IRS Whistleblower Program (2012)

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IRS Whistleblower Program

Annual Report to the Congress

Fiscal Year 2011

Publication 5241 (Rev. 6-2012) Catalog Number 68435Z Department of the Treasury Internal Revenue Service www.irs.gov

Fiscal Year 2011 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 .................................................................................. 6

Outreach and Communications ................................................................. 9

Administrative Priorities and Issues.................................................................... 10

Whistleblower Awards Paid ................................................................................ 14

Appendix: Revised Section 7623 and other provisions of law ............................ 16

FY 2011 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 $2,000,000. 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 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) 2011. 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 which result from an audit or investigation. Because payments are

not made until the taxpayer has exhausted all appeal rights and the statutory period for

the filing of a claim for refund has expired or been waived by the taxpayer, the IRS may

not make payments for several years after the whistleblower has filed the claim. The

IRS paid the first awards under the 2006 amendments in FY 2011; however, most of the

awards paid during FY 2011 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 2011, the IRS received

314 submissions that appear to meet the section 7623(b) criteria, identifying 732

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 2011. 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. A

public hearing on the proposed regulation was held on May 11, 2011. Internal program

guidance, including the Internal Revenue Manual (IRM), will be revised to reflect the

final regulation issued on February 22, 2012.

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) 1 of the Code has its origins in legislation 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). 2

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

discretionary, and IRS policy determined the amount. 3 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 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 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 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 that were described in the FY 2010 Annual Report, which can be found on the IRS web

site at http://www.irs.gov/pub/whistleblower/annual_report_to_congress_fy_2010.pdf.

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. 4 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, 5

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 may not appeal or otherwise challenge an IRS tax administration

decision as only determinations are subject to Tax Court review.

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

III.

Program Developments

Staffing

At the beginning of FY 2011, the Whistleblower Office staff of 17 included ten analysts

with decades of experience in a broad array of IRS compliance programs, and recruiting

was underway to increase the staff to 21. While additional staff was hired, staff

retirements resulted in an on-board staff of 18 at the end of the fiscal year. In addition,

the IRS Office of Chief Counsel appointed a senior attorney to serve as Special Counsel

to the Director of the Whistleblower Office. The Special Counsel provides legal advice to

the Director and coordinates support provided by other Chief Counsel offices.

Case Management Information System

The IRS began to receive whistleblower submissions alleging more than $2,000,000 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. 6

In August 2011, the Government Accountability Office (GAO) published a report on its

review of the Whistleblower Office. Among its findings and recommendations were

several issues related to the case management information system. GAO

recommended increased data collection to make the case management system a more

effective tool for identifying aging cases, and for tracking decisions made by various IRS

offices in the evaluation of whistleblower submissions. The IRS generally agreed with

the information system recommendations. In fact, the IRS had been working on

adjustments and enhancements to the information system in FY 2010 and early FY

2011, but had to suspend those efforts for much of FY 2011 so that it could provide

support to two audit teams—one from GAO and the other from the Treasury Inspector

General for Tax Administration (TIGTA). The specific recommendations from GAO will

be incorporated into a broader review of user requirements as the IRS develops a

comprehensive plan for system changes and enhancements. . The IRS plans to fully

implement the actions to the GAO 2011 report by October 15, 2012, and will make

additional improvements during the Winter of FY 2013.

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 to provide initial guidance on how to submit information

to the IRS. A revision to Form 211, Application for Award for Original Information, 7

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. 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.

The IRM includes a definition of the term “collected proceeds,” which changed the prior

rule that permitted awards to be paid when whistleblower information resulted in denial

of a taxpayer claim for refund. Subsequent to publication of the IRM, the Whistleblower

Office received Chief Counsel advice that application of the prior rule was permissible.

While awaiting publication of a final regulation, the Whistleblower Office relied on the

Chief Counsel advice as its authority to make award payments when information results

in denial of a refund claim.

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).

After a public hearing on May 11, 2011. the IRS issued final regulations on February 22,

2012. This regulation clarifies the definitions of “proceeds of 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.

Final regulations governing the use of contracts for services related to the detection of

violations of the internal revenue laws or related statutes were published and became

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

effective on March 15, 2011. These regulations describe the circumstances under

which the disclosure of taxpayer information to a whistleblower (and, if applicable, the

whistleblower’s representative) may be made, limitations on the use of any disclosed

information, and safeguards to ensure those limitations are followed.

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 Ogden 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.

In FY 2011, the Whistleblower Office paid the first claims under the 2006 amendments

to section 7623. Taxpayer privacy laws do not permit the publication of data on specific

claims, and allow reporting on consolidated data only when the number of claims paid is

large enough to produce a statistical report. The IRS paid awards for 97 claims in FY

2011, but the number of claims paid under 7623(b) was too small to qualify for separate

reporting.. While the IRS cannot provide specific information about these cases, they

are a significant event in the development of the program. Evaluation of these cases,

and others that will be paid in FY 2012, has highlighted policy and procedure issues that

are addressed below in the section on Administrative Priorities and Issues.

