Whistleblower Final Rules Expand Definition of Collected Proceeds

Comprehensive final regulations issued Thursday 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 (T.D. 9687). The regulations provide the 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 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 that the IRS proceeded on based on the information the whistleblower provided to the IRS.

The IRS explained that it received a large number of written comments on the proposed rules (REG-141066-09) but that more than 70% were identical form letters that expressed support for the comments of Senator Charles Grassley, R-Iowa, which were set out in a Jan. 28, 2013, letter to the IRS. In response to the comments, the IRS made a number of changes in the final regulations.

The biggest change in the final regulations was to the definition of collected proceeds, which did not make any allowance in the proposed rules 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. 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 that would 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, but otherwise left the list unchanged.

Another major change is 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 are open on that date.