Final rules expand the definitions of collected proceeds and eligible individuals, and specify the criteria for award amounts.
Comprehensive final regulations issued in August provide rules for whistleblower awards under Secs. 7623(a) and (b), as well as rules governing the disclosure of return information under Sec. 6103(h) to pursue these claims. The regulations provide rules for submitting information to the IRS, define key terms, provide rules for administrative proceedings, and contain the criteria for determining the size of an award. The regulations finalize rules proposed in 2012 (REG-141066-09) with a few substantive changes.
Sec. 7623(a) permits the IRS to pay awards to whistleblowers at its discretion. Any amount payable under Sec. 7623(a) is paid from the proceeds of amounts collected by reason of the information provided, and any amount collected is available for these discretionary payments.
Sec. 7623(b) provides that qualifying individuals will receive an award of at least 15%, but not more than 30%, of the collected proceeds resulting from the action or settlement by the IRS based on the information the whistleblower provided, depending on the extent to which the whistleblower substantially contributed to the action.
The biggest change in the final regulations from the proposed rules was to the definition of collected proceeds, in which the proposed rules did not make any allowance for amounts received as a result of reductions in tax attributes, such as net operating losses (NOLs). In response to comments, the final rules provide for monitoring the taxpayer’s account until the IRS receives collected proceeds as a result of a reduction in the tax attribute or the taxpayer’s ability to apply the tax attribute expires unused. For example, if an NOL is reduced as a result of whistleblower information, the IRS will periodically review the taxpayer’s account to determine whether future-year tax payments have been made that would not have been made if the NOL had not been reduced. Under the final regulations, awards will be paid on any such post-determination collected proceeds. But if the NOL carryforward expires before the reduced NOL results in a tax payment, the IRS will not pay an award.
Another substantive change was to the definition of individuals eligible for Sec. 7623 awards. In the proposed rules, the IRS identified as ineligible certain categories of individuals who could have access to return information of third parties by virtue of their relationship with the federal government. In response to comments that this list of ineligible individuals was too broad, the IRS removed state and local government employees and federal or state body or commission members from the categories of ineligible whistleblowers.
Another major change was to the definition of when the IRS “proceeds based on” the information received from a whistleblower in pursuing the claim. In response to comments that the definition in the proposed rules was too narrow, the regulations amend the rule to provide for awards for actions when the IRS proceeds based on information provided that substantially contributes to that action.
The regulations apply to information submitted on or after Aug. 12, 2014, and to claims for awards that were open on that date.
- T.D. 9687
By Sally P. Schreiber, J.D., a JofA