Firm Comments on Proposed Changes to Whistleblower Award Determination Administrative Proceedings

I am writing to provide comments to proposed amendments to Internal Revenue Manual ("IRM") section 25.2.2.8 regarding Whistleblower Award Determination Administrative Proceeding and to suggest that the Internal Revenue Service (the "Service") make and communicate to whistleblowers preliminary award determinations prior to the expiration of the two-year statute of limitations for refunds.

The Service has proposed several amendments to the IRM that would affect the way in which whistleblower claims under section 7623 of the Internal Revenue Code of 1986, as amended, (the "Code") are evaluated and processed. These amendments are welcome improvements to the IRM, will go a long way toward encouraging whistleblowers to report tax non-compliance and, in general, will help achieve the policy considerations that underlie section 7623 of the Code.

The proposed amendments to IRM section 25.2.2.8 provide that the Whistleblower's Office (the "WBO") will begin the review and determination process once the WBO becomes aware that there is a final determination of tax for those actions that compose the award determination. The proposed amendments go on to state that, after the statutory period for filing a claim for refund expires, or there is an agreement for a specific amount of tax that waives any right to file a refund claim, the WBO will prepare an award determination than can be communicated to the whistleblower in a Preliminary Award Determination package.

I suggest that it would be more appropriate for the WBO to prepare a preliminary award determination and send a Preliminary Award Determination package to a whistleblower after a final determination of tax has been made, but before the two-year statute of limitations for refund claims expires regardless of whether the taxpayer has agreed to waive any refund claims.¹ It is clear that the Service has decided that it cannot pay any whistleblower awards prior to the expiration of the statute of limitations for refund claims unless the taxpayer waives its right to claim a refund of the tax at issue. However, it is not clear why the Service must wait for the two-year refund period to expire before it can make a preliminary award determination and advise the whistleblower of any such preliminary determination.

Presumably, the Service does not want to waste time and resources making an award determination if it is still possible for the taxpayer to claim a refund of paid tax. Further, the Service may be hesitant to communicate preliminary award determinations to taxpayers because such communications could raise issues regarding taxpayer confidentiality or could prematurely create some type of substantive or procedural rights for whistleblowers.

These concerns should not stop the Service from making and communicating preliminary award determinations prior to the expiration of the refund period. First, it is not likely that the Service will waste time and resources making preliminary award determinations in any meaningful number of cases because it is very rare for a taxpayer to agree to pay a tax and later make a refund for that same tax on a ground other than a net operating loss or credit carryback. Even if such a refund were made, the existence of a preliminary award determination would not adversely affect the Service in any way.² Second, taxpayer confidentiality issues do not become more or less pronounced depending on whether the two-year statute of limitations on refunds has expired. And, any concern regarding confidentiality can be addressed by requiring whistleblowers to sign a confidentiality agreement before receiving a preliminary award determination. Finally, any concerns that making and communicating a preliminary award determination will give the whistleblower procedural or substantive rights can be addressed by requiring the whistleblower to sign an agreement acknowledging that a preliminary award determination does not create any such rights.

Most importantly, any concerns the Service may have about making and communicating preliminary award determinations prior to the expiration of the statue of limitations for refunds should be weighed against the problems and consternation caused by waiting an additional two years after a tax has been paid to make and communicate to the whistleblowera preliminary award determination. The criticism of the whistleblower program over the past couple of years has demonstrated how delays in making awards and the lack of communication with whistleblowers has undermined public confidence in the whistleblower program and impaired the policy objectives behind section 7623 of the Code. Making and communicating preliminary award determinations prior the expiration of the two-year statute of limitations will allow the Service to provide more statistics about preliminary award determinations and will alleviate some of the anxiety and pressures that are negatively affecting public perception of the whistleblower program.

I would be pleased to discuss these comments with appropriate personnel if that would be helpful. Thank you.

² A claim for refund based on a loss or credit carryback should not affect the award determination. See the proposed definition of collected proceeds in IRM section 25.2.2.1. If the taxpayer made a claim for refund on another basis and the Service determined that the claim was meritorious, then the preliminary award determination could easily be reversed. Indeed, preliminary award determinations could expressly be made conditional on the absence of any meritorious claim for refund.