An IRS tax whistleblower award hinges on whether the IRS initiated an action (i.e. an “administrative action” or a “judicial action”) using the whistleblower’s information. Accordingly, understanding the concept of an administrative action may assist whistleblowers in receiving a larger award, or in other cases advocating for an award in the first place.
Internal Revenue Code Section (I.R.C. § 7623(b)(1) states:
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 proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action (determined without regard to whether such proceeds are available to the Secretary).
I.R.C. 7623(a), without using the term administrative or judicial action describes action as:
(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.
Treasury Regulations (Treas. Reg.) have also further clarified or defined action as an administrative action or judicial action (see Treas. Reg. § 301.7623-2(a)). Treas. Reg. § 301.7623-2(a)(2) also defines administrative action as:
all or a portion of an Internal Revenue Service (IRS) civil or criminal proceeding against any person that may result in collected proceeds, as defined in paragraph (d) of this section, including, for example, an examination, a collection proceeding, a status determination proceeding, or a criminal investigation.
In summary, an administrative action (at least statutorily defined) is all or any portion of an IRS civil or criminal proceeding in which the IRS detects the underpayment of tax.
While the IRS typically subscribes to the statutory definition, the IRS will deviate from the statutory definition in minimizing/denying awards to whistleblowers. Some examples of the deviation are as follows:
Smith v. Commissioner, 148 T.C. No. 21 (2017): IRS took the position that in an examination of one issue within a multi-issue examination can be both one administrative action or multiple administrative actions (i.e. each tax issue being a separate action) for purposes of an award.
IRS’ position required the Whistleblower to contribute information to each tax issue in order to be awarded an award from all the issues in the administrative action, even though the IRS only collected the tax due to the audit it began based upon the whistleblower’s information.
Whistleblower 16158-14W v. Commissioner, 148 T.C. No. 12 (2017): The IRS undertook an administrative action (audit) of the taxpayer for certain tax years. The IRS did not collect tax proceeds as a result of the administrative action for the years examined. However, as a result of the audit, the Taxpayer changed its behavior and began paying taxes (i.e. collected proceeds) on the whistleblower’s issue in future years as a result of the IRS’ action.
IRS position was that there was no administrative action in the years the taxes were paid because the administrative action was in the prior years. Therefore, the payment of taxes by the Taxpayer were voluntary compliance and no administrative action was undertaken by the IRS regarding the future years.
IRS’ definition of administrative action should be more inclusive than currently used by the IRS. Once the IRS verifies the Whistleblower’s claims are credible, an administrative action (all or a portion of a civil proceeding) could be any affirmative step taken by the IRS to detect the underpayment of tax, for example:
making a phone call informing the taxpayer of the audit/tax issue;
meeting with the taxpayer to discuss their reported positions and/or acquiring documents to substantiate the improper position;
issuing Information Document Requests (IDRs) to gather the taxpayer’s information/documentation; or
other affirmative acts to detect the underpayment of taxes.
Once an administrative action or a portion thereof has begun by the IRS based upon the whistleblower information, then all issues that are uncovered during the audit (i.e. tax issues for which the whistleblower did not substantially contribute) but were discovered only because of the audit began based upon the whistleblower’s information, should be included in the determination of award.
If the IRS opens an audit, detects the underpayment of tax, and takes corrective action, then the whistleblower should get credit for the corrective action if the corrective actions extends to future years. For example, a whistleblower provides information about a taxpayer’s wrongdoing for the past 15 years; the IRS audits the taxpayer for only one prior year and the taxpayer agrees to the change for the year under audit and subsequently corrects its behavior in the current year. Currently, in this example the IRS will only determine an award for the prior year where the correction was made by the IRS, ignoring the additional tax collected in the current year in which it detected the underpayment of tax, but did not make an audit adjustment. In cases like this, the whistleblower should get credit for this additional tax collected due to the audit and administrative action taken to correct the error in the current year.
As discussed before in this blog, the IRS should be maximizing the use of the Whistleblower program by not interpreting the definition of “administrative action” so narrowly as to deprive a whistleblower an award if the IRS uses the whistleblower’s information to initiate an audit. The IRS and all American taxpayers benefit from the success of the whistleblower program. Therefore, the IRS should be interpreting the term Administrative Action more broadly to encourage whistleblowers to come forward.
Moving forward, if you are having an interpretation issue involving the term administrative action with the IRS, seek proper legal counsel in assessing whether the IRS’ interpretation is valid and for proper methods to challenge the IRS’ interpretation.