The IRS released welcome guidance relating to whistleblower claims submitted under its long embattled whistleblower program. With all the recent reports showing that the IRS has numerous problems yet to solve to make its whistleblower program as effective as Congress intended, it is good to see that they are still working to resolve some of the issues that whistleblowers and their representatives are identifying.
The first piece of guidance WO-25-0612-03 will add new sections to the Internal Revenue Manual that will allow for reduced withholding on whistleblower awards. This reduced withholding regime is a compromise position similar to those that we proposed in our letter to Whistleblower Office Director Steven Whitlock on January 11, 2012. In that letter, we pointed out that while the IRS has no actual authority to withhold on whistleblower payments, at the very least the IRS should agree to reduce withholding when a whistleblower demonstrates that their taxable award will be offset in part by an above the line deduction for attorneys fees. We’re happy that this new withholding guidance at least eliminates the harm caused by overwithholding, although we’re still curious why whistleblowers were singled out by the IRS for their own extra-statutory withholding regime.
The second piece of guidance WO-25-0612-01 sets forth several procedural changes to the handling of whistleblower claims that will again be added to the Internal Revenue Manual, and others that will replace or eliminate other sections of the IRM. The most important part of this new guidance is that it lays the groundwork for “partial” awards to be paid to whistleblowers. We’ve always said that each taxpayer and each year of each taxpayer should stand alone for award purposes. Perhaps shortsightedly, the IRS was originally grouping together years and taxpayers and treating them as one whistleblower claim with one claim number, and thinking that it had to issue just one award once all periods of all those taxpayers were resolved. Under this new and much anticipated guidance, “partial” awards can be paid by the IRS when one of the years of a targeted taxpayer becomes final. This should avoid significant award delays in some cases, particularly in the LB&I context.
Furthermore, WO-25-0612-01 sets forth other important clarifications with respect to how awards are determined that were left unclear by Treas. Reg. Section 301.7623-1 on “collected proceeds” that was finalized earlier this year. Specifically, in The Ferraro Law Firm’s comments to the proposed regulation, we noted that it was unclear how denied claims for refund would be considered for award eligibility purposes when a taxpayer made informal claims for refund that acted to offset a liability on an adjustment made as a result of a whistleblower’s information. The new guidance sets forth a procedure called “Refund Netting” whereby whistleblowers will still be eligible for awards on amounts that act as offsets to adjustments made or refunds denied as a result of a whistleblower’s information. We believe that the approach of this procedure is consistent with the final regulation which allowed awards to be paid on information that leads to a “denial of a claim for refund” because as a practical matter that is exactly what is occurring.
This guidance also makes changes to procedures in the IRM for corresponding with the whistleblower and the representative, confirming termination of representation, determining the timing and funding of payments, and processing the award claim form. However, it was also apparent to us that by restating in this guidance several times that the period of limitations on refunds must be closed on a taxpayer before an award payment can be made, that the IRS has become further entrenched on the erroneous policy that it must delay award payments by up to two years even when the targeted taxpayer has paid the taxes due as a result of the whistleblower’s information and signed a closing agreement on those issues. Senator Grassley has recently probed further about the extent and rationale behind this policy in his April 30, 2012 letter to Secretary Geithner and Commissioner Shulman, but it appears that it is going to continue to be an uphill battle to get this policy changed. It is sadly ironic that the Refund Netting procedure contained in this same piece of guidance should have made the logic behind the “two year” rule make no sense to the IRS. In our experience, this policy is unnecessarily delaying awards in almost every single award eligible whistleblower case by two full years.
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