Source: http://www.taxwhistleblowerreport.com/irs-whistleblower-office/
Timestamp: 2013-05-21 19:36:19
Document Index: 152609862

Matched Legal Cases: ['§301', '§301', '§301', '§301', '§301', '§301', '§301', '§301', '§301']

IRS Whistleblower Office : Tax Whistleblower Report
A congratulations and a thank you to Erica Brady, who yesterday spoke on behalf of The Ferraro Law Firm’s clients at the public hearing on the Proposed Treasury Regulations that outline how the IRS will interpret section 7623. Erica joined other practitioners in pointing out that the Proposed Treasury Regulations should not be finalized in their current form. Erica reiterated my message from the hearing on the previous Proposed Regulations of, “Do no harm.” The regulations should not narrow a broad statute or thwart Congressional intent by limiting existing whistleblower’s rights or discouraging whistleblowers from coming forward. Erica highlighted four topics at the hearing:
Administrative Proceedings, Award Percentages, Collected Proceeds, Comments on Proposed Treasury Regulations, Erica L. Brady
This section of the proposed regulations establishes that that 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). Therefore, the Director, officers, and employees of the Whistleblower Office may disclose returns and return information (as defined in section 6103(b)) to the whistleblower (or the whistleblower’s legal representative) to the extent necessary to conduct a whistleblower administrative proceeding.
§301.7623-1, General rules, submitting information on underpayments of tax or violations of the internal revenue laws, and filing claims for award.
This section of the proposed regulations provides the general rules for submitting information and filing claims for an award. This is the “who, what, when, where, and how” of submitting a claim for an award. A whistleblower must follow these rules to ensure that their claim for an award is appropriately filed to ensure that the IRS Whistleblower Office will consider their claim for an award. The proposed regulations in section 301.7623-1(e) states that the IRS will use its best efforts to protect the identity of whistleblowers.
§301.7623-2, Definitions
This section of the proposed regulation defines key terms used in the statute and the regulations. The proposed regulations build on definitions in the current regulations and define additional key terms for section 7623. These definitions will affect how the IRS Whistleblower Office interprets section 7623 and ultimately will makes award determinations based on these definitions. How “proceed based on,” “related action,” and “collected proceeds” are defined will greatly influence the number of awards issued and the amount of those awards. Particular attention should be paid to the definition of “proceed based on” and “collected proceeds.” The definition of “proceed based on” in the proposed regulations seems to be reading the word “only” into the statute and requiring that the IRS take action that it would not have taken but for the information provided to be award eligible. This reading goes beyond the language of section 7623, which simply requires that the IRS use the whistleblower’s information in an administrative or judicial action in order for the whistleblower to be able to collect an award. The proposed regulations appear to assume that the IRS would discover an issue simply because the issue was listed generally in an audit plan. Hopefully, this narrowing of the statute will be addressed in the final regulations after hearing comments from the public. Either way, we are confident that this regulatory expansion would not survive judicial review.
The definition of “collected proceeds” continues to be an area that should be focused on. The proposed regulations continue to claim that criminal fines are not part of collected proceeds; however, as discussed at length on this blog and elsewhere, this position goes against the language of the statute and the intent of Congress. The definition of collected proceeds also touches on the inclusion of tax attributes in collected proceeds. The preamble to the regulations goes into more detail illustrating that tax attributes that are used as of the date that the award computation is made will be counted as collected proceeds. There does not appear to be a clear legal theory behind this cut off, but our discussions with various IRS personnel suggests this is an administrative compromise.
§301.7623-3, Whistleblower administrative proceedings and appeal of award determinations.
This section provides outlines of the administrative proceedings and appeal rights for award determinations. The largest changes here are the creation of administrative proceedings for cases that do not meet the requirements of section 7623(b) (under §301.7623-3(b)) and claims that are denied (under §301.7623-3(c)(7)). The creation of the administrative procedures for denied cases is likely to reduce the number of whistleblower cases filed in the United States Tax Court that are ultimately dismissed because the IRS did not use the information, did not detect an underpayment of tax based on the information, or collect proceeds based on the information. The proposed regulations states that, “The Whistleblower Office will send to the claimant a preliminary denial letter that states the basis for the denial of the claim.” §301.7623-3(c)(7). This letter and administrative proceeding should provide claimants with a sense of closure as to what happened with the information that was provided. §301.7623-4, Amount and payment of award.
