IRS Whistleblower Program (2011)

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IRS Whistleblower Program

Annual Report to the Congress

Fiscal Year 2010

Publication 5241 (Rev. 6-2011) Catalog Number 68435Z Department of the Treasury Internal Revenue Service www.irs.gov

Fiscal Year 2010 Report to the Congress

on the Use of Section 7623

Table of Contents

II.

III.

IV.

VI.

Executive Summary.............................................................................................. 1

Program History................................................................................................... 2

Prior Law and Policy .................................................................................. 2

2006 Amendments..................................................................................... 3

Implementing the 2006 Amendments ........................................................ 3

Program Developments........................................................................................ 4

Staffing....................................................................................................... 4

Case Management Information System..................................................... 4

Program Guidance..................................................................................... 5

Program Operations .................................................................................. 7

Outreach and Communications ................................................................. 8

Administrative Priorities and Issues...................................................................... 8

Whistleblower Awards Paid ................................................................................ 12

Appendix: Revised Section 7623 and other provisions of law ............................ 15

FY 2010 Report to Congress on the Use of Section 7623

Executive Summary

The Tax Relief and Health Care Act of 2006 (the Act) enacted significant changes in the

IRS award program for whistleblowers. For information provided to the IRS after

December 19, 2006, new section 7623(b) of the Internal Revenue Code (the Code)

generally requires the IRS to pay awards if information an individual provides

substantially contributes to the collection of tax, penalties, interest, and other amounts

when the amounts in dispute are more than $2 million. The law set award ranges based

on percentages of the collected proceeds, and established a Whistleblower Office within

the IRS to administer those awards.

The Secretary of the Treasury must conduct an annual study and report to the

Congress on the use of section 7623 and the results obtained, and include any

legislative or administrative recommendations for section 7623 and its application

(section 406(c) of the Act). This report discusses program activities for fiscal year (FY)

2010. It includes a review of the law and regulations applicable to whistleblower awards,

changes made in program administration since the Act, a description of internal and

external program guidance, administrative priorities, and data on awards paid. The IRS

pays awards from collected proceeds after the completion of an audit or investigation

and after the taxpayer has exhausted all appeal rights. Therefore, the IRS may not

make payments for several years after the whistleblower has filed the claim. All award

payments made during FY 2010 resulted from claims filed under the prior law.

The primary purpose of the Act was to encourage people with knowledge of significant

tax noncompliance to provide that information to the IRS. In FY 2010, the IRS received

431 submissions that appear to meet the section 7623(b) criteria, identifying 5,429

taxpayers. Many of the individuals submitting this information claim to have inside

knowledge of the transactions they are reporting, and often provide extensive

documentation to support their claims. The IRS cannot yet tell how many of the cases

will result in collected proceeds, and whether the whistleblowers’ estimates of the

amounts in dispute are accurate.

This report describes the legal framework that forms the basis for developing program

guidance that the IRS issued in FY 2010, most notably the revisions to the Internal

Revenue Manual (IRM) issued on June 18, 2010. 1 On January 18, 2011, the IRS

published a proposed change to the applicable Treasury Regulation, seeking public

comment on the definition of “collected proceeds” that the IRS will use in determining

award amounts. Internal program guidance, including the IRM, will be revised to reflect

the final regulation after it is issued. The IRS expects the final regulation to be issued in

FY 2011. The discussion of the legal framework also explains the basis for disclosures

of taxpayer information that will occur in administrative proceedings to make award

determinations.

I.R.M. Section 25.2.2.

II.

Program History

Prior Law and Policy

The IRS has had the authority to pay awards to whistleblowers for many years. What is

now section 7623(a) 2 of the Code has its origins in legislation the Congress enacted in

1867. The original law provided the Secretary with the authority “to pay such sums as

he deems necessary for detecting and bringing to trial and punishment persons guilty of

violating the internal revenue laws or conniving at the same.” Before 1996, the IRS

made payments from appropriated funds. In 1996, section 1209 of the Taxpayer Bill of

Rights 2 (PL 104-168) expanded the purposes for which the IRS may pay awards,

adding “detecting underpayments of tax” as a basis for making an award and changed

the source of funds from IRS operating funds to proceeds of amounts collected from the

taxpayer (other than interest). 3

Before the 2006 amendments to section 7623, awards to whistleblowers were

discretionary, and IRS policy determined the amount. 4 The policy provided a framework

for assessing the contribution of the information to the collection of proceeds from a

taxpayer, and allowed for awards of 1 percent, 10 percent, or 15 percent of proceeds.

The published policy set a cap on awards at $10,000,000, but the IRS waived this cap

from time to time under “special agreements” with a whistleblower.

