Final Whistleblower Regulations Create Administrative Review of Rejected and Denied Claims

Today we welcome Erica Brady as a new guest blogger. Erica is a tax associate with the Ferraro Law Firm in its Washington, D.C. office. Ms. Brady practices exclusively in the area of tax whistleblower claims. We asked her to comment on the new regulations published by the IRS last week. Keith

Final Treasury Regulations regarding Awards for Information Relating to Detecting Underpayments of Tax or Violations of the Internal Revenue Laws, also known as the Whistleblower Regulations, were published on August 12, 2014. It was a bit of a wait for the final regulations, in the end the final regulations were an improvement over the proposed version of these Treasury Regulations, which were initially published on December 28, 2012. The IRS received literally hundreds of comments on these proposed regulations. The changes made in the final regulations reflect a great many of the comments.

I am optimistic that these regulations, while not going as far as many commenters or even Senator Grassley had hoped in opening the channels of communications between the IRS and whistleblowers, will help answer the question that almost every whistleblower has: “What did the IRS do with my information?” My optimism comes from Treasury Regulation section 301.7623-3, Whistleblower administrative proceedings and appeals of award determinations, which created a new administrative proceeding by which whistleblowers may provide comments to the IRS where they believe that the IRS is improperly rejecting or denying their claim for an award prior to a final determination to reject or deny their claim for an award is made. The regulations describe this review as an administrative proceeding that begins on the day that the preliminary letter is mailed. The designation of this as an administrative proceeding allows the Whistleblower Office the ability to share necessary information with the whistleblower under section 6103(h)(4) and Treasury Regulation section 301.6104(h)(4)-1, which was finalized as part of these regulations.

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The regulations are specific on when this new procedure will apply. First, the claim that was rejected or denied must have been made under section 7623(b), which means that the claim must have an “amount in dispute,” as defined in Treasury Regulation section 301.7623-2(e)(2)(i), of at least $2 million, and if the taxpayer is an individual, if the taxpayer’s gross income exceeds $200,000 in at least one taxable year. Second, the claim must have been rejected or denied within the meaning of Treasury Regulation section 301.7623-3(c) (7) and (8), respectively. Treasury Regulation section 301.7623-3(c)(7) defines a “rejection” as “a determination that relates solely to the whistleblower and the information on the café of the claim that pertains to the whistleblower.” Treasury Regulation section 301.7623-3(c)(8) defines a “denial” as “a determination that relates to or implicates taxpayer information.”

In these cases, the Whistleblower Office will send the whistleblower a preliminary rejection or denial letter that states the basis for the rejection or denial of the claim. The whistleblower has 30 days from the date the Whistleblower Office send the preliminary rejection or denial letter to submit comments to the Whistleblower Office explaining why they disagree with the preliminary rejection or denial of the claim. According to the regulations, the Whistleblower Office will review these comments and either (1) provide written notice to the whistleblower of the rejection or denial of the claim, including the basis for the rejection or denial of the claim, or (2) the whistleblower claim will be subject to the same administrative review as claims for award that have not been denied or rejected.

In cases where the whistleblower’s comments reveal a need to reevaluate the claim, the administrative procedures for review of an award are applied. This administrative procedure is described in Treasury Regulation section 301.7623-3(c)(1) through (6), but has been in place for some time now relating to claims where the IRS has approved a claim for award. The administrative review process begins with the IRS Whistleblower Office sending a preliminary award recommendation. The preliminary award recommendation is based on the Whistleblower Office’s review of the administrative claim file, as described in Treasury Regulation section 301.7623-3(e). The whistleblower has 30 day from the date the preliminary award procedure to respond by (1) consenting to the award and forfeiting their right to appeal the award determination; (2) submitting comments on the preliminary award determination that the Whistleblower Office will review and make a final award determination; (3) doing nothing and allowing the Whistleblower Office to make a final award determination; or (4) signing, dating, and returning the confidentiality agreement. By signing, dating, and returning the confidentiality agreement, the whistleblower will receive a detailed award report, which provides a full explanation of the factors that contributed to the recommended award percentage; an opportunity to review documents supporting the detailed report in the administrative claim file that is not protected by common law or statutory privilege; and respond to this information. The whistleblower has 30 days to respond to the detailed report by (1) consenting to the award and forfeiting their right to appeal the award determination; (2) submitting comments on the detailed report that the Whistleblower Office will review and make a final award determination; (3) doing nothing and allowing the Whistleblower Office to make a final award determination; or (4) requesting an appointment to review the administrative claim file. If the whistleblower chooses to review the administrative claim file, the whistleblower will have 30 days from the date of the appointment to submit comments on the detailed report and the documents in the administrative file. The Whistleblower Office will review these comments and make a final award determination. If the whistleblower disagrees with the Final Award Determination then the Whistleblower has 30 day to file an appeal with the United States Tax Court.

This new administrative procedure for rejected and denied claims could provide whistleblowers with some insight into what happened with their information and allow whistleblowers to comment on the preliminary rejection or denial. This chance to comment provides whistleblowers a chance to be heard prior to a final award determination. Until these regulations were finalized, whistleblowers would receive a generic letter telling them that their claim had been denied, without giving any basis or explanation. Once this letter was mailed, the whistleblower had 30 days to determine what they could about why their claim had been denied and if they wanted to appeal the denial by filing a petition in the United States Tax Court. Many whistleblowers have a reasonable belief that the IRS used their information based on the interactions the whistleblower had with the IRS early in the case and logically believe that in the time since these interactions that the IRS collected proceeds based on that information. As a result, many cases that are filed in the Tax Court are resolved early in the process once the whistleblower is provided with information about how the audit or investigation of the taxpayer was resolved. Now the Whistleblower Office can provide the whistleblower with the basis for the rejection or denial before a final determination is made by the Whistleblower Office to reject or deny the claim. By providing the whistleblower with the basis for the rejection or denial, the Whistleblower Office could provide the information that gives the whistleblower closure as to what happened with their information. Also, where the basis for the rejection or denial is incorrect the whistleblower has a chance to comment prior to their being a final determination. For example, where the Whistleblower Office has preliminarily closed a whistleblower’s claim prematurely, the whistleblower has an opportunity to alert the IRS to this prior to having their claim for an award closed. Or, where there is a miscommunication about who the whistleblower is and the Whistleblower Office is preliminarily rejecting the claim because of a mistaken belief that the whistleblower was ineligible to make a claim for an award, such as a federal employee, at the time the whistleblower provided information to the Whistleblower Office. By providing the whistleblower a chance to comment prior to rejecting or denying the claim, the whistleblower has a chance to correct any misinformation prior to having a final determination made.

This simple change could have a large impact on the IRS Whistleblower Program as a whole by providing whistleblowers with some information about the basis for the Whistleblower Office’s rejection or denial. This is likely to give additional insight about what happened after the whistleblower provided the IRS with information without requiring the whistleblower to appeal to the Tax Court and is likely to allow misinformation that may be causing an improper rejection or denial to be corrected before a final determination is made. Providing the basis for these decisions is likely to provide closure for some whistleblowers through improved communications with whistleblowers.