This section outlines the procedures that the Whistleblower Office uses to determine the award amount, including what factors are considered in determining the award percentage, what happens when there are multiple independent claimants, and when payment of an award is made. In particular whistleblowers will want to look at §301.7623-4(c)(3), which discusses the Whistleblower Office’s application of “planned and initiated” for purposes of reduction or denial of an award. If the Whistleblower Office determines that a claim for award is brought by an individual who planned and initiated the actions, transaction, or events that led to the underpayment of tax, the Whistleblower Office may appropriately reduce the amount of the award percentage that would otherwise result under section 7623. Section 301.7623-4(c)(3)(ii) of the proposed regulations states when the IRS Whistleblower office is determining whether a whistleblower planned or initiated the scheme that the IRS Whistleblower Office will look at whether the individual “(A) Designed, structured, drafted, arranges, formed the plan leading to, or otherwise planned, an underlying act, (B) Took steps to start, introduce, originate, set into motion, promote or otherwise initiate an underlying act, and (C) Knew or had reason to know that there were tax implications to planning and initiating the underlying act.” Tags:
Administrative Proceedure, Guidance, Proposed Treasury Regulaltions, Rules, Whistleblowers
We are excited to share some good news … the IRS has awarded $38,037,899 to one of our clients for providing information about a tax avoidance scheme perpetrated by one of the nation’s largest corporations. We respect our client’s wishes to remain anonymous and are therefore we are not authorized to comment on the specifics of the tax issues that led to this $38 million award. We can say that the issues involved were more akin to aggressive corporate tax planning than outright fraud, and the tax adjustments the IRS made were commensurate with the factual and legal allegations we made in our submission to the IRS. Both the name of the company and the name of the whistleblower have remained completely confidential throughout this whole process, and remain so even after payment of this award. The company was in the top half of the annual Ferraro 500 list, which reorders the Fortune 500 companies based on the size of those companies’ Uncertain Tax Positions.
Before agreeing to the proposed award, we went through the administrative award determination procedure. During the administrative award determination procedure, we were able to thoroughly review the IRS’s proposed award computation. This is a crucial step for any whistleblower claim involving a complex corporate return. We were able to aid the process by submitting our own proposed award computation to the IRS prior to the IRS coming up with their proposed award computation. Also, as we have written about before on this blog, the IRS is withholding on the award payments that it is making. In order to ensure that the IRS did not over withhold millions of dollars, we negotiated a withholding agreement with the IRS on behalf of our client. It has been great to see years of work come to fruition. This particular claim was filed shortly after The Ferraro Law Firm began representing whistleblowers in front of the IRS. This is within the 5 to 7 years that the IRS estimates on average it takes to work a whistleblower claim from start to finish. It has been a long journey with a great ending. Tags:
IRS Whistleblower, Paid, Whistleblower Awards, Withholding Agreement
Congratulations to Brad Birkenfeld for receiving a $104 million award from the IRS for turning in UBS for their offshore banking practices. Kudos to Steve Kohn and Dean Zerbe, his counsel since 2009 on this matter. It appears that Birkenfeld’s award determination was based on the $400 million of “collected proceeds” (tax penalties and interest) that were proscribed to be paid to the IRS pursuant to UBS's Deferred Prosecution Agreement, dated February 18, 2009, (see paragraph 3).
The IRS's award determination shows that tax whistleblowers can and do make significant contributions to the enforcement of the internal revenue laws, and will be rewarded for their help. The process works. While the road may be long and sometimes winding, tax whistleblowers can have an impact on tax cheats.
Award Determinations, Award Payments, Bradley Bikenfeld, IRS Whistleblower Award, IRS Whistleblower Office, UBS
Wait for it... Whistleblower Awards are coming.