The Internal Revenue Manual (IRM) provided several grounds for rejecting a claim for

award, including participation in the evasion scheme that was the subject of the report

the whistleblower provided. Other common reasons for rejecting claims included:

•

The information provided was of no value.

•

The IRS already had the information or the information was available in public

records.

•

No collection of taxes and penalties existed from which the IRS could pay an

award.

The information might be of no value because it did not provide a sufficient basis for

initiating an examination or investigation of the issue presented, or because the

examination resulted in a “no change” finding.

The 2006 amendments re-designated the prior section 7623 as section 7623(a), added new provisions

as section 7623(b), and included program administration requirements that were not incorporated into the

Internal Revenue Code. The appendix to this report reprints section 7623, as amended, as well as

additional provisions in the Act that the Congress did not incorporate into the Code.

The IRS has separate authority to pay informant expenses from appropriated funds available for

confidential criminal investigation expenditures. The IRS makes those payments under authorities

delegated to Criminal Investigation and they are not within the scope of the Whistleblower Office or this

report to the Congress.

Regulations implementing what is now section 7623(a) appear at Code of Federal Regulations Title 26,

section 301.7623-1. The last version of the policy issued prior to the 2006 amendments was published in

2004, as Policy Statement P-4-27. The policy was revised in FY 2010, through revisions of the Internal

Revenue Manual discussed below.

2006 Amendments

The Tax Relief and Health Care Act of 2006 (section 406) (PL 109-432) created section

7623(b) of the Code. This section set a new framework for the consideration of

whistleblower submissions and established the Whistleblower Office within the IRS to

administer that framework. Operating at the direction of the Commissioner of the IRS,

the Whistleblower Office coordinates with other divisions of the IRS, analyzes

information submitted, and makes award determinations. The statute provides that the

Whistleblower Office may investigate the claim itself or assign it to the appropriate IRS

office for investigation. The Whistleblower Office does not currently investigate claims

itself. Individuals may appeal Whistleblower Office determinations to the U.S. Tax Court.

A whistleblower must meet several conditions to qualify for the section 7623(b) award

program. 5 To qualify for a whistleblower award, the information must:

•

Relate to a tax noncompliance matter in which the tax, penalties, interest,

additions to tax, and additional amounts in dispute exceed $2,000,000; and

•

Relate to a taxpayer, and for individual taxpayers only, one whose gross income

exceeds $200,000 for at least one of the tax years in question.

If the information meets the above conditions and substantially contributes to a decision

to take administrative or judicial action that results in the collection of tax, penalties,

interest, additions to tax, or additional amounts, the IRS will pay an award of at least 15

percent, but not more than 30 percent, of the collected proceeds resulting from

administrative or judicial actions (including related actions), or from any settlement in

response to an administrative or judicial action. The maximum award percentage

decreases to 10 percent for cases based principally on specific allegations disclosed in

certain public information sources (such as government audit reports). The

Whistleblower Office also can reduce the percentage if the whistleblower planned and

initiated the actions that led to the underpayment of tax.

Implementing the 2006 Amendments

On December 19, 2007, Notice 2008-4, 2008-2 Internal Revenue Bulletin 253, 6

provided initial guidance on how to submit whistleblower information to the IRS. The

IRS continues to develop and revise operating procedures to ensure the proper review

of each submission. Individuals may appeal award determinations made under section

7623(b) to the Tax Court. Procedures established to evaluate whistleblower

submissions make a clear distinction between determinations regarding awards, made

by the Whistleblower Office (such as eligibility for an award or the amount of an award),

and tax administration decisions, made by IRS operating divisions (such as the scope of

an examination or investigation, or the assessment of taxes, penalties, and interest).

The whistleblower has no role in tax administration decisions, and may not appeal or

otherwise challenge an IRS tax administration decision.

On June 18, 2010, the IRS revised the IRM to provide detailed guidance under section

7623, including disclosures to whistleblowers prior to award determinations under

If the submission does not meet the criteria for section 7623(b) consideration, the IRS may consider it

for an award under the pre-Act discretionary authority (what is now section 7623(a) of the Code).

http://www.irs.gov/pub/irs-drop/n-08-04.pdf

section 7623(b). This guidance is described further in the Program Developments

section, below.

III.

Program Developments

Staffing

At the beginning of FY 2010, the Whistleblower Office staff of 17 included ten analysts

with decades of experience in a broad array of IRS compliance programs. After

reviewing case intake levels and expected workload as the first award determinations

were made under section 7623(b), the IRS authorized a staff increase to 21 in August

2010. Recruiting for the additional staff was in progress as of the end of FY 2010.

Case Management Information System

The IRS began to receive whistleblower submissions alleging more than $2 million in

underpayment of tax almost immediately after enactment of the amendments to section

7623. The IRS initially evaluated the submissions using processes and systems

designed for the pre-amendment informant awards program. The IRS recognized that

the case management information system designed for the pre-amendment program

would not be adequate to manage the case load under the new law. Therefore, the IRS

supplemented it with other automated and manual case management tools as a stopgap until it could design and implement a new case management system.

