I.R.C. §7623 authorizes the IRS to pay an award for the:
detecting underpayments of tax, or
detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same
I.R.C. § 7623(a) permits the IRS to make a discretionary award up to 15% for information used by the IRS.
I.R.C. § 7623(b) requires the IRS to pay between 15%-30% of the collected proceeds depending on the extent to which the whistleblower substantially contributed to the administrative or judicial action that detects underpayments or detects and brings to trial violators of the internal revenue laws.
Calculation of an Award:
Treas. Reg. § 301.7623-4(a) provides, The Whistleblower Office will pay all awards under I.R.C. §§ 7623(a) and (b) using the following formula:
Analyze claim by applying the positive and negative factors in Treas. Reg. § 301.7623-4(b) to determine an award percentage.
Multiply the award percentage by the amount of collected proceeds.
Amount of Award Percentage:
Once a whistleblower is eligible for an award (i.e., once the IRS has begun an administrative or judicial action based on the whistleblower’s information; and there are collected proceeds) the IRS then undertakes an award percentage computation.
For I.R.C. § 7623(b) cases, Treas. Reg. § 301.7623-4(c) states that the IRS whistleblower Office must start the analysis at 15%. Then applying the positive factors to the administrative claim file, the analyst can determine an award percentage increase to 22 percent and/or 30 percent. The analyst, upon applying any negative factors, can also determine a decrease of the percentage to 26%, 22% 18% and all the way down to 15%.
There is no exact formula to determine the award payable to a whistleblower, only guidelines the IRS will consider in determining an award. Those guidelines are found in Treas. Reg. § 301.7623-4.
Positive and Negative factors:
Treas. Reg. § 301.7623-4(b)(1) lists the positive factors to be considered by the IRS whistleblower office with respect to the whistleblower as follows:
Acted promptly to inform the IRS of the tax non-compliance;
identified an issue or transaction of a type previously unknown to the IRS;
identified taxpayer behavior that the IRS was unlikely to identify or that was particularly difficult to detect;
Information was clear and presented in an organized manner;
provided exceptional cooperation/assistance during the action(s);
Identified assets of the taxpayer that could be used to pay liabilities;
Identified connections between transactions, or parties to transactions, that enabled the IRS to understand tax implications; and
Impacted the behavior of the taxpayer, for example by causing the taxpayer to promptly correct a previously-reported improper position.
Treas. Reg. § 301.7623-4(b)(1) lists negative factors to be considered by the IRS whistleblower office with respect to the whistleblower, as follows:
delayed informing the IRS of the facts and issues;
contributing to the underpayment or noncompliance identified;
directly or indirectly profiting from the underpayment of tax or tax noncompliance identified, but did not plan and initiate the actions that led to the underpayment;
negatively affecting the IRS's ability to pursue the action(s);
violating IRS instructions;
violating the terms of the confidentiality agreement ;
violating the terms of a contract entered into with the IRS pursuant to § 301.6103(n)-2; and/or
providing false or misleading information.
Examples of how the computation works:
Treas. Reg. § 301.7623-4(c)(iii) provides two examples of the computational framework established in Treas. Reg. § 301.7623-4(c).
Whistleblower provided information about an improperly claimed credit in 2006.
Information provided was non-privileged information relevant to Corporation’s eligibility for credit.
Whistleblower also provided analysis of documents, and information about meetings held to discuss the credit.
When interviewed, whistleblower clarified ambiguities and answered questions about the Corporation’s business and accounting practices.
Documents provided by Whistleblower were not included in Corporation’s general record keeping system and their existence may not have been uncovered by IRS examination.
Corporation denied factual scenario brought by Whistleblower, and IRS exam uncovered the false factual scenario for the corporation’s falsely claiming credit.
Whistleblower provided specific and credible information.
Whistleblower provide difficult to detect information, and provided useful assistance that helped IRS to sustain assessment.
Based on positive factors, the award percentage can be increased to 22%.
However, if there were negative factors, award percentage can be reduced to 18% or 15%.
Whistleblower provided information indicating that a Financial Advisory firm helped clients engage in activities that were to avoid detection of IRS, and prior audits by IRS failed to detect the underpayments of tax.
Whistleblower provided documents containing client profiles, marketing strategies, descriptions of the transactions and structures used by the firm to obscure the client’s identities and to generate substantial underpayment.
Whistleblower provided specific and credible information that formed the basis for action by the IRS.
The information provided identified transactions that were difficult to detect.
Whistleblower acted promptly after he understood the activities at issue, and he provided useful assistance to the IRS.
Whistleblower's assistance, and the information he provided, helped the IRS overcome the efforts made to obscure the activities and the clients' identities.
And the information provided by Whistleblower contributed to the decision to issue the notice, which may have a positive effect on client behavior and save IRS resources.
Based on the presence and significance of these positive factors, the Whistleblower Office could increase the award percentage to 30%.
However, If Whistleblower directly or indirectly profited from Firm 1's and the clients' activities resulting in the tax underpayments, then the Whistleblower Office could, based on this negative factor, reduce the award percentage to 26, 22, 18 percent or 15 percent (but not to lower than 15 percent of collected proceeds).
Significance of how to calculate an award.
IRS claims that it is paying the full award, but then reduces the payment of the award for sequestration (see prior blog about sequestration). IRS claims that the reduction is due to separate operation of law and is not a reduction of the award determination. However, as reflected above, I.R.C. § 7623 and the Treasury Regulations, thereunder (Treas. Reg. 301.7623-4), state that an award is a basic formula (namely, award percentage times collected proceeds equals award determination). If sequestration reduces the payment of the determined award, then that reduction could only be due to an award percentage decrease, or a reduction of the collected proceeds. Since the amount of collected proceeds is not reduced, as the IRS has not returned any amounts collected to the target taxpayer, then the only reduction is award percentage.
Understanding how an award is calculated will help a whistleblower score as many positive points using the factors provided and reduce or minimize any negative factors before the award percentage computation is undertaken to ensure that the maximum award is payable to the whistleblower.
Additionally, understanding how an award is calculated will allow a whistleblower to challenge the IRS’ determination when a factor is included, but otherwise should not have been included in the calculation.
Author, SHINE LIN strives to present a balanced yet focused claim which allows the IRS to concentrate on the key facts, legal issues, law and legal analysis so that the IRS may successfully pursue the alleged wrongdoers.