An interesting letter was released last night from IRS Commissioner Shulman to Senator Grassley. Commissioner Shulman’s letter says more about what is in the pipeline for large whistleblower case award determinations than any statement the IRS has made to date, much more so than even the annual reports that the Whistleblower Office is required by law to provide to Congress. Shulman says that: 3 award determinations have already been made (and presumed paid), 3 more award determinations are in progress, 9 cases are closed out and waiting for the statutes of limitation to run, and another 60+ have resulted in audit adjustments already that look like they will result in mandatory awards. We know of a bunch more cases with proposed adjustments, so the case pipeline is moving slowly but surely. The IRS is still leaving huge dollars on the table in some cases, and while that’s to be expected as part of the tax controversy process, it still disturbing to see the government lose out on potential revenue in these austere times.
Commissioner Shulman also committed the IRS to a 90 day timeline for making award determinations once the refund statute of limitations has closed on the taxpayer which was set forth in Deputy Commissioner Steven Miller’s June memo. Shulman added a new twist though – he said that the combined determination and payment timeframe so far has actually been completed within that 90 day period – specifically he said ”With respect to payments made to date, awards have been generally been paid within three months of resolution of legal issues.” According to my review of the relevant procedures and my discussions with IRS officials, payment processing once the award determination is accepted should be a matter of weeks, so it makes sense that they can get both the determination and payment done within that timeframe.
Commissioner Douglas Shulman, Senator Charles Grassley, Timeline, Whistleblower Awards, Whistleblower Report
Academic Paper on the IRS Whistleblower Office Provides a Thorough Impartial Analysis of the Program
This spring I had the pleasure of being interviewed by Justin Kempf, law student at the University of Miami, about the IRS whistleblower program for an academic paper he was writing. That paper, titled the "IRS Whistleblower Office: There is More Work to be," provides a thorough overview of the origins of the IRS Whistleblower Program, the challenges it faces, and proposals for improvements. While some of the proposals (i.e. reducing or eliminating withholding on whistleblower awards) have been resolved since the time this paper was finalized, it still contains relevant criticisms of the results of the program. Potential whistleblowers would also be well informed by reading about the hurdles and roadblocks that Mr. Kempf found in his research, as well as some of the factors he said to consider when making a claim. Well done.
IRS Whistleblower Program, Overview, Proposed Changes, Witholding on Whistleblower Awards
Annual Report, Award Payments, Collected Proceeds, Fiscal Year 2011 Annual Report, IRS Whistleblower Office
The IRS puts Timelines in Place for Reviewing Whistleblower Submissions
The IRS has adopted internal timelines for how long the IRS has to act on whistleblower submissions according to a field directive sent to the agency’s operating divisions on June 20, 2012. According to the field directive, Deputy Commissioner Steven T. Miller is asking that the following timelines are adhered to:
Whistleblower Office – claims received should be initially evaluated by the Whistleblower Office within 90 days.
Operating Divisions and Criminal Investigation – review by subject matter experts should be completed within 90 days of receipt.
Whistleblower Office – whistleblowers should be notified of an award decision within 90 days of when collected proceeds can be finally determined.
If followed, these timelines will greatly affect whistleblower case resolution as currently the whistleblower office takes on average 131 days to review a submission and field examinations average 299 days according to the IRS Whistleblower Office’s Fiscal Year 2011 Annual Report, which is discussed in further detail here.
Deadlines, IRS Whistleblower Program, Steven T. Miller, Timelines
Whistleblower Guidance Issued on Partial Payments and Withholding
The IRS released welcome guidance relating to whistleblower claims submitted under its long embattled whistleblower program. With all the recent reports showing that the IRS has numerous problems yet to solve to make its whistleblower program as effective as Congress intended, it is good to see that they are still working to resolve some of the issues that whistleblowers and their representatives are identifying.
The first piece of guidance WO-25-0612-03 will add new sections to the Internal Revenue Manual that will allow for reduced withholding on whistleblower awards. This reduced withholding regime is a compromise position similar to those that we proposed in our letter to Whistleblower Office Director Steven Whitlock on January 11, 2012. In that letter, we pointed out that while the IRS has no actual authority to withhold on whistleblower payments, at the very least the IRS should agree to reduce withholding when a whistleblower demonstrates that their taxable award will be offset in part by an above the line deduction for attorneys fees. We’re happy that this new withholding guidance at least eliminates the harm caused by overwithholding, although we’re still curious why whistleblowers were singled out by the IRS for their own extra-statutory withholding regime.
