Section 7623 of the Internal Revenue Code (the "Code"), added in 1954, authorizes the Treasury Secretary to pay an award as he deems necessary for "(1) detecting underpayments of tax, or (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same." The program was significantly enhanced in 2006 as part of the Tax Relief and Health Care Act with the addition of Code section 7623(b), which provides that if the Treasury Secretary proceeds with any action based on information brought to the Secretary's attention by an individual, such individual will receive as an award at least 15% but not more than 30% of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action. The determination of the amount of such award by the IRS Whistleblower Office, which was created by the 2006 legislation, depends upon the extent to which the individual substantially contributed to such action.
The IRS issued final regulations under the Whistleblower provisions on August 7. These are contained in four parts. Treasury Regulations section 301.7623-1 provides information on filing a claim as well as information on who is eligible to file a claim. It also addresses confidentiality of the identity of an informant. Treasury Regulations section 301.7623-2 provides definitions of the terms used in the whistleblower regulations. Treasury Regulations section 301.7623-3 provides for administrative procedures relating to claim determinations and Treasury Regulations section 301.7623-4 addresses the amount and payment of claims. The final regulations apply to information submitted on or after August 12, 2014, and to claims for award under Code section 7623(b) that are open as of August 12, 2014.
The final regulations largely adopt proposed regulations issued in December 2012. A significant aspect of the final regulations is the addition of administrative provisions that allow a taxpayer to obtain information on the status of an investigation and to initiate an administrative action in the event the taxpayer is unsatisfied with the progress or determination of the investigation. Under the final regulations, the IRS must provide notice of the determination of an award or the rejection or denial of a claim. Upon receipt of the notice, the whistleblower has 30 days to comment on the report.
Although a number of awards have been granted, many have not progressed, aggravating taxpayers and their advisors. In fact, only a small percentage of awards have been granted (although high in dollar amount). As of the Treasury Department's annual report to Congress on the whistleblower program for fiscal year 2013, of the 39,746 claims received by the IRS in fiscal years 2010 through 2013, 17,073 remained open and only 16 were paid in full in 2013. The IRS awarded over $53 million to whistleblowers in fiscal 2013, collecting over $367 million based on the information provided. Both totals are smaller than comparable figures for 2012. Despite the lukewarm support the program has previously engendered within the IRS, the new Commissioner has embraced the program, making the following announcement on August 20.
The IRS Whistleblower Program, revised and expanded by Congress in 2006, is an important tool for improving tax administration. I am a strong believer in this program and proud of the work being done by the IRS Whistleblower Office. The information received from whistleblowers has the potential to assist the IRS in detecting tax compliance issues, which in turn helps ensure the integrity and fairness of our tax system. Average taxpayers who play by the rules must be confident that corporations and wealthy individuals cannot avoid paying their fair share of tax through the creation and use of complicated financial structures that exploit the tax law.
It is clear that the IRS Whistleblower Program has been making important contributions to the tax system: over the last three fiscal years, the IRS has paid out more than $186 million in awards, on collection of more than $1 billion based on whistleblower information. These collections, and the awards that followed from them, came about through the dedicated efforts of our field agents and managers, and demonstrate the IRS' commitment to taking appropriate action on whistleblower submissions and compensating whistleblowers under the law.
The IRS' commitment to the Whistleblower Program is also reflected in the significant progress the agency has made to date in implementing the 2006 law. This includes the recent issuance of regulations designed to define relevant terms under that law and allow disclosure of information, to the extent that the law permits and in a manner that is administratively feasible.
Looking to the future, the IRS must do everything possible to strengthen the Whistleblower Program and build on the progress already y made in implementing the law, while remaining mindful of the need to protect taxpayer rights. I am committed to expanding the program's reach and improving communications with existing and potential whistleblowers. To the extent that statutory changes are needed to further improve the program, I intend to work with Congress to ensure that such changes are enacted. Given the support for the Whistleblower Program evidenced at all levels of our agency, I am confident the program will continue to grow and evolve as a critical element in the IRS' program of tax compliance
The reference to statutory changes is important. The most pressing statutory change is the addition of anti-retaliation provisions. Such an addition would put the program in line with other Federal whistleblower programs, such as the False Claims Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