In January 2009, the IRS began using a new case management system based on

commercial-off-the-shelf technology to record all new section 7623 claims. By the end of

FY 2009, the IRS converted all section 7623(b) claims recorded on the old systems to

the new system, and began planning to convert legacy data to the new system. The

legacy data on pre-amendment claims and section 7623(a) claims submitted prior to

January 2009 was loaded into the new system in July 2010, and records on all open

legacy cases were updated to incorporate the enhanced features of the new system. 7

The new case management system captures all of the data needed to manage section

7623 claims, from receipt to analysis and assignment to an operating division, as well

as the award determination process when operating division actions result in collected

proceeds. Staff in each operating division and Criminal Investigation have access to

data on cases assigned to their organization or component, and may update records to

reflect actions they take during the evaluation of information submitted by

whistleblowers.

Legacy data on closed cases is available for research and reference in the new system, but was not

updated.

Program Guidance

The IRS issued Notice 2008-4 on December 19, 2007 to provide initial guidance on how

to submit information to the IRS. A revision to Form 211, Application for Award for

Original Information, 8 accompanied this notice. The notice addressed the most pressing

guidance requirements—how to submit information and the criteria that the IRS will

apply to determine whether the information qualifies under section 7623(b). The notice

included the requirement that an individual submit the information under penalty of

perjury and defines ineligible submissions. A submission may be ineligible because the

person submitting it is disqualified (e.g., a federal employee who learned of the tax

noncompliance in the course of performing his or her duties), or because the

information does not provide a basis for IRS action. The latter category includes

information that is speculative or that the IRS already knows. The notice also described

the types of information that the whistleblower should include for the IRS to be able to

evaluate the submission.

The IRS published revisions to the IRM on June 16, 2010. Those revisions update

procedures for receipt and processing of whistleblower submissions, and provide the

framework for making award determinations. Key sections of revised IRM 25.2.2

address:

•

Procedures for case intake and case information management

•

Guidelines for evaluating whistleblower submissions, including a checklist for

debriefing the whistleblower and rules to follow when legal issues may preclude

the use of information provided by a whistleblower

•

Information required by the Whistleblower Office when the Operating Division or

Criminal Investigation completes action on a submission, including required

supporting documents

•

Criteria for evaluating the whistleblower’s contribution to IRS actions, including

definitions of key terms such as “related actions” and “collected proceeds,” 9 as

well as criteria for setting the award percentage within the ranges provided by

law

•

Administrative procedures for determining the award amount, which include an

opportunity for the whistleblower to comment on section 7623(b) award

determinations before a final decision is made

http://www.irs.gov/pub/irs-pdf/f211.pdf

After the IRM was published, the IRS re-examined the definition of “collected proceeds” and concluded

that the language in the IRM was more restrictive than is legally required. A change to Treas. Reg. §

301.7623-1 to reflect a broader definition of collected proceeds was issued for public comment on

January 18, 2011.

•

Procedures for processing the award payment through the IRS accounting

functions

An important policy change reflected in the IRM was that awards paid in section 7623(a)

cases submitted on or after July 1, 2010 (those in which the statutory thresholds for

7623(b) claims are not met) will be determined using the same criteria and percentages

that apply to 7623(b) claims. Section 7623(a) claims submitted prior to July 1, 2010, will

be evaluated under the rules and policy in effect at the time the claim was filed.

Disclosure of Taxpayer Information

A whistleblower can appeal any determination regarding an award under section

7623(b)(1), (b)(2), or (b)(3) to the Tax Court pursuant to section 7623(b)(4). A

meaningful right to appeal to the Tax Court requires disclosure to the whistleblower of

the basis for the award determination. The IRS Chief Counsel has advised that section

6103(h)(4), which permits disclosures in certain administrative and judicial proceedings,

authorizes this disclosure. That disclosure authority provides a new level of

transparency in award determinations. However, it is important to note that the award

determination focuses on the extent to which the whistleblower’s information contributed

to assessments and collection of taxes, penalties, interest, and other amounts, which

may require disclosure to the whistleblower of significant taxpayer information. 10

The core findings that the IRS must make in an award determination focus on the extent

to which the IRS took action based on the information the whistleblower provided, and

the degree to which the whistleblower’s information substantially contributed to that

action. Analysis may include a review of the examination plan to determine whether the

IRS adjusted the scope of the examination, review of information document requests to

determine whether the IRS modified them based on the issues the whistleblower

identified, or review of information from the taxpayer or a third party that may have

corroborated or refuted the whistleblower’s submission.

