Final Regulations for Information Sharing With Whistleblowers are Issued Despite the IRS’s Refusal to Enter Into Such Agreements.

Treasury Regulations for section 6103(n), Disclosure of Return Information in Connection with Written Contracts Among the IRS, Whistleblowers, and Legal Representatives of Whistleblowers, were finalized today.  The finalized regulations are essentially what were put in place in March of 2008 with a few slight language tweaks.  The regulation had to be finalized now because the temporary regulation authorizing disclosure contracts with whistleblowers expired on March 24th, 2011.  However, as a practical matter, the expiration of the temporary regulations does not make much of a difference, as the IRS is not entering into these contracts because of either extreme caution bordering on neglect, a failure of internal communication, or both. 

As of March 14, 2011, not even a single section 6103(n) disclosure contract has been entered into with a whistleblower.  Let’s break that down by year since such agreements were authorized in the original Temporary Regulations:

The IRS is simply squandering the opportunity to make the best and highest use of the insiders that Congress was seeking when it amended section 7623 in December of 2006.  Some of the schemes we have presented to the IRS are extremely complex, with a labyrinth of layers and steps put in place just to make it harder to figure out. Even though we do our best to break down such schemes factually and legally in our initial submission to the IRS so that they have a roadmap of how to attack the abusive scheme, they have still refused the additional ongoing help we offered.  In several of our cases, the IRS has even gone to the extreme of having the field ask questions to the taint review team, who then asks questions to the tax whistleblower, and then the taint review team relays the answers to the field.  We engage in this grown-up game of operator because no one in the IRS knows who can and should be setting up section 6103(n) agreements.

The complaint that the IRS is squandering the opportunity to work directly with whistleblowers to work through the tax avoidance schemes has been voiced before.  On October 22, 2010, Gregory Lynam and Scott Knott, Tax Partners at The Ferraro Law Firm and contributors to this blog, were interviewed by the Government Accounting Office (“GAO”) as part of an audit they were doing of the IRS Whistleblower Program resulting from Senator Grassley’s scathing letter to Secretary Geithner criticizing the whistleblower guidance published in the Internal Revenue Manual on June 18, 2010.  The main criticism of the IRS Whistleblower Program Lynam and Knott reported to the GAO was the failure to enter into a single section 6103(n) agreement with a whistleblower, which is preventing the IRS from getting the benefit of two-way communications with knowledgeable insiders that Congress had hoped for to prevent tax avoidance.  We’ll see if the results of the GOA audit (which is expected to be completed this summer) or the finalization of these regulations make any difference.