The second piece of guidance WO-25-0612-01 sets forth several procedural changes to the handling of whistleblower claims that will again be added to the Internal Revenue Manual, and others that will replace or eliminate other sections of the IRM. The most important part of this new guidance is that it lays the groundwork for “partial” awards to be paid to whistleblowers. We’ve always said that each taxpayer and each year of each taxpayer should stand alone for award purposes. Perhaps shortsightedly, the IRS was originally grouping together years and taxpayers and treating them as one whistleblower claim with one claim number, and thinking that it had to issue just one award once all periods of all those taxpayers were resolved. Under this new and much anticipated guidance, “partial” awards can be paid by the IRS when one of the years of a targeted taxpayer becomes final. This should avoid significant award delays in some cases, particularly in the LB&I context.
Furthermore, WO-25-0612-01 sets forth other important clarifications with respect to how awards are determined that were left unclear by Treas. Reg. Section 301.7623-1 on “collected proceeds” that was finalized earlier this year. Specifically, in The Ferraro Law Firm's comments to the proposed regulation, we noted that it was unclear how denied claims for refund would be considered for award eligibility purposes when a taxpayer made informal claims for refund that acted to offset a liability on an adjustment made as a result of a whistleblower’s information. The new guidance sets forth a procedure called “Refund Netting” whereby whistleblowers will still be eligible for awards on amounts that act as offsets to adjustments made or refunds denied as a result of a whistleblower’s information. We believe that the approach of this procedure is consistent with the final regulation which allowed awards to be paid on information that leads to a “denial of a claim for refund” because as a practical matter that is exactly what is occurring.
This guidance also makes changes to procedures in the IRM for corresponding with the whistleblower and the representative, confirming termination of representation, determining the timing and funding of payments, and processing the award claim form. However, it was also apparent to us that by restating in this guidance several times that the period of limitations on refunds must be closed on a taxpayer before an award payment can be made, that the IRS has become further entrenched on the erroneous policy that it must delay award payments by up to two years even when the targeted taxpayer has paid the taxes due as a result of the whistleblower’s information and signed a closing agreement on those issues. Senator Grassley has recently probed further about the extent and rationale behind this policy in his April 30, 2012 letter to Secretary Geithner and Commissioner Shulman, but it appears that it is going to continue to be an uphill battle to get this policy changed. It is sadly ironic that the Refund Netting procedure contained in this same piece of guidance should have made the logic behind the “two year” rule make no sense to the IRS. In our experience, this policy is unnecessarily delaying awards in almost every single award eligible whistleblower case by two full years.
Partial Awards, Refund Netting, Whistleblower Awards, WO-25-6012-01, WO-25-6012-03
Final Whistleblower "Collected Proceeds" Regulations Issued
Today the Treasury Department issued the finalized Treas. Reg. Section 301.7623-1(a) and (g) relating to the definition of “collected proceeds” for purposes of section 7623 tax whistleblower awards. Although the language of the final whistleblower regulation was unchanged from the proposed regulation, the supplementary information to the final regulation reveals that the Treasury Department shares our view that section 7623's definition of "collected proceeds” should be read broadly. Treasury affirmatively responded to our hearing testimony with respect to the question of whether restitution payments are award eligible and whether the reduction of a tax attribute in one year can result in an award from proceeds collected in another year. The unchanged final regulation confirmed that awards can be paid on information that that leads to the “denial of a claim for refund that otherwise would have been paid” - which is a huge victory for whistleblowers because the IRS initially sought to make these amounts ineligible for awards. Tags:
Awards, Collected Proceeds, Treasury Regulations, Whistleblower Regulations
Congratulations to our associate, Erica Brady, for the publishing of her article, Does Tax Crime Pay (Whistleblowers)?, in the February 2012 edition of TAXES–The Tax Magazine published by CCH. She has previously blogged about criminal fines as tax whistleblower proceeds, and also had another article published by the American Bar Association on this topic.
CCH, Criminal Fines, Erica L. Brady, TAXES - The Tax Magazine, Whistleblower Awards
GAO report critical of delays in processing IRS Whistleblower Claims.
