Thursday, August 21, 2014
I’m posting again on the August IRS final regulations for tax whistleblowers, whose principal author is Melissa A. Jarboe of the Office of theAssociate Chief Counsel (Procedure and Administration). This could be a very boring post, because what I’ll do is compare what I suggested and what was done on several unrelated topics. If you’re interested in whistleblowing, in how little details require regulations because statutes don’t include them, or in how notice-and-comment works, you might like this blogpost.
Relevant links are my previous blog post that used these regulations to illustrate the usefulness of public comment on technical details, my public comment on the proposed regulations, the final regulations, Dean Zerbe’s article arguing that awards should be paid for violation of reporting requirements and on the basis of criminal fines for violation of laws not in the Tax Code, and Erica Brady’s nice blog summaries of (a) the Pro’s and Con’s of the final regulations, and (b) the important new procedures for rejections and appeals. I agree with Erica Brady that these final regulations are an improvement over the proposed regulations and a huge improvement over the status quo. I am heartened by them; the IRS has shown distaste for the whistleblower statute in the past, but these regulations will make it run better rather than worse.
The topics follow.
(1) How to treat whistleblower information about false tax attributes such as net operating loss carryforwards (NOL’s).
This was a crucial point, because at the time the IRS determines the NOL carryforwards are illegitimate, they haven’t yet been used to reduce taxes paid, so at that point the proceeds collected are zero, even though as the years pass the whistleblowing will result in much more tax being paid than would have happened otherwise. The proposed regulation seemed to give zero award on NOL’s and such, though it wasn’t very clear, and the IRS specifically asked for guidance on what to do. If it didn’t give any award, I think that would clearly have violated the statute, but the problem was how to practically implement payment in a situation like that. One possibility was to estimate the present value at the time the award was to be bade of the proceeds to be collected. I wrote at length, with lots of examples and arguments, about how the IRS should adopt a different solution, which involves writing more checks but fewer judgement calls and mispayments: just decide the whistleblower’s percentage and pay it to him as the extra revenue from his information comes in each year till the tax attribute expires. The IRS has to keep track of the taxpayer’s multi-year tax attributes anyway, and can automate the process. And that procedure tracks the statute’s plain language.
The final regulations inserts a new paragraph to use just that procedure.
(ii) Post-determination proceeds. If, based on all information known with respect to the taxpayer’s account as of the date of the computation described in paragraph (d)(5)(i) of this section, there is a possibility that the IRS may collect additional proceeds, then the Whistleblower Office will continue to monitor the case. If the Whistleblower Office identifies additional collected proceeds, then the IRS will compute and pay accordingly.
The IRS says in its explanation:
These final regulations provide that the Whistleblower Office will monitor the relevant taxpayer account or accounts until the IRS receives collected proceeds as a result of a reduction in the tax attribute, or the taxpayer’s ability to apply the tax attribute expires unused. For example, if a NOL is reduced as a result of actions taken based on whistleblower information, the Whistleblower Office will periodically review the taxpayer account to determine whether future year tax payments are made that would not have been made if the NOL had not been reduced. Under the approach in the final regulations, awards will be paid on any such post-determination collected proceeds. If the NOL carry-forward period expires before the reduced NOL results in a tax payment, no award will be payable. The decision to monitor future year activities for impact on the amount of collected proceeds will apply to all claims, not just claims involving NOLs. As a result, in some cases, the Whistleblower Office may defer action on an award claim. For example, whistleblower information may result in IRS action to disallow a taxpayer’s treatment of the purchase of an asset as an expense in Year 1, because the asset should be capitalized and depreciated in accordance with the applicable depreciation schedule. As a result, taxable income in Year 1 is increased by the purchase price of the asset, less allowable Year 1 depreciation. Taxable income in future years would be reduced by the allowable depreciation for each year, until the asset is fully depreciated (or sold or otherwise disposed of). When this occurs, the Whistleblower Office will monitor the taxpayer’s account to determine whether future year offsetting reductions in liability related to the Year 1 tax liability occur, and will reduce the amount of collected proceeds accordingly.