The IRS may include in the file information about the return as originally filed by the

taxpayer and any adjustments made based on information provided by the

whistleblower. The IRS will also include information on consideration of penalties,

abatement requests, reasonable cause defenses, and collection issues. All of this

information in the award recommendation file is part of the administrative record

supporting the award determination, and will be available to a whistleblower challenging

the determination in the Tax Court.

Because of the volume and sensitivity of the information in an awards file, the IRS has

designed an award determination administrative proceeding to protect taxpayer privacy

while affording the whistleblower a meaningful opportunity to participate in the process.

The initial communication to the whistleblower will identify the proceeds collected based

on the whistleblower’s information, the recommended award percentage, and the

recommended award amount. It will also describe, in general terms, the factors

contributing to the recommended award percentage. The IRS will give the whistleblower

the option of accepting the recommendation, providing comments based on the

This administrative procedure, including disclosure of taxpayer information, is set forth in IRM 25.2.2,

as revised on June 16, 2010. This procedure does not apply to award determinations in 7623(a) cases,

which are not subject to appeal to the U.S. Tax Court.

summary, or reviewing the detailed recommendation and the award recommendation

file before submitting comments. Before the whistleblower can review the detailed

recommendation and the award recommendation file, he or she must sign an

agreement to use the taxpayer information only in connection with the award

determination proceeding. Disclosure of the taxpayer’s information or use for any other

purpose could reduce the recommended award percentage.

Program Operations

As noted above, in December 2007, the IRS directed that all section 7623 submissions

go first to the Whistleblower Office. The Whistleblower Office reviews the information to

identify matters that appear to meet the section 7623(b) criteria, and forwards those that

do not to the Informant Claims Examination unit for further action. That unit evaluates all

submissions it receives to determine whether the information offered may materially

contribute to the assessment or collection of unpaid taxes, penalties, interest, or other

amounts.

During FY 2010, the IRS received 431 whistleblower submissions relating to 5,429

taxpayers 11 that appeared to meet the $2 million of tax, penalties, interest, and

additions to tax threshold in section 7623(b). Many of the individuals submitting

information to the IRS claimed to have inside knowledge of the reported transactions,

often with extensive documentation to support their claims. It is not yet known how

many of these cases will result in collected proceeds after examination or investigation,

as the amounts alleged reflect only the whistleblower’s estimate of the potential

recovery. Only 9 of 97 full paid claims in FY 2010 involved collections of more than $2

million. However, because whistleblowers submitted all of the claims paid in 2010 under

the old Informant Award Program, this data does not assist in making estimates about

the claims brought under the revised statute.

(Table 1)

7623(b) SUBMISSIONS BY FISCAL YEAR 12

Submissions

2007

2008

2009

2010

378

470

431

Taxpayers

Identified

587

1366

2150

5429

The Whistleblower Office often receives submissions that allege underpayment of tax by more than one

taxpayer. In most cases, the IRS must evaluate the liability of each taxpayer individually—a single audit

or investigation cannot resolve the issues for all taxpayers identified in the submission.

Statistics on 7623(b) submissions and taxpayers identified are based on the best information available

at the time the report is produced. The classification of a particular submission as a potential 7623(b)

case, and the number of taxpayers identified, can change as additional information is developed. As a

result, the numbers for a particular fiscal year included in previous annual reports do not match the

numbers reported here.

Outreach and Communications

The IRS has developed a communications plan to address outreach to both the public

and IRS personnel on changes in the whistleblower program. The plan includes efforts

to identify opportunities for improvement and potential barriers to change, and to

manage expectations for the scope and pace of change.

The Whistleblower Office has a page on the IRS Intranet to make information available

to IRS personnel, and provides articles for internal newsletters and speakers for

professional education events to reach employees who are most likely to deal with a

whistleblower case. In June 2010, the Whistleblower Office hosted a meeting of

managers and employees from the Operating Divisions and the offices of Criminal

Investigation and Chief Counsel. This provided a forum to discuss the new guidance

published in the IRM, and to share experiences in an effort to further improve program

administration.

A dedicated page on the public website, www.irs.gov, contains information for the public

about the purpose of the Whistleblower Program, how to make a submission, and what

to expect after making a submission, as well as links to Notice 2008-4 and Form 211. 13

The Whistleblower Office also makes presentations to professional groups involved in

the representation of taxpayers and whistleblowers, both to describe program

developments and to obtain outside perspectives on the program.