During FY 2011, the IRS received 314 whistleblower submissions relating to 732

taxpayers 8 that appeared to meet the $2,000,000 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 4 of 97 claims paid in FY 2011 involved collections of more than

$2,000,000. However, because most of the claims paid in FY 2011 were submitted

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

about the claims brought under the revised statute.

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.

(Table 1)

7623(b) SUBMISSIONS BY FISCAL YEAR 9

Submissions

2007

2008

2009

2010

2011

377

472

422

314

Taxpayers

Identified 10

875

1369

2178

5545

734

The charts below provide information on the status of open claims identified as

potentially exceeding the $2,000,000 threshold for section 7623(b). These claims are

identified during initial review of submissions by the Whistleblower Office, and then

forwarded to subject matter experts (SMEs) in the IRS Operating Divisions. The SMEs

determine whether the whistleblower information will be provided to field offices for audit

or investigation, considering the quality of the information provided, IRS enforcement

priorities and, in some cases, legal limitations on the use of the information submitted.

Once information is provided to a field office, it may be incorporated into an on-going

audit or investigation, a new audit or investigation may be started, or it may be deferred

or declined in favor of higher priority cases or issues. Upon completion of an audit or

investigation, or after a decision by an SME or a field office not to act on the information

provided by the whistleblower, the file is returned to the Whistleblower Office. The

Whistleblower Office determines whether a whistleblower is eligible for an award and, if

so, the amount of the award.

The tables below include a category called “Whistleblower Office-Suspended.” Action

on claims may be suspended for several reasons. These include waiting for collection

action after tax has been assessed, waiting for the taxpayer to exhaust or waive appeal

rights, and waiting for action on related cases. A related case suspension would be

appropriate when a whistleblower submission identifies multiple taxpayers, and the IRS

decides to take action with respect to some but not others. The declined cases would be

suspended until the actions on other taxpayers are resolved. Another reason to

suspend for related cases would be that actions have been completed on some

taxpayers, but the amount in dispute is below the $2,000,000 threshold for section

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.

A relatively small number of submissions account for a large number of taxpayers identified, as they

contain long lists of taxpayers involved in the reported activity, or they lead to the identification of a large

number of taxpayers. While the number of taxpayers identified for FY 2011 is substantially lower than

prior years, experience has shown that this number is likely to rise (and may rise dramatically) as the

information submitted is further analyzed.

7623(b). Suspending action to determine whether additional actions could push the

aggregate amount in dispute over the threshold preserves the whistleblower’s potential

Tax Court appeal right. The Whistleblower Office has not recorded the reason for

suspension in the information system in a way that would permit statistical reporting, but

will include a change in data collection to permit this information to be reported in the

2012 Annual Report.

(Table 2)

Current Status of Open 7623(b) Claims

Current Status

Submissions

Taxpayers

Whistleblowers

Claim

Not recorded

Appeals 11

CI Review

Operating Division Field Examination

564

2905

447

2798

Operating Division Subject Matter

Expert Review

Whistleblower Office - Award

Evaluation

Whistleblower Office - Case

Suspended

Whistleblower Office - Form 11369

Review

Whistleblower Office - Initial Review

264

1016

209

951

4339

4280

131

385

109

351

142

140

1176

8949

952

8643

Total

Current Status Appeals refers to claims related to matters in which the taxpayer has sought review by

IRS Appeals

(Table 3)

Open claims, Days in Current Status

Current Status

Average

Longest

Shortest

Appeals 12

200

596

CI Review

842

1071

604

Operating Division Field Examination

299

1393

Operating Division Subject Matter Expert Review

328

1003

Whistleblower Office - Award Evaluation

285

881

Whistleblower Office - Case Suspended

315

783

Whistleblower Office - Form 11369 Review

214

1106

Whistleblower Office - Initial Review

131

909

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.

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 November 2010, the Whistleblower Office hosted a meeting of

managers and employees from the Whistleblower Office and the Ogden Informant

Claims Examination (ICE) Unit to discuss issues related to claim intake and evaluation,

and award determinations and payment. One result of this meeting was to begin

planning for the transfer of the ICE Unit from the Small Business/Self Employed

Operating Division to the Whistleblower Office. This realignment, to be implemented in

FY 2012, will consolidate staffs working on section 7623 claims, offering opportunities to

improve efficiency and productivity.

A dedicated page on the public website, www.irs.gov 13 , 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. The Whistleblower Office also makes presentations to professional groups

involved in the representation of taxpayers and whistleblowers, including Taxpayers

Against Fraud and the American Bar Association Tax Section, both to describe program

developments and to obtain outside perspectives on the program.

Current Status Appeals refers to claims related to matters in which the taxpayer has sought review by

IRS Appeals

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

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 drafting proposed regulations that would update the current

regulations to reflect the statutory changes made by the 2006 amendments to

section 7623. As is noted under “Program Developments,” the IRS issued final

regulations to define “collected proceeds.” 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 remaining 2006 amendments to

the statute, and expects to issue proposed regulations in the Summer of 2012.