It is hardly news that the IRS can be a slow moving, and an often-frustrating agency to work with. These inefficiencies can discourage potential whistleblowers from coming forward. In an effort to improve the IRS Whistleblower Program, the GAO conducted a study and has issued its findings in a report suggesting how to improve the IRS's Whistleblower Program to ensure that the claims are given timely consideration. The finds in this report should also serve as a warning to those thinking of going to the IRS without representation because of the innumerable pitfalls and the complex procedures (for example, how would one know when their claim was taking an in ordinate amount of time to reach a certain step in the process). GAO Report GAO-11-683, “TAX WHISTLEBLOWERS - Incomplete Data Hinders IRS’s Ability to Manage Claim Processing Time and Enhance External Communication” takes a hard look at the IRS’s Whistleblower program, noting that the Whistle blower program suffers a lack of complete data made it hard to evaluate the whistleblower program and a failure to adequately communicate with whistleblowers and the public. Scott Knott and Greg Lynam, Tax Partners at The Ferraro Law Firm and contributors to this blog, were interviewed for the GAO report late last year and then again earlier this year as part of their review of the IRS Whistleblower Program as the prepared this report. The report noted that whistleblower claims often languish in various stages of review. Of the claims that were submitted in fiscal years 2007 through 2009, 192 claims continue to languish, waiting for review by an operating division Subject Matter Expert to decide if the claim is worth further investigation for more than two years. The length of time it takes the IRS to determine if it wants to move forward with the information is a point frustration for whistleblowers and their attorneys. Greg was quoted by Laura Saunders of The Wall Street Journal in “IRS Whistleblower Program Faulted” as saying:
The IRS shouldn’t take three years to determine if a case could be valid.
Greg points out that by allowing cases to linger in these initial stages of review, the Whistleblower Office ensures that these claims will not be valid due to the expiration of the statute of limitations. The report cites various reasons that the Whistleblower Office put forward for why claims take significant time to review and examine whistleblower claims. However, the report does not state how long the average claim spends at each step because, according to the report, “the Whistleblower Office and operating divisions do not have complete data on the length of time claims spend at each step of the review process.” Another problem is the lack of accountability due to the way claims are tracked. Scott was quoted in “GAO Faults IRS Whistleblower Program for Award Delays” by Jeremiah Coder of Tax Analysts as saying:
The current IRS system of tracking whistleblower cases does not put any responsibility on either the subject matter expert or chief counsel for delaying a case because their evaluation time gets lumped together, such that they can each blame the other for taking too long and not be held accountable to their supervisors.
Scott went on to point out that subject matter expert and chief counsel supervisors cannot see how long their staffs are taking to process a case. The lack of information about how long the IRS is taking to get the information provided by whistleblowers into the hands of auditors creates additional uneasiness regarding the years that a whistleblower claim takes to process. The lack of communication between the IRS and whistleblowers makes the process unnecessarily frustrating for the whistleblower. The report suggests increasing communications on the overall results of the whistleblower program could improve program transparency, while complying with the restrictions on disclosing taxpayer information. The report also pointed out that the IRS is not fully utilizing the tools that Congress had given them when the enhanced whistleblower provisions were enacted. Specifically, as Scott and Greg discussed in “GAO Faults IRS Whistleblower Program for Award Delays,” the IRS has yet to enter into any section 6103(n) agreements, which would allow the IRS to discuss the case with the whistleblower. Section 6103(n) contracts would allow the IRS to know when a taxpayer had provided the IRS with false information. Scott went on to say that “apparently there is an institutional resistance to asking for help.” One of the primary issues Scott and Greg raised with the GAO was the IRS’s reluctance to enter into 6103(n) agreements despite the obvious benefits. The IRS said that it generally agreed with the GAO’s recommendations, such as improving E-TRAK to record the time-in-step for all claims and more accurately track the number of days in each step, track the reasons for claim rejections and suspensions, collect additional information through the Form 211, provide additional statistics in the annual report to Congress, and (most importantly) establish a process for the Whistleblower Office to follow up with subject matter experts that have had a claim for review for more than a set number of days. If the IRS implements these recommendations, the IRS and the GAO may be able to make more specific recommendations, which in turn may help improve the efficiency of the Whistleblower Office. Tags:
GAO, GAO Report GAO-11-683, Gregory S Lynam, Scott A. Knott
Wall Street Journal article about how to report tax underpayments to the IRS
This weekend Laura Sanders of the Wall Street Journal published an article interestingly titled “Taxes: How To Turn Your Neighbor In To The IRS”, in which she described how the IRS Whistleblower Program works and the keys to making a good submission. It was unfortunate that no one at the IRS could get clearance to comment about some of the issues that we have raised to improve the Program, but as a how-to piece Ms. Sanders was on the right track and it was a pleasure speaking with her about what we do for our clients. Even one of Greg’s favorite stories about the Arby’s kid got in the article. We hear some interesting tales, believe me!