IV.

Administrative Priorities and Issues

The Whistleblower Office continues to work with the IRS Office of Chief Counsel and

Treasury Department to develop appropriate administrative program guidance. Based

on the Whistleblower Office’s experiences in administering the whistleblower program

since its formation in 2007, the IRS has identified several areas it believes should be

addressed through administrative guidance and as well as other issues.

A. Administrative Priorities

1. Guidance

A top priority is to update formal published guidance for section 7623. As described

below, this includes issuing final regulations to define collected proceeds and drafting

proposed regulations that would update the current regulations to reflect the statutory

changes made by the 2006 amendments to section 7623. The IRS recently finalized the

temporary and proposed regulations issued in March 2008 under section 6103(n).

a. Issue final regulations to define collected proceeds. On January 18,

2011, the IRS issued proposed regulations seeking public comment on a

proposal to define the term “collected proceeds” for both section 7623(a) and

(b). As proposed, this regulation clarifies the definitions of “proceeds of

http://www.irs.gov/compliance/article/0,,id=180171,00.html

amounts collected” and “collected proceeds” for purposes of section 7623,

and states that the provisions of Treas. Reg. §301.7623-1(a) concerning

refund prevention claims are applicable to claims under section 7623(a) and

(b). In clarifying the definitions of proceeds of amounts collected and collected

proceeds, this proposed regulation also provides that the reduction of an

overpayment credit balance is also considered proceeds of amounts collected

and collected proceeds under section 7623. The IRS expects to issue final

regulations defining collected proceeds for purposes of section 7623 after

receiving public comments on the proposed regulations.

b. Issue proposed regulations updating section 7623 regulations to

reflect 2006 Amendments. The IRS Office of Chief Counsel, working with

the Assistant Secretary for Tax Policy, the Whistleblower Office, and other

IRS offices, is drafting comprehensive proposed regulations that will revise

the current regulations implementing section 7623 to reflect the 2006

amendments to the statute.

c. Final section 6103(n) regulations. Treasury and the IRS recently

finalized temporary regulations issued under section 6103(n) in March 2008

which authorize contracts for services with whistleblowers to be used in

unusual circumstances when direct assistance of a whistleblower is sought by

the Service, and the parameters for disclosure of return information in

connection with such contracts. These regulations were set to expire in March

2011.

2. Other Priorities

a. Review and update internal operating procedures to improve

program performance. The IRS plans to conduct a comprehensive review of

whistleblower program internal operating procedures to identify opportunities

for improved performance. This will include collecting information from

Operating Division and Chief Counsel staff who evaluate whistleblower

information in order to identify opportunities to more efficiently and effectively

evaluate and process whistleblower claims.

b. Begin paying awards for claims made under section 7623(b). In FY

2011, the IRS will begin paying awards for claims made under section

7623(b). In June 2010, the IRS published procedures and criteria for making

award determinations under the 2006 Amendments, including providing an

opportunity for whistleblowers in section 7623(b) cases to provide comments

on award recommendations before a final award determination is made. The

Whistleblower Office expects to apply these procedures and criteria to the

initial section 7623(b) cases in which proceeds have been collected, and

begin making award determinations in these cases in the second quarter of

FY 2011.

B. Other Issues of Interest

A number of additional issues exist in the administration of the Whistleblower Program.

1. The definition of “collected proceeds” does not extend to all recoveries

from taxpayers. Potential taxpayer liabilities are sometimes resolved in a

manner that does not result in collected proceeds from which an award may be

paid. This can occur when the taxpayer has a net loss carried forward from a

prior period or carried back from a subsequent period. In addition, if a taxpayer is

prosecuted for a criminal violation of the internal revenue laws, a sentence after

conviction may include fines. Criminal fines are not available to pay awards

under section 7623, because the Victims of Crime Act (42 U.S.C. section 10601

et seq.,) requires that all criminal fines be deposited in the Victims of Crime Fund.

2. The dollar amount thresholds for “gross income” and “amounts in dispute”

are undefined. Section 7623(b)(5) sets two thresholds for application of section

7623(b), which also serve to define the jurisdiction of the U.S. Tax Court to

review whistleblower award determinations. The general rule applicable to all

claims requires that “the tax, penalties, interest, additions to tax, and additional

amounts in dispute exceed $2,000,000.” The law also provides that subsection

(b) shall apply “in the case of any individual [taxpayer], only if such individual’s

gross income exceeds $200,000 for any tax year….” Because neither term is

defined in the statute, there is uncertainty in both the administration of the

whistleblower program and in determining whether the U.S. Tax Court has

jurisdiction to consider an appeal.

