§ 301.7623-2 Definitions.
(a) Action.
(1) In general. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the term action means an administrative or judicial action.
(2) Administrative action. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the term administrative action means all or a portion of an Internal Revenue Service (IRS) civil or criminal proceeding against any person that may result in collected proceeds, as defined in paragraph (d) of this section, including, for example, an examination, a collection proceeding, a status determination proceeding, or a criminal investigation.
(3) Judicial action. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the term judicial action means all or a portion of a proceeding against any person in any court that may result in collected proceeds, as defined in paragraph (d) of this section.
(b) Proceeds based on.
(1) In general. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the IRS proceeds based on information provided by a whistleblower when the information provided substantially contributes to an action against a person identified by the whistleblower. For example, the IRS proceeds based on the information provided when the IRS initiates a new action, expands the scope of an ongoing action, or continues to pursue an ongoing action, that the IRS would not have initiated, expanded the scope of, or continued to pursue, but for the information provided. The IRS does not proceed based on information when the IRS analyzes the information provided or investigates a matter raised by the information provided.
(2) Examples. The provisions of paragraph (b)(1) of this section may be illustrated by the following examples:
Example 1.
Information provided to the
IRS by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a
taxpayer, describes and documents specific
facts relating to the
taxpayer's foreign sales in Country A, and, based on those
facts, alleges that the
taxpayer was not entitled to a foreign tax credit relating to its foreign sales in Country A. The
IRS receives the information after having already initiated an examination of the
taxpayer. The
IRS's audit plan includes foreign tax credit issues but focuses on
taxpayer's foreign sales in Country B and does not specifically address the
taxpayer's foreign sales in Country A. Based on the information provided, the
IRS expands the examination of the foreign tax credit issue to include consideration of the amount of foreign tax credit relating to the
taxpayer's foreign sales in Country A. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
portion of the
IRS's examination of the
taxpayer relating to the foreign tax credit issue with respect to Country A is an
administrative action with which the
IRS proceeds based on the information provided by the whistleblower because the information provided substantially contributed to the
action by causing the expansion of the
IRS's examination.
Example 2.
Information provided to the
IRS by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a
taxpayer, describes and documents specific
facts relating to the
taxpayer's activities, and, based on those
facts, alleges that the
taxpayer owed additional taxes in Year 1. The
IRS proceeds with an examination of the
taxpayer for Year 1 based on the information provided by the whistleblower. The
IRS discovers that the
taxpayer engaged in the same activities in Year 2 and expands the examination to Year 2. In the course of the examination, the
IRS obtains, through the
issuance of Information Document
Requests (IDRs) and summonses, additional
facts that are unrelated to the activities described in the information provided by the whistleblower. Based on these additional
facts, the
IRS expands the scope of the examination of the
taxpayer for both Year 1 and Year 2. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
portion of the
IRS's examination relating to the activities described and documented in the information provided is an
administrative action with which the
IRS proceeds based on information provided by the whistleblower because the information provided substantially contributed to the
action by causing the expansion of the
IRS's examination of Year 1 and Year 2. The
portions of the
IRS's examination of the
taxpayer in both Year 1 and Year 2 relating to the additional
facts obtained through the
issuance of IDRs and summonses are not actions with which the
IRS proceeds based on the information provided by the whistleblower because the information provided did not substantially contribute to the
action.
Example 3.
Information provided to the
IRS by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a
taxpayer, describes and documents specific
facts relating to the
taxpayer's activities, and, based on those
facts, alleges that the
taxpayer owed additional taxes in Year 1. The
IRS receives the information after having already initiated an examination of the
taxpayer for Year 1. During the examination, the information is provided to the Exam team and the Exam team uses the information provided to confirm the correctness of adjustments made based on other information. Although the whistleblower's information confirms the correctness of the
IRS's adjustments, the
IRS does not rely on the whistleblower's information when it makes the adjustments, nor does the information cause the IRS to expand the scope of its examination. The whistleblower's information merely supports information independently obtained by the
IRS. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
IRS's examination is not an
administrative action with which the
IRS proceeds based on information provided by the whistleblower because the information provided did not substantially contribute to the
action.
Example 4.
Same
facts as
Example 3. During the examination, however, the Exam team identifies inconsistencies between the information provided by the whistleblower and other information already in the Exam team's possession. The Exam team uses the information provided by the whistleblower to make additional adjustments that it would not have made based solely on the other information. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
portion of the
IRS's examination relating to the additional adjustments is an
administrative action with which the
IRS proceeds based on information provided by the whistleblower because the information provided substantially contributed to the
action.
(c) Related action.
(1) In general. For purposes of section 7623(b) and §§ 301.7623-1 through 301.7623-4, the term related action means an action against a person other than the person(s) identified in the information provided and subject to the original action(s), when—
(i) The facts relating to the underpayment of tax or violations of the internal revenue laws by the other person are substantially the same as the facts described and documented in the information provided (with respect to the person(s) subject to the original action);
(ii) The IRS proceeds with the action against the other person based on the specific facts described and documented in the information provided; and
(iii) The other, unidentified person is related to the person identified in the information provided. For purposes of this paragraph, an unidentified person is related to the person identified in the information provided if the IRS can identify the unidentified person using the information provided (without first having to use the information provided to identify any other person or having to independently obtain additional information).
(2) Examples. The provisions of paragraph (c)(1) of this section may be illustrated by the following examples:
Example 1.