IRS Whistleblower Program, Laura Sanders, Wall Street Journal
yet it still paid out roughly the average amount it had been paying out in awards over that period. In other words, receipts from tax whistleblower cases have doubled, but the awards have basically stayed the same. Why? Because the current rule about when award determinations are eligible to be made is freezing out awards under section 7623(b). Under section 6511(a) the period of limitations on refunds expires no sooner than two years after the date a tax is paid, and a claim for refund can only be allowed to the extent of the tax actually paid in that two year period under 6511(b)(2)(B). This is often referred to as the “two year rule.” The two year rule regularly effects whistleblower cases because they often lead to the collection of additional taxes at the conclusion of an IRS examination (which were based at least in part on the whistleblower’s information). What ends up occurring as a result of the two year rule and the IRS’s policy about when award determinations are eligible to be made is that the taxpayer pays the tax and then the whistleblower has to wait an additional two years to get their award. Therefore, much of the $464,695,459 the IRS reported that it collected in Fiscal 2010 won’t be eligible for an award payment until Fiscal 2012, and the much of the awards the IRS paid in Fiscal 2010 actually relate to monies they collected in Fiscal 2008, or earlier.
Collected Proceeds, PTMA 2010-62, Section 6511, Two Year Rule, Whistleblower Awards
IRS Whistleblower Office Report for 2010 Shows Increased Submissions and Collections
The IRS has released on its website the “Fiscal Year 2010 Report to the Congress on the Use of Section 7623,” which details the progress of the IRS Whistleblower Office over the Fiscal 2010 year (thru September 30, 2010). The first and most important thing we noticed was that there was a huge jump in the “Amounts Collected” as a result of information from whistleblowers from FY 2009 to FY 2010 (See Table 2). The amount that the IRS collected due to this program doubled to nearly half a billion dollars per year in FY 2010. In addition, at 7,577 whistleblower submissions made to the IRS in FY 2010, they are receiving more tips than ever before.
The number of large case 7623(b) submissions has remained fairly stable according to Table 1, however, the number of Taxpayers involved greatly increased in 2010 (TP/Submission ratio: 2008 – 3.6, 2009 – 4.6, 2010 – 12.6.) Overall though most of the submissions the IRS is getting are small cases under section 7623(a). The IRS said “85 percent of submissions do not appear to meet the income amount or the amount in dispute thresholds but will be considered for awards under section 7623(a) if the IRS acts on them and collects proceeds.” See part IV.B.2 A reader of the FY 2010 Report cannot use the ratio of Awards Paid to Amounts Collected to determine average award percentage paid to whistleblowers because of timing of collection and payment for two reasons: (1) the delay in award payments as a result of the 2009 policy change/decision to only make award determinations after the section 6511 period of limitations on refunds has expired; and (2) the time it takes each case to go through the award procedures. Of the 97 awards paid: 9 related to collections of $2 million or more, and 17 were partial payments totaling $13 million. No payments were made in FY 2010 under 7623(b). The IRS said that they “expect” the first payments under section 7623(b) to be paid in 2Q 2011, but it was already public knowledge that a section 7623(b) award was paid to an accountant at the end of 2Q 2011.