The “individual’s gross income” limitation was apparently included in the law to

ensure that the focus of the award program under section 7623(b) is on relatively

high income taxpayers. In the absence of a definition, the IRS must look to other

provisions of the Internal Revenue Code to determine how to calculate “gross

income.” This may require complex calculations in cases where allocation of

partnership income or other similar issues apply. The IRS questions whether this

effort is intended or justified, given that failure to satisfy the gross income

threshold generally shifts the claim from a mandatory section 7623(b) claim to a

discretionary section 7623(a) claim. Approximately 85 percent of submissions do

not appear to meet the income or amount in dispute thresholds but will be

considered for awards under section 7623(a) if the IRS acts on them and collects

proceeds. To the extent that the individual income threshold was intended to

provide a limit on U.S. Tax Court jurisdiction, the practical impact appears to be

limited. Few cases involving individual taxpayers will exceed the $2 million

threshold but not have at least one taxpayer whose income exceeds $200,000 or

at least one taxpayer that is not an individual.

Similar concerns pertain to the $2 million “amount in dispute” threshold. Section

7623(b)(5)(B) requires that “the tax, penalties, interest, additions to tax, and

additional amounts in dispute” must exceed $2 million. The term “in dispute” is

not defined in the law, the legislative history, or elsewhere in the Internal

Revenue Code, nor does the law or legislative history indicate the point at which

the amount is determined. An allegation by a whistleblower does not create a

dispute between the IRS and a taxpayer, nor does the amount asserted by the

whistleblower to be owed by a taxpayer satisfy the statutory threshold. The IRS

working definition assumes that the dispute in question must be between the IRS

and one or more taxpayers (or persons who may be required to pay penalties or

“other amounts”). In cases where action is taken against multiple taxpayers as a

result of information provided by a whistleblower, the IRS working definition

aggregates the disputed amounts of multiple taxpayers to determine whether the

$2 million threshold has been exceeded.

The IRS, Tax Court, and whistleblowers would have greater certainty about the

application of section 7623(b) if the “gross income” and “amount in dispute”

thresholds were replaced by a reference to a threshold that can be reasonably

ascertained, such as the amount of collected proceeds.

3. Rules on access to and disclosure of taxpayer information do not fully

protect taxpayers. A whistleblower can appeal any determination on an award

under section 7623(b)(1), (2), or (3) of the Code to the Tax Court (section

7623(b)(4) of the Code). A meaningful right to appeal to Tax Court requires

disclosure to the whistleblower of the basis for the award determination, which

oftentimes will include taxpayer information that is protected from disclosure

under section 6103. Consistent with section 6103(h), the IRM provides for

disclosure of taxpayer information by the IRS to the whistleblower if the

whistleblower enters into a confidentiality agreement and agrees not to disclose

the information other than as permitted in that agreement.

The IRS has two concerns regarding the disclosure of taxpayer information to the

whistleblower as part of an award determination. First, current law does not

provide an effective sanction if the whistleblower discloses taxpayer information

in violation of the confidentiality agreement and section 6103(h). Second, the

whistleblower may, against the wishes of the taxpayer, disclose the identity of the

taxpayer in a Tax Court or other judicial proceeding. The taxpayer is not a party

to any dispute between the IRS and a whistleblower over eligibility for or the

amount of an award under section 7623, but both pleadings and court decisions

in these cases routinely include details about the taxpayer. 14

4. The Whistleblower Office has limited information about the extent of the

whistleblower’s contribution in some criminal cases. In some criminal cases,

information available to the Whistleblower Office on the extent of the

whistleblower’s contribution may be limited by grand jury secrecy rules. The

Whistleblower Office may not review and consider grand jury information

protected from disclosure under the Federal Rules of Criminal Procedure unless

an exception to the secrecy rules is granted on a case-by-case basis. Without

that information, it may not be possible for the Whistleblower Office to

independently assess the extent of the whistleblower’s contribution when making

a determination regarding an award under section 7623.

The IRS Office of Chief Counsel has initiated a process to bring the IRS’s concerns about the

taxpayer information disclosure issue to the attention of the Tax Court.

5. The law does not provide for whistleblower protection. Unlike other laws that

encourage whistleblowers to report information to the government, section 7623

does not prohibit retaliation against the whistleblower. When the whistleblower is

an employee of the taxpayer, retaliation can take the form of a job-related action.

In other cases, whistleblowers may face threats of physical harm or damage to

economic interests. In such cases, whistleblowers reporting information under

section 7623 may have recourse under state law, but federal law does not

appear to provide a remedy.

