Update: The IRS Whistleblower Program

In 2006, Congress amended Section 7623 of the Internal Revenue Code of 1986 (the Code) and significantly enhanced the IRS Whistleblower Program with respect to claims made after Dec. 20, 2006, through the enactment of the Tax Relief and Health Care Act of 2006 (the TRHC
Act). Pub. L. No. 109-432, ' 406 (2006). (Along with the substantive modifications to Section 7623, the IRS also changed the name of the program from the “Informants' Reward Program” to the “Whistleblower Program.”)

New Section 7623(b) of the Internal Revenue Code provides a monetary incentive for people to report to the IRS, or blow the whistle on, those in significant tax noncompliance, by requiring the IRS to pay awards to whistleblowers if their information “substantially contributed” to the collection of proceeds. I.R.C.
' 7623(b)(1). In addition, the law established a Whistleblower Office, which operates at the direction of the Commissioner of the IRS, to administer the award program. Finally, the law created the right to appeal an award determination to the United States Tax Court. I.R.C. ' 7623(b)(4).

Following is a discussion of the key provisions of the revised Whistleblower Program and the steps involved in a whistleblower claim.

Key Provisions of Section 7623(b)

The TRHC Act created an entirely new regime pursuant to which informants, or “whistleblowers,” are eligible for more predictable compensation for valuable information provided to the IRS than they had been under prior law. The provisions implementing the new regime are set forth in Section 7623(b), which applies only to information relating to amounts in dispute that exceed $2 million and, if the information is provided with respect to a taxpayer who is an individual, where the taxpayer has gross income in excess of $200,000 for the taxable year at issue. I.R.C. ' 7623(b)(5). (The “amount in dispute” includes “tax, penalties, interest, additions to tax, and additional amounts.”) If these thresholds are not met, or if the information was provided prior to Dec. 20, 2006, the informant may still be eligible for an award under the old regime, the provisions of which are now set forth in Section 7623(a). See IRM 25.2.2.1 (June 18, 2010) (“If the thresholds in 7623(b)(5) are not met, Section 7623(a) authorizes, but does not require, the Service to pay for information that results in the government's recovery of taxes, penalties, interest, additions to tax, and additional amounts.”). Section 7623(a) awards thus are made at the discretion of the IRS.

Steps in the Whistleblower Process

In early 2008, the IRS issued guidance on the filing of whistleblower claims under Section 7623(b). I.R.S. Notice 2008-4. Regulations issued under Section 7623 provide guidance on claims under the old regime and therefore remain relevant for claims brought under Section 7623(a). The Notice was issued to provide interim guidance for claims brought under the new law. The first step in the process is for the whistleblower to submit IRS Form 211 to the Whistleblower Office, along with supporting information. Id. at Section 3.02. Among the information the whistleblower is asked to submit is “[s]pecific and credible information concerning the person(s) that the claimant believes have failed to comply with the tax laws and which lead to the collection of unpaid taxes.” Id. at Section 3.03. The whistleblower is also asked to explain “how the information that forms the basis of the claim came to the attention of the claimant, including the date(s) on which the information was required, and a complete description of the claimant's present or former relationship ' to the person that is the subject of the claim.” Id. Whistleblower claims cannot be made anonymously; this is because the IRS needs to assess the whistleblower's relationship to the taxpayer and determine whether the whistleblower was involved in any way in the alleged wrongdoing.

Once a properly completed and signed Form 211 is submitted, the Whistleblower Office will acknowledge receipt of the claim in writing, and it may offer the whistleblower an opportunity to confer to discuss the details of the claim. Id. at Section 3.05. Thereafter, the IRS will evaluate the claim, using the information provided by the whistleblower and the facts developed by the IRS as a result of the information provided. Id. at Section 3.07. The guidance specifically states that it will take several years from when information is submitted until proceeds are collected; the IRS therefore will not commit to a time period with respect to the duration of the process. Id. at Section 3.08.

All final determinations concerning whether or not an award will be forthcoming, and in what amount, are made by the Whistleblower Office (Id. at Section 3.09), and all such final determinations are appealable to the Tax Court within 30 days. Id. at Section 3.11. (The right to appeal to Tax Court does not apply to Section 7623(a) claims, which are subject to the rules of the old whistleblower regime. Id.)

Next month, we will discuss awards, the IRS's decision-making processes and some suggestions for improvements to the whistleblower program.

Sharon L. McCarthy is a partner at Kostelanetz & Fink, LLP in New York.

