Today The Ferraro Law Firm sent out a letter to IRS Commissioner Douglas Shulman (PDF) disputing an IRS policy that is negatively effecting most tax whistleblowers. In July of 2009 Chief Counsel decided – without telling anyone – that the IRS will not pay any section 7623 whistleblower awards on “collected proceeds” resulting from whistleblower information until after the period of limitations has expired on claims for refund. Prior to that date, whistleblower award determinations were made after the period of limitations on assessments had closed. There is evidence that this policy change has had a drastic effect on the IRS Whistleblower Program. In the “Fiscal Year 2010 Report to the Congress on the Use of Section 7623,” the
IRS disclosed that it collected more than double the amounts of proceeds than it had received as a result of the Whistleblower Program in the prior three fiscal years
yet it still paid out roughly the average amount it had been paying out in awards over that period. In other words, receipts from tax whistleblower cases have doubled, but the awards have basically stayed the same. Why? Because the current rule about when award determinations are eligible to be made is freezing out awards under section 7623(b).
Under section 6511(a) the period of limitations on refunds expires no sooner than two years after the date a tax is paid, and a claim for refund can only be allowed to the extent of the tax actually paid in that two year period under 6511(b)(2)(B). This is often referred to as the “two year rule.” The two year rule regularly effects whistleblower cases because they often lead to the collection of additional taxes at the conclusion of an IRS examination (which were based at least in part on the whistleblower’s information). What ends up occurring as a result of the two year rule and the IRS’s policy about when award determinations are eligible to be made is that the taxpayer pays the tax and then the whistleblower has to wait an additional two years to get their award. Therefore, much of the $464,695,459 the IRS reported that it collected in Fiscal 2010 won’t be eligible for an award payment until Fiscal 2012, and the much of the awards the IRS paid in Fiscal 2010 actually relate to monies they collected in Fiscal 2008, or earlier.
However, we believe that the recent guidance in PTMA 2010-62 (September 1, 2010) (PDF), to the extent that it now allows for whistleblower awards to be paid when a claim for refund is denied, makes the two year rule irrelevant because the IRS still has to pay out awards under section 7623 if such a taxpayer later claims a refund. In other words, it no longer matters if the refund statute is open, and the IRS is holding up award payments anyway because of a policy they put in place when they couldn’t pay awards on denied claims for refund. We call upon the IRS to take action and reverse this outdated rule that is hurting the Whistleblower Program.
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