Tuesday, February 21, 2012

IRS Finalizes Whistleblower Regulations (2/21/12)

Today, the IRS published final regulations addressing certain issues under the whistleblower provision of the Code, Section 7623.  The regulations are here and Section 7623 is here.  Readers will recall that Section 7623 authorizes the IRS to pay awards from collected proceeds for information that results in the collection of tax, penalties and interest.  Subsection (a) is a discretionary award in a suitable amount ("as the IRS deems necessary").  Subsection (b), the provision drawing the most interest, is a mandatory reward of at least 15% scaling up to 30%.  In part relevant to this blog, the new regulations provide (applicable to both subsections) that the:collected proceeds include:

1.  Amounts collected subject to reward do not include criminal fines.

2.  Amounts collected subject to reward do include criminal restitution for tax order by the court.


  1. Guess Mr. Birkenfeld is out of luck: no rewards for criminal penalties.

    1. No, the big bucks are not in the criminal fines. Indeed, there is precious little money in the criminal fines in these cases and most of the money involved is collected outside the criminal system through the voluntary disclosure program (the formal programs, the quiet disclosures and audits for the rest). The civil tax dollars, penalties and interest thus collected should go into the base. Some of this may be collected by a restitution orders in criminal cases, but the regs allow an award for restitution because restitution is simply a collection device for the tax.

      An interesting question is whether the "in lieu of" penalty is in the base for the whistleblower award. There are very large dollar amounts collected as an "in lieu of" penalty. An FBAR penalty would not be in the base. But the IRS has made a big deal of saying that the "in lieu of" penalty is a miscellaneous IRS penalty rather than an FBAR penalty. So, it seems to me it should be in the whistleblower base.

      I would appreciate other viewers observations on this.

      Jack Townsend

    2. Interesting question Jack. "In lieu of" penalties should be included in the whistleblower base, IF those collected funds are not required to be deposited in the Criminal Victims Fund.

      The CVF requires that "there shall be deposited in the Fund "[criminal] fines that are collected from persons convicted of offenses against the U.S." Straight up criminal penalties were excluded from the whistleblower base because Treasury did not collect those amounts--they were required to be deposited in the CVF and, therefore, were not available for distribution to whistleblowers. The Office of Chief Counsel (per Linda Horowitz) wrote a memo on point dated Feb. 22, 2010.

      Strictly on the statutory language, I do not think that "in lieu of" penalties are required to be deposited in the CVF, because, although one could argue they are a proxy for fines per se, they are not actually fines within the strict terms of the CVF statute. To treat "in lieu of" amounts as actual fines for purposes of the CVF as such would require importing words--"or amounts in lieu of said fines" --into the statute as written.

      The other side of the argument is obvious, but I think that those arguing for inclusion of "in lieu of" amounts in the base have the stronger argument, so I tend to agree with Jack.

      Patrick Carmody

    3. The "in lieu of" penalties are clearly not fines and not deposited into the CVF. Even if the "in lieu of" penalties were deemed FBAR penalties and thus payable to Treasury rather than the IRS, they would not be deposited into the CVF because they have no relationship to a crime.

      To close that loop, the "in lieu of" penalties are not FBAR penalties; they are miscellaneous IRS penalties. So still no relationship that would require them to go into the CVF.

      Now, in the actual criminal cases, the taxpayers did agree to pay FBAR penalties (not "in lieu penalties", although I suspect that the agreement covered other IRS penalties such as 5471 and 3520). Those plea agreements did not treat the FBAR penalties as fines, but simple agreements to pay the penalties.

      The penalties are also not CVF. Treasury was not defrauded out of the penalties; its only complaint was that the defendants did not file FBARs. Failure to file entitled Treasury to an FBAR civil penalty for failure to file the FBAR. But that had no relationship to the criminal penalty for failure to file the FBAR.

      Lot of redundancy in this comment, so I apologize.

      Jack Townsend


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