(2) What if the IRS changes its mind about using the whistleblower’s information? I suggested clarifying that the whistleblower will still be eligible for the reward. The IRS agreed that clarification would be useful.
A second or subsequent determination, however, is appropriate when there are new circumstances that result in collected proceeds. Although this result was not precluded under the proposed regulations, Treasury and the IRS added language to the definition of final determination of tax at §301.7623-4(d)(2) of the final regulations to explicitly clarify this point. Because the final regulations allow for subsequent determinations when proceeds are collected after an initial determination, and any such subsequent determination will be subject to all the rules and procedures applicable to an initial determination, no additional procedures are needed in these final regulations.
(3) I suggested adding a new negative factor to push down awards--- that the IRS would have discovered the information by itself anyway, even outside the course of an audit. The IRS disagreed with me.
One commenter suggested an additional negative factor—when it is more likely than not that the IRS would have discovered the information on its own… Treasury and the IRS have decided not to incorporate any new negative or mitigating factors into the final regulations, which would serve only to make it harder for whistleblowers to recover.
(4) I suggested that if multiple whistleblowers happen to submit the same information, then they should all share the award, rather than giving it to the one who submitted it first. This would avoid races and discouragement because of the risk of being the second submitter. The IRS seems to have overlooked my comment on that issue:
Treasury and the IRS received two comments on this issue. One commenter suggested that multiple whistleblowers should not have to share an award. The other commenter suggested that the first whistleblower should receive full credit for their information and that later whistleblowers should only receive an award for information that was not provided by the first whistleblower.
The final regulation rewards only the winner of the race:
If two or more independent claims relate to the same collected proceeds, then the Whistleblower Office may evaluate the contribution of each whistleblower to the action(s) that resulted in collected proceeds. The Whistleblower Office will determine whether the information submitted by each whistleblower would have been obtained by the IRS as a result of the information previously submitted by any other whistleblower. If the Whistleblower Office determines that multiple whistleblowers submitted information that would not have been obtained based on a prior submission, then the Whistleblower Office will determine the amount of each whistleblower’s award based on the extent to which each whistleblower contributed to the action(s).
(5) l suggested clarifying that a whistleblower could assign or sell his potential award claim, just as the owner of a patent (who must be an individual, not a corporation) can assign it to his employer or sell it. That would help a lot with the problem of years passing between information submission and final collection of underpaid tax, because if the whistleblower really does have a good claim, that will be clear much sooner and he’d be able to sell all or part of it for big money. Probably this would just be a clarification, rather than a change in law (though I don’t know--- this gets into contract and property law and legal ethics). One IRS angle, though, is very important. The assigning whistleblower should not have to pay income tax on the entire award if he has assigned part of it to other parties, and they should have to pay tax on it. But the IRS didn’t want to address all that, perhaps because it gets into substantive tax law. They said:
Under the proposed regulation, the IRS will pay any award under section 7623 to a whistleblower as promptly as circumstances permit after there has been a final determination of tax with respect to the action(s) and after the Whistleblower Office has determined the award and all appeals of the determination are final or the whistleblower has executed an award consent form. Treasury and the IRS received two comments on this proposed rule. One commenter suggested that the final regulations should provide procedures for payment of an award to attorney trust accounts. Another commenter suggested that whistleblowers should be allowed to assign or sell their claim for award. The issues raised in these comments are beyond the scope of the current regulations and, accordingly, the regulations have been finalized as proposed.
(6) I also suggested (a) requiring (with the possibility of exceptions) electronic filing, and (b) mentioning the penalty violation of a confidentiality agreement in two places rather than one, but the IRS disagreed.
Update, August 23. Via Taxprof, I came across "Lost Opportunities: The Underuse of Tax Whistleblowers" by Karie Davis-Nozemack and Sarah Webber, which is a good reference for the hostility of the IRS to the whistleblower program, e.g., refusing to talk to the whistleblower and requiring one initial submission in writing of all his information.