2. Other Priorities

a. First awards for claims made under section 7623(b). In FY 2011, the

IRS paid the first 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.

Those procedures and criteria were generally adequate for the initial section

7623(b) cases. However, the initial cases highlighted potential areas for

improvement in the administrative process for evaluating the whistleblower

contribution, and for communicating with the whistleblower about a proposed

award determination. These topics will be further explored in developing a

comprehensive revision to the Treasury Regulations and the IRM planned for

the summer of 2012.

b. Review and update internal operating procedures to improve

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

whistleblower program internal operating procedures in FY 2011 was deferred

because of the need to provide support to audit teams from GAO and TIGTA.

This effort was re-started in FY 2012, and includes collecting information from

Operating Divisions and Chief Counsel staff who evaluate whistleblower

information in order to identify opportunities to more efficiently and effectively

evaluate and process whistleblower claims. The IRS will begin implementing

changes in the Summer of 2012.

B. Other Issues of Interest

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

1. There are statutory and computational limitations to determining what

constitutes “collected proceeds.” The FY 2010 Annual Report highlighted

issues related to the definition of collected proceeds. 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

operating loss carryback or carry forward. 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.

The Whistleblower Office has identified another area where recoveries from

taxpayers cannot be used to pay awards under section 7623. The IRS is

responsible for administering internal revenue laws under Title 26 of the United

States Code. The IRS has also been delegated responsibility to administer other

laws, such as those related to the Bank Secrecy Act and Foreign Bank Account

Reports (FBARs). The IRS has used FBAR penalties as an important component

in its efforts to combat use of offshore bank accounts to evade U.S. tax

obligations. However, those laws appear in Title 31 of the United States Code,

which also provides for a separate award program for information that leads to

the identification of violations. The authority to pay awards under section 7623

extends only to recoveries under title 26, and does not permit awards to be paid

based on collection of FBAR penalties.

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

should be clarified. 14 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

This issue was included in the FY 2010 report.

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 $2,000,000

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 $2,000,000 “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 $2,000,000. 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 in dispute 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 requires that the dispute in question 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 on multiple taxpayers as a result of

information provided by a whistleblower, the IRS aggregates the disputed

amounts of multiple taxpayers to determine whether the $2,000,000 threshold

has been exceeded.

The IRS 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 FY 2010 Annual Report noted 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. 15 Cases brought before the Tax Court in FY 2011 continue to

raise this issue. In addition, whistleblowers who challenge IRS decisions on their

award claims continue to raise questions about the separate decisions made

regarding the taxpayer’s liability, and seek information through pre-trial discovery

on those decisions. While the Tax Court has ruled in a few cases that its

jurisdiction to consider whistleblower award claim appeals does not include the

authority to order IRS action with respect to taxpayer liability, it has not yet ruled

on the scope of permitted discovery. The ability of the IRS to successfully resist

overbroad or otherwise improper whistleblower discovery requests related to

taxpayer liability issues is unclear, and an area of concern.

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

whistleblower’s contribution in some criminal cases. 16 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.

5. The law does not provide for whistleblower protection. 17 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, 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 even in cases where the

government did not identify the whistleblower as a potential witness at trial . The

appropriate response to such a request should be to neither confirm nor deny

On December 28, 2011, the Tax Court proposed rules to require protection of taxpayer information in

Tax Court proceedings, and to address circumstances under which the identity of the whistleblower may

also be protected. If adopted, these rule changes will address the concern about disclosure in Tax Court

proceedings.

This issue was included in the FY 2010 report.

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 premised in case law, 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. In FY 2011, the first awards were paid based

on information submitted under the 2006 amendments to section 7623. However, most

awards have been based on claims covered by the pre-2006 law. Taxpayer privacy

laws do not permit the publication of data on specific claims, and allow reporting on

consolidated data only when the number of claims paid is large enough to produce a

statistical report. The number of claims paid under the 2006 amendments is too small to

qualify for separate reporting, so that data has not been segregated from other award

payments made in FY 2011. For most of the cases included in the table below, 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

FY 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 4)

Amounts Collected and Awards Paid under 7623 FY 2007-2011 18

2007

2008

2009

2010

2011

Cases

Received

2,751

3,704

5,678 19

7,577

7,471

Awards Paid

227

198

110

Collections

over

$2,000,000

Total Amount

of Awards

Paid 20

$13,600,205

$22,370,756

$5,851,608

$18,746,327

$8,008,430

Amounts

Collected

$181,784,287

$155,985,834

$206,032,872

$464,695,459

$48,047,500

7.5%

14.3%

2.8%

4.0%

16.7%

Awards paid

as a

percentage of

amounts

collected.

All awards paid from FY 2007 through FY 2010 were paid under section 7623(a), the pre-amendment

law governing award claims. FY 2011 includes a limited number of awards paid under 7623(b).

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 2011, there

were no partial payments.

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 redesign ting 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) are 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.