The IRS has, as a matter of policy and as an application of section 6103,

committed to protect a whistleblower’s identity, and even the fact that the agency

received whistleblower information in a particular case. This commitment is

qualified, however, as the IRS tells whistleblowers it may identify them if they are

an essential witness in a judicial proceeding or if ordered to do so by a court of

competent jurisdiction. Despite the IRS’s commitment to protect whistleblower

identities, recent litigation has highlighted a tension between the IRS’s

commitment to whistleblowers and its obligations in civil discovery. Certain

litigants have sought information on informant involvement in tax matters in

cases where the prospect that an informant could be a witness at trial did not

exist. The appropriate response to such a request should be to neither confirm

nor deny informant involvement, because a truthful denial in some cases will

allow individuals to draw a conclusion in other cases. The authority to take this

approach is somewhat uncertain, however, and an adverse ruling on a discovery

request could open the door to fishing expeditions to identify whistleblower

involvement and targeted requests to determine whether particular individuals

made whistleblower submissions.

Whistleblower Awards Paid

The table below provides information on informant claims paid. The IRS cannot make

an award determination until the underlying taxpayer matter is completed, including any

administrative or judicial appeals the taxpayer may choose to pursue. Whistleblowers

are advised that this process may take five to seven years, and longer when there are

protracted appeals or collection actions. Through FY 2010, all awards the IRS paid have

been based on information received before December 20, 2006, the date of the

enactment of section 406 of the Act. Therefore, the IRS paid all of the awards, including

those paid in 2010, based on the prior law, what is now section 7623(a). Thus, the

applicable award percentages were those established in prior IRS policy, not the higher

percentages set by the 2006 law.

The number and amount of awards paid each year can vary significantly, especially

when a small number of high-dollar claims are resolved in one year (as was the case in

2006 and 2008). One factor contributing to the lower award payments in FY 2009 was a

change in the IRS definition of the point at which proceeds in a tax case are available to

make an award payment. In the past, the IRS monitored the tax case to ensure that it

collected proceeds before processing the award claim. Where the taxpayer filed an

administrative or judicial appeal, the IRS did not pay claims until the court finally

resolved the appeal. After consultation with the Office of Chief Counsel, the IRS

determined that it should not pay claims even when the taxpayer has not filed an appeal

until the period for filing an appeal has lapsed. The general rule is that a taxpayer may

file a claim for refund within two years of the last payment, unless he or she has waived

that right. Thus, beginning in July 2009, the IRS monitors cases for both collection and

the lapse of the period for filing a claim for refund. As a result, the IRS did not pay some

claims that it would have otherwise paid in FY 2009 until FY 2010 or FY 2011.

(Table 2)

Amounts Collected and Awards Paid under 7623(a) FY 2005-2010

2006

2007

2008

2009

2010

Cases

Received

4,295

2,751

3,704

5,678 15

7,577

Awards Paid

220

227

198

110

Collections

over $2 million

Total Amount

of Awards

Paid 16

$24,184,458

$13,600,205

$22,370,756

$5,851,608

$18,746,327

Amounts

Collected

$258,590,435

$181,784,287

$155,985,834

$206,032,872

$464,695,459

The implementation of a new case management information system included changes in the way the

IRS recorded submissions under 7623(a). The IRS cannot determine the extent to which this change was

a factor in the higher number of cases received after the new system was implemented in FY 2009.

The amount of awards paid includes both fully-paid awards and partially-paid awards. In FY 2010, 17

informants received partial payments totaling $13 million.

VI.

Appendix: Revised Section 7623 and other provisions of law

Revised 26 USC Section 7323

TITLE 26 - INTERNAL REVENUE CODE

Subtitle F - Procedure and Administration

CHAPTER 78 - DISCOVERY OF LIABILITY AND ENFORCEMENT OF TITLE

Subchapter B - General Powers and Duties

Sec. 7623. Expenses of detection of underpayments and fraud, etc.

(a) In General- The Secretary, under regulations prescribed by the Secretary, is authorized to pay such

sums 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,

in cases where such expenses are not otherwise provided for by law. Any amount payable under the

preceding sentence shall be paid from the proceeds of amounts collected by reason of the information

provided, and any amount so collected shall be available for such payments.

(b) Awards to Whistleblowers(1) IN GENERAL- If the Secretary proceeds with any administrative or judicial action described in

subsection (a) based on information brought to the Secretary's attention by an individual, such

individual shall, subject to paragraph (2), receive as an award at least 15 percent but not more

than 30 percent 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

Whistleblower Office shall depend upon the extent to which the individual substantially

contributed to such action.