The IRS also said they expect to finalize the Proposed Treasury Regulations defining collected proceeds and issue proposed regulations updating section 7623 regulations to reflect 2006 Amendments in 2011. But we believe that the bigger problem that needs to be addressed is that the IRM needs to reflect the recent guidance in e.g. PTMA 2010-62, etc., as well as the finalized Regulations, but we’ll write more about that another time.
IRS Whistleblower Office, PTMA 2010-62, Whistleblower Report
by Hilary B. Lefko
Last week, Ferraro Law Firm partner, Scott Knott, spoke at the IRS’s public hearing on Proposed Treasury Regulations on the definition of “collected proceeds” in the context of paying whistleblower awards under section 7623. Scott joined other practitioners in pointing out that the Proposed Regs are too narrow in scope and may prevent the IRS for paying awards that are otherwise authorized under the statute. As Scott noted, the current language “unduly ties the hands of the IRS Whistleblower Office.”
Scott's Comments.
Scott also addressed the Regs' failure to answer the “when” question—that is when can the Whistleblower Office pay an award? Scott raised concerns over the contradiction between the Internal Revenue Manual, I.R.M. 25.2.2.12 (06-18-2010), which states that the IRS should wait until the statutory period of filing a refund has expired, and PMTA 2010-62, in which the Commissioner states that a whistleblower can be paid an award based on the denial of a claim for refund. Scott asked the government panel to consider the tension between the two positions and consider revoking the I.R.M. policy in light of the Commissioner’s clear intention to the contrary.
The Government’s panel included IRS Whistleblower Office Director, Stephen Whitlock; Tom Kane, Senior IRS Counsel; Kristen Whitter, IRS Office of Chief Counsel; and Alexandra Minkovick, an Attorney Advisor for the Treasury Department. The Government’s representatives were very engaged in the process and clearly thinking about how to make award determinations fair based on the statute. The IRS attorneys from Chief Counsel’s Office seemed keen to consider the comments made by Scott and other practitioners in drafting final regulations. The IRS addressed several common practitioner concerns. Notably, Mr. Kane addressed concerns over the Proposed Regs’ failure to specifically address the treatment of net operating losses. As BNA reported, 92 DTR G-4 [PDF], Mr. Kane explained that the explicit exclusion of net operating losses from the regulation should not be a concern. Mr. Kane continued, “if a whistleblower's information affects a net operating loss deduction, the whistleblower will be entitled to an award based on that contribution.”
Award Determinations, Comments on Proposed Treasury Regulations, Internal Revenue Manual 25.2.2.12, IRS Chief Counsel, IRS Whistleblower Office, PMTA 2010-62, Public Hearing, Scott A. Knott, Section 7623, Stephen Whitlock, Thomas J. Kane, Treasury Department
IRS Finally Pays an Award Under the Enhanced Whistleblower Provisions
A month ago on this blog I said “The first tax whistleblower award payments under the enhanced provisions of section 7623(b) are imminent, likely within the next couple months or sooner.” I got a lot of questions from colleagues and clients about it, and now I can say I told you so.
In the early morning hours of Friday, April 08, 2011, word of the first confirmed payout under the enhanced award provisions of section 7623(b) spread like wildfire. An APNewsBreak released at 3:16AM declared that:
The IRS cut a $3.24 million check to the whistleblower, which represents 22 percent of the taxes recovered minus 28 percent tax withholding. (This is not the last word on the validity of the withholding here, we assure you.) The underpayment was reported to the IRS Whistleblower Office in 2007. The IRS did not deem the issues he raised complex; however, the information his client provided pointed out new questions for a routine IRS audit that was already under way.
The award payout is tangible evidence that the program is working and has begun to bear fruit. The enhanced award provisions, found in section 7623(b) of the Internal Revenue Code, mandating awards of 15 to 30 percent of the collected proceeds for information leading to the collection of at least $2 million took effect in December of 2006. The program’s slow start has been discouraging to some, including Senator Charles Grassley who was the primary drafter of the enhanced award provisions and long-time champion of whistleblowers. Tags:
Award Payments, IRS Whistleblower Office, Senator Charles Grassley, Tax Withholding
Final Regulations for Information Sharing With Whistleblowers are Issued Despite the IRS's Refusal to Enter Into Such Agreements.
