PMTA 2010-60, Criminal Fines and Whistleblower Awards [PDF], is a line in the sand signaling that the IRS is willing to litigate whether criminal fines are properly included in “collected proceeds.”  The Proposed Treasury Regulations [PDF] are silent on the issue of both criminal fines and restitution payments.  However, the Internal Revenue Manual states, “Criminal fines, which must be deposited into the Victims of Crime Fund [sic], cannot be used for payment of whistleblower awards.”  The IRS has been silent on whether restitution payments are included in collected proceeds.  Restitution payments should be included in “collected proceeds” because restitution payments are assessed and collected as a tax according to section 6201(a)(4).  After researching this issue in preparation of an article on the topic, I believe that criminal fines and restitution payments should be included in the definition of collected proceeds (and from some phrasing in the memorandum, it seems there is a receptive audience in the Whistleblower Office to this position).

In PMTA 2010-60, the IRS reasons that criminal fines are excluded from collected proceeds because all criminal fines collected for offenses against the United States, unless statutorily exempted, are required to be deposited into the Crime Victims Fund under the Victims of Crime Act of 1984 (42 U.S.C. § 10601).  The memorandum acknowledges that criminal prosecutions as one of the actions that can result in a payment of an award; yet still concludes that the Victims of Crime Act and section 7623 can be read harmoniously, giving full effect to Congressional intent for both statutes.  It is disingenuous to say that the Victims of Crime Act and section 7623(b) can be read harmoniously because each statute mandates that monies collected go to different places. 

The IRS simply dismisses criminal fines from being part of collected proceeds “because the IRS does not collect fines imposed by a court in connection with a criminal prosecution, [the IRS does] not think that these fines can be considered ‘collected proceeds’. [sic]”  Section 7623 does not require that the IRS collect the proceeds for there to be an award.  The award is based on collections resulting from the detection of underpayments of tax, or detection and bringing to trial and punishment persons guilty of violating the internal revenue laws.

Additionally, from a policy prospective, the conclusion that criminal fines are outside of collected proceeds undermines the entire whistleblower program.  The whistleblower program was established to incentivize the public to come forward with information about tax underpayments.  Excluding criminal fines from collected proceeds will have the contrary effect on those coming forward with information regarding the most egregious violations of internal revenue laws.  Claims that involve an allegation of fraud are referred to the Criminal Investigation Division of the IRS after the initial review of the whistleblower claim.  Excluding criminal fines from collected proceeds would result in fewer claims involving fraud because there less of an incentive to come forward with the information. 

I am currently working on an article that explores this topic and will continue to write on the subject.  In the mean time, I encourage the IRS to reexamine its position on criminal fines as part of collected proceeds.  If the IRS does not reexamine its position on collected proceeds, it will likely result in litigation and a loss in faith in the whistleblower program.

Lynam Knott