(2) AWARD IN CASE OF LESS SUBSTANTIAL CONTRIBUTION(A) IN GENERAL- In the event the action described in paragraph (1) is one which the

Whistleblower Office determines to be based principally on disclosures of specific

allegations (other than information provided by the individual described in paragraph (1))

resulting from a judicial or administrative hearing, from a governmental report, hearing,

audit, or investigation, or from the news media, the Whistleblower Office may award such

sums as it considers appropriate, but in no case more than 10 percent 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, taking into account the significance of the individual's information and the role of

such individual and any legal representative of such individual in contributing to such

action.

(B) NONAPPLICATION OF PARAGRAPH WHERE INDIVIDUAL IS ORIGINAL SOURCE

OF INFORMATION- Subparagraph (A) shall not apply if the information resulting in the

initiation of the action described in paragraph (1) was originally provided by the individual

described in paragraph (1).

(3) REDUCTION IN OR DENIAL OF AWARD- If the Whistleblower Office determines that the

claim for an award under paragraph (1) or (2) is brought by an individual who planned and

initiated the actions that led to the underpayment of tax or actions described in subsection (a)(2),

then the Whistleblower Office may appropriately reduce such award. If such individual is

convicted of criminal conduct arising from the role described in the preceding sentence, the

Whistleblower Office shall deny any award.

(4) APPEAL OF AWARD DETERMINATION- Any determination regarding an award under

paragraph (1), (2), or (3) may, within 30 days of such determination, be appealed to the Tax Court

(and the Tax Court shall have jurisdiction with respect to such matter).

(5) APPLICATION OF THIS SUBSECTION- This subsection shall apply with respect to any

action-(A) against any taxpayer, but in the case of any individual, only if such individual's gross

income exceeds $200,000 for any taxable year subject to such action, and

(B) if the tax, penalties, interest, additions to tax, and additional amounts in dispute

exceed $2,000,000.

(6) ADDITIONAL RULES(A) NO CONTRACT NECESSARY- No contract with the Internal Revenue Service is

necessary for any individual to receive an award under this subsection.

(B) REPRESENTATION- Any individual described in paragraph (1) or (2) may be

represented by counsel.

based on information submitted to the Secretary unless such information is submitted

under penalty of perjury.'.

Other provisions of Section 406 of the Tax Relief and Health Care Act

of 2006

(a)(2) ASSIGNMENT TO SPECIAL TRIAL JUDGES(A) IN GENERAL- Section 7443A(b) (relating to proceedings which may be assigned to special

trial judges) is amended by striking `and' at the end of paragraph (5), by redesignating paragraph

(6) as paragraph (7), and by inserting after paragraph (5) the following new paragraph:

(6) any proceeding under section 7623(b)(4), and'.

(B) CONFORMING AMENDMENT- Section 7443A(c) is amended by striking `or (5)' and inserting

`(5), or (6)'.

(3) DEDUCTION ALLOWED WHETHER OR NOT TAXPAYER ITEMIZES- Subsection (a) of section 62

(relating to general rule defining adjusted gross income) is amended by inserting after paragraph (20) the

following new paragraph:

`(21) ATTORNEYS FEES RELATING TO AWARDS TO WHISTLEBLOWERS- Any deduction

allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the

taxpayer in connection with any award under section 7623(b) (relating to awards to

whistleblowers). The preceding sentence shall not apply to any deduction in excess of the

amount includible in the taxpayer's gross income for the taxable year on account of such award.'.

(b) Whistleblower Office(1) IN GENERAL- Not later than the date which is 12 months after the date of the enactment of

this Act, the Secretary of the Treasury shall issue guidance for the operation of a whistleblower

program to be administered in the Internal Revenue Service by an office to be known as the

`Whistleblower Office' which-(A) shall at all times operate at the direction of the Commissioner of Internal Revenue

and coordinate and consult with other divisions in the Internal Revenue Service as

directed by the Commissioner of Internal Revenue,

(B) shall analyze information received from any individual described in section 7623(b) of

the Internal Revenue Code of 1986 and either investigate the matter itself or assign it to

the appropriate Internal Revenue Service office, and

legal representative of such individual.

(2) REQUEST FOR ASSISTANCE- The guidance issued under paragraph (1) shall specify that

any assistance requested under paragraph (1)(C) shall be under the direction and control of the

Whistleblower Office or the office assigned to investigate the matter under paragraph (1)(A). No

individual or legal representative whose assistance is so requested may by reason of such

request represent himself or herself as an employee of the Federal Government.

Congress on the use of section 7623 of the Internal Revenue Code of 1986, including-(1) an analysis of the use of such section during the preceding year and the results of such use,

and

(2) any legislative or administrative recommendations regarding the provisions of such section

and its application.

(d) Effective Date- The amendments made by subsection (a) shall apply to information provided on or

after the date of the enactment of this Act.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.