Attorney Suggests Improvements to Proposed Whistleblower Regs

I am writing to provide comments to proposed regulations under Section¹ 7623 regarding whistleblower claims for awards (the "Proposed Regulations").²

Congress revised Section 7623 in 2006 and, since then, the Internal Revenue Service has worked steadily to implement the new provisions. The role and staff of the Whistleblower Office ("WO") have increased dramatically and several forms of guidance have been issued on topics such as fling claims, receipt of whistleblower information, taxpayer confidentiality, computation of awards, and determination of collected proceeds. The Proposed Regulations provide comprehensive guidance on many aspects of the procedure for claiming, determining and paying awards under the statute. The Propose Regulations are a welcome addition to the statute and will go a long way toward making the whistleblower law an important element of tax enforcement.

In general, the Proposed Regulations contain very workable and efficient procedures to receive and evaluate information provided by claimants and make awards. Many provisions in the Proposed Regulations require the Service to balance the objectives underling Section 7623, the interests of claimants, the interests of taxpayers, the taxpayer confidentiality rules in Section 6103 and the need to maximize the Service's limited resources. My comments outlined below are intended to suggest a re-balancing of those considerations in certain circumstances to provide for a more equitable, efficient and transparent whistleblower process while at the same time having due regard for the competing considerations at play.

These definitions and rules draw a bright line by prohibiting an award whenever the Service already is examining the issue that is the subject of the information provided unless the claimant can demonstrate that the Service would have dropped the examination but for the information. These rules leave no room for a situation in which a claimant provides information to the Service on an issue that the Service already was examining regardless of whether the information is useful, or even determinative, in making an assessment against a taxpayer. There are many cases in which the Service is examining a taxpayer on a specific issue but may not make an assessment, or may make a smaller assessment, because the Service is not aware of certain relevant information. If a claimant provides such relevant information and the Service is able to make an assessment it would not have otherwise made, or is able to increase the amount of an assessment, there is nothing in the statute to indicate that a claimant should not be eligible to receive an award for providing such information. I recognize that it may be difficult to prove when the Service makes or increases an assessment based on information provided by a claimant, but if a claimant can carry that burden, there is no reason why he or she should not be eligible for an award.

Accordingly, I suggest that Prop. Reg. § 301.7623-2(a)(2) be modified to add the making of an assessment to the examples of what constitutes an "administrative action." Further, Prop. Reg. § 301.7623-2(b)(1) should be expanded to include a new paragraph (iv) which provides that the Service proceeds based on information provided by a claimant if a claimant can demonstrate that the Service "made or increased the amount of an assessment." Finally, Example 1 should be modified to provide that the claimant in the example would be eligible for an award if he or she could demonstrate that the information provided regarding the foreign tax credit to the Service was useful or determinative in making or increasing the amount of an assessment against the taxpayer.

For the reasons stated in section 7 of this letter, infra, the WO should make a final determination of tax for each year for each taxpayer. The WO can then make separate final determinations for each year that involves the carryforward of a tax attribute to determine whether there are collected proceeds because of information provided by a claimant. I am not aware of any reason why it would be unduly burdensome for the Service to provide the WO with information necessary to carry out the intent of Section 7623 by monitoring taxpayers who have a carryforward of tax attributes to determine when collected proceeds should accrue. However, if the burden to monitor the carryforward of tax attributes would be unreasonable, the burden can be shifted to the claimant by requiring the claimant to submit follow-up claims after an initial final determination of tax and collected proceeds has been made. As the future collected proceeds accrue, the claimant could submit a follow-up claim or claims and the WO could determine at that point whether there are additional collected proceeds on which an award should be paid.

I commend the Service for creating rules designed to provide information to claimants and include them in the award determination process as early as possible. To further these goals within the limits required by Section 6103, I suggest that the Proposed Regulations expressly state that the WO will communicate a preliminary award determination to a claimant within some fixed period, perhaps 90 or 180 days, after the Service has received collected proceeds because of the information provided by the claimant. This will further the objectives underlying Section 7623 by informing claimants of the status of their claims as soon as practicable under Section 6103 and will keep the administrative proceeding moving forward as promptly as possible.

There is no good reason to bias the computation framework toward the lower end of the range. It is unfair and will invite unnecessary litigation in the Tax Court concerning appropriate award percentages. Accordingly, I suggest that the WO begin its analysis at 22.5 percent, the middle of the statutorily mandated range, and then adjust the percentage up or down from that point based on the presence and significance of positive and/or negative factors.⁴ In addition, I suggest that the Proposed Regulations contain an example of a case in which the WO would determine an award of 30 percent to provide clarity around what is required to achieve the highest award allowed by law.

Combining several taxpayers or tax years into a single final determination of tax will cause unnecessary and protracted delays in paying awards. For example, if a claimant provides information that results in administrative actions against two taxpayers, it is possible that one taxpayer will pay the tax within two years while the second taxpayer contests the issues over a period of seven or eight years. Similarly, if a claimant provides information about a single taxpayer regarding an issue affecting several tax years, such as basis, that results in actions involving five, or even ten, tax years, it is possible that the taxpayer will pay the tax for the early years, but will wait to correct the issue in subsequent years until the issue is raised in subsequent audits or audit cycles. In either case, if the WO has combined the taxpayers or tax years, no final determination of tax can be made until after a payment has been made for the last taxpayer or tax year.

These procedures will result in substantial delays before a final determination of tax is made, even in cases where the Service has received substantial payments of tax in earlier years. There is no reason, other than administrative convenience, to delay a final award determination with respect to taxes paid until the last payment for the last taxpayer or tax year is made. While I recognize that it is important for the Service to allocate its limited resources as effectively as possible, these procedures will result in extreme delays in certain complex claims, which are precisely the type of claims the new whistleblower laws were intended to encourage. Extended delays in paying claims, or even communicating with the claimant, in cases when the Service already has collected substantial tax is unfair and will impair the perceived integrity of the whistleblower program. Ultimately, claimants and their advisors will become discouraged from making complex claims that cover several taxpayers or tax years.

I suggest that Prop. Reg. § 301.7623-4(d)(2) be amended to adopt the annual accounting principal used throughout the Internal Revenue Code and provide that a final determination of tax shall be made with respect to each separate taxpayer and each separate tax year. This information already is being tracked by the WO because, under current procedures, no final determination can be made until all taxes are paid with respect to all combined taxpayers and tax years. Further, Prop. Reg. § 301.7623-4(a)(2) already contemplates that separate award percentages may be applied on an action-by-action basis. Accordingly, it should not be difficult for the Service to determine an award percentage and make a final determination of tax for each separate taxpayer and tax year. The amount of additional resources required is appropriate to avoid the unnecessary and unfair delays described above.

I would be pleased to discuss these comments or to appear and testify at a public hearing to the extent doing so would be appropriate and helpful. Thank you.

² Federal Register, Vol 77, No. 243, p. 74798 (12/18/12).

³ It will be very difficult for a claimant to prove why a taxpayer filed an amended return. Therefore, it may be appropriate to create a rebuttable presumption that, if an amended return is filed to correct an issue that is or was audited by the Service based on information provided by the claimant, then the amended return was filed because of the information provided.

⁴ A similar adjustment should be made to the computation framework for determining the award percentage in Treas. Reg. 301. 7623-4(c)(2)(ii) regarding awards for less substantial contribution.