this section may be illustrated by the following examples. These examples are intended to illustrate the operation of the computational framework. They are not intended to provide standards against which the planning and initiating of an individual submitting a claim for award may be compared. The examples provide simplified descriptions of the facts relating to the claim for award, the information provided, and the facts relating to the underlying tax case. The application of section 7623(b)(3) and paragraph (c)(3) of this section will depend on the specific facts of each case.
Individual A is employed in the finance department of a corporation (Corporation 1) and is responsible for performing research and drafting activities for, and at the direction of, Supervisor B. Individual A performed research on financial products for Supervisor B that Supervisor B used in advising Corporation 1 on a financial strategy. After Corporation 1 executed the strategy, Individual A submitted a claim for award under section 7623 along with information about the strategy to the IRS. The IRS initiated an examination of Corporation 1 based on Individual A's information, determined deficiencies in tax and penalties, and ultimately assessed and collected the tax and penalties as determined. Individual A did nothing to design or set into motion Corporation 1's activities. Individual A did not know or have reason to know that there were tax implications to the research activities. Accordingly, as a threshold matter, Individual A was not a planner and initiator of Corporation 1's strategy, and the award that would otherwise be determined based on the application of section 7623(b)(1) and paragraph (c)(1) of this section is not subject to reduction under section 7623(b)(3) and paragraph (c)(3) of this section.
Individual C is employed in the HR department of a corporation (Corporation 2). Corporation 2 tasked Individual C with hiring a large number of temporary employees to meet Corporation 2's seasonal business demands. Individual C organized, scheduled, and conducted job fairs and job interviews to hire the seasonal employees. Individual C was not responsible for, had no knowledge of, and played no part in, classifying the seasonal employees for Federal income tax purposes. Individual C later discovered, however, that Corporation 2 classified the seasonal employees as independent contractors. After discovering the misclassification, Individual C submitted a claim for award under section 7623 along with non-privileged information describing the employee misclassification to the IRS. The IRS initiated an examination of Corporation 2 based on Individual C's information, determined deficiencies in tax and penalties, and ultimately assessed and collected the tax and penalties as determined. The award that would otherwise be determined based on the application of section 7623(b)(1) and paragraph (c)(1) of this section would not be subject to a reduction under section 7623(b)(3) and paragraph (c)(3) of this section because Individual C did not satisfy the requirements of the threshold determination of a planner and initiator. Individual C did not know and had no reason to know that her actions had tax implications or that Corporation 2 would misclassify the employees as independent contractors.
Individual D is employed as a supervisor in the finance department of a corporation (Corporation 3) and is responsible for planning Corporation 3's overall financial strategy. Pursuant to the overall financial strategy, Individual D and others at Corporation 3, in good faith but incorrectly, planned tax-advantaged transactions. Individual D and others at Corporation 3 prepared documents needed to execute the transactions. After Corporation 3 executed the transactions, Individual D submitted a claim for award under section 7623 along with non-privileged information about the transactions to the IRS. The IRS initiated an examination of Corporation 3 based on Individual D's information, determined deficiencies in tax and penalties, and ultimately assessed and collected the tax and penalties as determined. The award that would otherwise be determined based on the application of section 7623(b)(1) and paragraph (c)(1) of this section would be subject to an appropriate reduction under section 7623(b)(3) and paragraph (c)(3) of this section because Individual D satisfies the requirements of the threshold determination of a planner and initiator. Individual D planned the transactions, prepared the necessary documents, and knew the tax implications of the transactions. Individual D was not the sole planner and initiator of Corporation 3's transactions. Individual D did nothing to conceal Corporation 3's activities. Corporation 3 had a good faith basis for claiming the disallowed tax benefits. On the basis of those facts, Individual D was a moderate-level planner and initiator. Accordingly, the Whistleblower Office will exercise its discretion to reduce Individual D's award by 0 to 33 percent.
Same facts as Example 3, except that Individual D independently planned a high-risk tax avoidance transaction and prepared draft documents to execute the transaction. Individual D presented the transaction, along with the draft documents, to Corporation 3's Chief Financial Officer. Without the further involvement of Individual D, Corporation 3's Chief Financial Officer, Chief Executive Officer, and Board of Directors subsequently approved the execution of the transaction. After Corporation 3 executed the transaction, Individual D submitted a claim for award under section 7623 along with non-privileged information about the transaction to the IRS. The IRS initiated an examination of Corporation 3 based on Individual D's information, determined deficiencies in tax and penalties, and ultimately assessed and collected the tax and penalties as determined. The award that would otherwise be determined based on the application of section 7623(b)(1) and paragraph (c)(1) of this section would be subject to an appropriate reduction under section 7623(b)(3) and paragraph (c)(3) of this section because Individual D satisfies the requirements of the threshold determination of a planner and initiator. Individual D planned the transaction, prepared the necessary documents, and knew the tax implications of the transaction. Working independently, Individual D designed and took steps to effectuate the transaction while knowing that the planning and initiating of the transaction was likely to result in tax noncompliance. Individual D, however, did not approve the execution of the transaction by Corporation 3 and, therefore, was not a decision-maker. On the basis of those facts, Individual D was a significant-level planner and initiator. Accordingly, the Whistleblower Office will exercise its discretion to reduce Individual D's award by 34 to 66 percent.