Treasury Regulations for section 6103(n), Disclosure of Return Information in Connection with Written Contracts Among the IRS, Whistleblowers, and Legal Representatives of Whistleblowers, were finalized today. The finalized regulations are essentially what were put in place in March of 2008 with a few slight language tweaks. The regulation had to be finalized now because the temporary regulation authorizing disclosure contracts with whistleblowers expired on March 24th, 2011. However, as a practical matter, the expiration of the temporary regulations does not make much of a difference, as the IRS is not entering into these contracts because of either extreme caution bordering on neglect, a failure of internal communication, or both. As of March 14, 2011, not even a single section 6103(n) disclosure contract has been entered into with a whistleblower. Let’s break that down by year since such agreements were authorized in the original Temporary Regulations:
Number of 6103(n) Agreements
The IRS is simply squandering the opportunity to make the best and highest use of the insiders that Congress was seeking when it amended section 7623 in December of 2006. Some of the schemes we have presented to the IRS are extremely complex, with a labyrinth of layers and steps put in place just to make it harder to figure out. Even though we do our best to break down such schemes factually and legally in our initial submission to the IRS so that they have a roadmap of how to attack the abusive scheme, they have still refused the additional ongoing help we offered. In several of our cases, the IRS has even gone to the extreme of having the field ask questions to the taint review team, who then asks questions to the tax whistleblower, and then the taint review team relays the answers to the field. We engage in this grown-up game of operator because no one in the IRS knows who can and should be setting up section 6103(n) agreements.
The complaint that the IRS is squandering the opportunity to work directly with whistleblowers to work through the tax avoidance schemes has been voiced before. On October 22, 2010, Gregory Lynam and Scott Knott, Tax Partners at The Ferraro Law Firm and contributors to this blog, were interviewed by the Government Accounting Office (“GAO”) as part of an audit they were doing of the IRS Whistleblower Program resulting from Senator Grassley's scathing letter to Secretary Geithner criticizing the whistleblower guidance published in the Internal Revenue Manual on June 18, 2010. The main criticism of the IRS Whistleblower Program Lynam and Knott reported to the GAO was the failure to enter into a single section 6103(n) agreement with a whistleblower, which is preventing the IRS from getting the benefit of two-way communications with knowledgeable insiders that Congress had hoped for to prevent tax avoidance. We'll see if the results of the GOA audit (which is expected to be completed this summer) or the finalization of these regulations make any difference. Tags:
GAO, Gregory S Lynam, Scott A. Knott, Section 6103(n), Senator Charles Grassley
New Opportunities for Tax Whistlebowers Signaled in IRS Whistleblower Office's Fiscal Year 2009 Annual Report to Congress
On December 13, 2010, the IRS Whistleblower Office published its annual report to Congress for fiscal year 2009 (PDF). The report revealed that the IRS Whistleblower Office has received a steady stream of information about multi-million dollar tax underpayments over fiscal years 2008 and 2009. The IRS reported receiving 460 submissions relating to 1941 taxpayers in their fiscal year 2009 that meet the criteria for section 7623(b), which is the mandatory award program for multi-million dollar cases. The IRS had previously reported receiving 476 of these submissions relating to 1246 in fiscal year 2008. The report failed to discuss several sensitive issues that have not been resolved internally, are awaiting public guidance, or have been criticized by practitioners.
The report did address an internal change in policy in the timing of payment of award determinations. In the past, the IRS processed the award determination after collecting the unreported tax liabilities discussed in the whistleblower claim. However, as of a July 2009 decision by IRS Chief Counsel’s Office, the IRS is now waiting to making an award determination until after the time the taxpayer has to appeal or seek a refund has passed.
In the report, the IRS notes that it has yet to pay an award under the new program. Stephen Whitlock, Director of the IRS Whistleblower Office, recently stated that he expects the first awards to be paid in 2011. Once the awards start being paid, we believe the floodgates will open and new whistleblower submissions will pour into the IRS. Those who come forward with information early are in a better position to collect an award because award determinations are based in part on when the whistleblower came forward. If someone else beat you to the punch, you may not be entitled to an award at all.
Annual Report, IRS Whistleblower Office, Stephen Whitlock, Whistleblower Report