In 2006, Congress amended Section 7623 of the Internal Revenue Code of 1986 (the Code) and significantly enhanced the IRS Whistleblower Program with respect to claims made after Dec. 20, 2006, through the enactment of the Tax Relief and Health Care Act of 2006 (the TRHC
Act). Pub. L. No. 109-432, ' 406 (2006). (Along with the substantive modifications to Section 7623, the IRS also changed the name of the program from the “Informants' Reward Program” to the “Whistleblower Program.”)

New Section 7623(b) of the Internal Revenue Code provides a monetary incentive for people to report to the IRS, or blow the whistle on, those in significant tax noncompliance, by requiring the IRS to pay awards to whistleblowers if their information “substantially contributed” to the collection of proceeds. I.R.C.
' 7623(b)(1). In addition, the law established a Whistleblower Office, which operates at the direction of the Commissioner of the IRS, to administer the award program. Finally, the law created the right to appeal an award determination to the United States Tax Court. I.R.C. ' 7623(b)(4).

Following is a discussion of the key provisions of the revised Whistleblower Program and the steps involved in a whistleblower claim.

Key Provisions of Section 7623(b)

The TRHC Act created an entirely new regime pursuant to which informants, or “whistleblowers,” are eligible for more predictable compensation for valuable information provided to the IRS than they had been under prior law. The provisions implementing the new regime are set forth in Section 7623(b), which applies only to information relating to amounts in dispute that exceed $2 million and, if the information is provided with respect to a taxpayer who is an individual, where the taxpayer has gross income in excess of $200,000 for the taxable year at issue. I.R.C. ' 7623(b)(5). (The “amount in dispute” includes “tax, penalties, interest, additions to tax, and additional amounts.”) If these thresholds are not met, or if the information was provided prior to Dec. 20, 2006, the informant may still be eligible for an award under the old regime, the provisions of which are now set forth in Section 7623(a). See IRM 25.2.2.1 (June 18, 2010) (“If the thresholds in 7623(b)(5) are not met, Section 7623(a) authorizes, but does not require, the Service to pay for information that results in the government's recovery of taxes, penalties, interest, additions to tax, and additional amounts.”). Section 7623(a) awards thus are made at the discretion of the IRS.

Steps in the Whistleblower Process

In early 2008, the IRS issued guidance on the filing of whistleblower claims under Section 7623(b). I.R.S. Notice 2008-4. Regulations issued under Section 7623 provide guidance on claims under the old regime and therefore remain relevant for claims brought under Section 7623(a). The Notice was issued to provide interim guidance for claims brought under the new law. The first step in the process is for the whistleblower to submit IRS Form 211 to the Whistleblower Office, along with supporting information. Id. at Section 3.02. Among the information the whistleblower is asked to submit is “[s]pecific and credible information concerning the person(s) that the claimant believes have failed to comply with the tax laws and which lead to the collection of unpaid taxes.” Id. at Section 3.03. The whistleblower is also asked to explain “how the information that forms the basis of the claim came to the attention of the claimant, including the date(s) on which the information was required, and a complete description of the claimant's present or former relationship ' to the person that is the subject of the claim.” Id. Whistleblower claims cannot be made anonymously; this is because the IRS needs to assess the whistleblower's relationship to the taxpayer and determine whether the whistleblower was involved in any way in the alleged wrongdoing.

Once a properly completed and signed Form 211 is submitted, the Whistleblower Office will acknowledge receipt of the claim in writing, and it may offer the whistleblower an opportunity to confer to discuss the details of the claim. Id. at Section 3.05. Thereafter, the IRS will evaluate the claim, using the information provided by the whistleblower and the facts developed by the IRS as a result of the information provided. Id. at Section 3.07. The guidance specifically states that it will take several years from when information is submitted until proceeds are collected; the IRS therefore will not commit to a time period with respect to the duration of the process. Id. at Section 3.08.

All final determinations concerning whether or not an award will be forthcoming, and in what amount, are made by the Whistleblower Office (Id. at Section 3.09), and all such final determinations are appealable to the Tax Court within 30 days. Id. at Section 3.11. (The right to appeal to Tax Court does not apply to Section 7623(a) claims, which are subject to the rules of the old whistleblower regime. Id.)

Next month, we will discuss awards, the IRS's decision-making processes and some suggestions for improvements to the whistleblower program.

Sharon L. McCarthy is a partner at Kostelanetz & Fink, LLP in New York.