Individual E is a financial planner. Individual E designed a financial product that the IRS identified as an abusive tax avoidance transaction. Individual E marketed the transaction to taxpayers, facilitated their participation in the transaction, and, initially, took steps to disguise the transaction. After several taxpayers had participated in the transaction, Individual E submitted a claim for award under section 7623 along with non-privileged information to the IRS about the transaction and the participating taxpayers. The IRS initiated an examination of the identified taxpayers based on Individual E's information, determined deficiencies in tax and penalties, and ultimately assessed and collected the tax and penalties as determined. Individual E was not criminally prosecuted. The award that would otherwise be determined based on the application of section 7623(b)(1) and paragraph (c)(1) of this section would be subject to an appropriate reduction under section 7623(b)(3) and paragraph (c)(3) of this section because Individual E satisfies the requirements of the threshold determination of a planner and initiator. Individual E designed the financial product, marketed and facilitated its use by taxpayers, and knew the tax implications of the transaction. Individual E was the sole designer of the transaction, solicited clients to participate in the transaction, and facilitated and attempted to conceal their participation in the transaction. Individual E knew that the planning and initiating of the taxpayers' participation in the transaction was likely to result in tax noncompliance. On the basis of those facts, Individual E was a primary-level planner and initiator. Accordingly, the Whistleblower Office will exercise its discretion to reduce Individual E's award by 67 to 100 percent.
(4) Eligible affiliated claimants—(i) In general. If the Whistleblower Office determines that an affiliated claimant, as defined in § 301.7623-2(f), filed a claim for award based on information obtained from an otherwise eligible individual for the purpose of avoiding any reduction in the amount of any award that could result if the claim was filed by the otherwise eligible individual, then the Whistleblower Office may, for purposes of determining the amount of an award, treat the claim as if it had been filed by the otherwise eligible individual. Any award to the affiliated claimant that filed the claim for award will be paid pursuant to paragraph (d)(1) of this section. See § 301.7623-1(b)(3) for rules regarding ineligible affiliated claimants.
(ii) Example. Individual A is employed as a supervisor in the finance department of Corporation. Individual A planned and initiated the actions that led to an underpayment of tax by Corporation, within the meaning of section 7623(b)(3) and paragraph (c)(3) of this section. To avoid the application of section 7623(b)(3) and paragraph (c)(3) of this section, Individual A provided non-privileged information to Individual B that described and documented specific facts relating to Corporation's tax underpayment. Individual B did not plan and initiate the actions that led to an underpayment of tax by Corporation. Individual B submitted to the IRS the information received from Individual A, alleging that Corporation owed additional taxes and filing a claim for award under section 7623. The IRS proceeded with an examination of Corporation based on the information provided by Individual B, determined a deficiency against Corporation and, ultimately, collected proceeds from Corporation. For purposes of determining the amount of any award payable to Individual B, as the individual that filed the claim for award, the Whistleblower Office may treat the claim as if it had been filed by Individual A.
(d) Payment of Award—(1) In general. The IRS will pay any award determined under section 7623 and §§ 301.7623-1 through 301.7623-4 to the individual(s) that filed the corresponding claim for award. Payment of an award will be made as promptly as the circumstances permit, but not until there has been a final determination of tax with respect to the action(s), as defined in paragraph (d)(2) of this section, the Whistleblower Office has determined the award, and all appeals of the Whistleblower Office's determination are final or the individual has executed an award consent form agreeing to the amount of the award and waiving the individual's right to appeal the determination.
(2) Final determination of tax. For purposes of §§ 301.7623-1 through 301.7623-4, a final determination of tax means that the proceeds resulting from the action(s) subject to the award determination have been collected and either the statutory period for filing a claim for refund has expired or the taxpayer(s) subject to the action(s) and the IRS have agreed with finality to the tax or other liabilities for the period(s) at issue and the taxpayer(s) have waived the right to file a claim for refund.
(e) Effective/applicability date. When finalized, § 301.7623-4 is proposed to apply to information submitted on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register and to claims for award under section 7623(b) that are open as of the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.
[FR Doc. 2012-30512 Filed 12-14-12; 4:15 pm]