Information provided to the
IRS by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a
taxpayer (
Taxpayer 1), describes and documents specific
facts relating to
Taxpayer 1's activities, and, based on those
facts, alleges
tax underpayments by
Taxpayer 1. The information provided also identifies an accountant (
CPA 1) and describes and documents specific
facts relating to
CPA 1's contribution to the activities of
Taxpayer 1 that the whistleblower alleges resulted in
tax underpayments. The
IRS proceeds with an examination of
Taxpayer 1 based on the information provided by the whistleblower. Using the information provided, the
IRS obtains
CPA 1's client list and identifies two
taxpayer/clients of
CPA 1 (
Taxpayer 2 and
Taxpayer 3) that appear to have engaged in activities similar to
Taxpayer 1. The
IRS proceeds with an examination of
Taxpayer 2 and finds that
Taxpayer 2 engaged in the same activities as those described in the information provided with respect to
Taxpayer 1. The
IRS proceeds with an examination of
Taxpayer 3 and finds that
Taxpayer 3 engaged in different activities from those described in the information provided with respect to
Taxpayer 1. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the examination of
Taxpayer 2 is a
related action because it satisfies the conditions of
paragraph (c)(1) of this section. The examination of
Taxpayer 3 is not a
related action because the relevant
facts are not substantially the same as the
facts relevant to the examination of
Taxpayer 1.
Example 2.
Same
facts as
Example 1. Using the information provided by the whistleblower, the
IRS identifies a co-promoter of
CPA 1 (
CPA 2) that appears to have engaged in activities similar to
CPA 1.
CPA 2 is not a member of
CPA 1's firm. The
IRS subsequently obtains the client list of
CPA 2 and identifies a
taxpayer/client of
CPA 2 (
Taxpayer 4) that appears to have engaged in activities similar to
Taxpayer 1. The
IRS proceeds with an examination of
Taxpayer 4 and finds that
Taxpayer 4 engaged in the same activities as those described in the information provided with respect to
Taxpayer 1, and that
CPA 2 contributed to the activities in the same way as described in the information provided with respect to
CPA 1. The
IRS proceeds with an examination of
CPA 2's liability for promoter
penalties under section 6700 in connection with the activities described in the information provided with respect to
Taxpayer 1 and
CPA 1. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the examination of
CPA 2 is a
related action because it satisfies the conditions of
paragraph (c)(1) of this section. The examination of
Taxpayer 4 is not a
related action because
Taxpayer 4 was not related to
a person identified in the information provided.
CPA 2 was not identified in the information provided and the
IRS first had to identify
CPA 2 before identifying
Taxpayer 4 and proceeding with the examination of
Taxpayer 4.
Example 3.
Same
facts as
Example 1. An accountant (
CPA 3) is a member of
CPA 1's firm. Using the information provided by the whistleblower, the
IRS obtains the client list of
CPA 3 and identifies a
taxpayer/client of
CPA 3 (
Taxpayer 5) that appears to have engaged in activities similar to
Taxpayer 1. The
IRS proceeds with an examination of
Taxpayer 5 and finds that
Taxpayer 5 engaged in the same activities as those described in the information provided with respect to
Taxpayer 1, and that
CPA 3 contributed to the activities in the same way as described in the information provided with respect to
CPA 1. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the examination of
Taxpayer 5 is a
related action because
Taxpayer 5 is related to
CPA 3,
a person considered to be identified in the information provided under
§ 301.7623-1(c)(1), and the
facts relating to
Taxpayer 5 are substantially the same as the
facts described and documented in the information provided. An
IRS examination of
CPA 3's liability for promoter
penalties under section 6700, based on the
facts described and documented in the information provided with respect to
Taxpayer 1 and
CPA 1, is an
administrative action based on the information provided.
Example 4.
Information provided to the
IRS by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a
taxpayer (
Taxpayer 1), describes and documents specific
facts relating to
Taxpayer 1's activities, and, in particular,
Taxpayer 1's participation in a transaction. Based on those
facts, the whistleblower alleges that
Taxpayer 1 owed additional taxes. The
IRS proceeds with an examination of
Taxpayer 1 based on the information provided by the whistleblower. The
IRS identifies the other parties to the transaction described in the information provided (
Taxpayer 2 and
Taxpayer 3). The
IRS proceeds with examinations of
Taxpayer 2 and
Taxpayer 3 relating to their participation in the transaction described in the information provided. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
IRS's examinations of
Taxpayer 2 and
Taxpayer 3 relating to the activities described and documented in the information provided are
related actions because they satisfy the conditions of
paragraph (c)(1) of this section.
(d) Collected proceeds.
(1) In general. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the terms proceeds of amounts collected and collected proceeds (collectively, collected proceeds) include: Tax, penalties, interest, additions to tax, and additional amounts collected because of the information provided; amounts collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided. Collected proceeds are limited to amounts collected under the provisions of title 26, United States Code.
(2) Refund netting.
(i) In general. If any portion of a claim for refund that is substantively unrelated to the information provided is—
(A) Allowed, and
(B) Used to satisfy a tax liability attributable to the information provided instead of refunded to the taxpayer, then the allowed but non-refunded amount constitutes collected proceeds.
(ii) Example. The provisions of paragraph (d)(2)(i) of this section may be illustrated by the following example:
Example.
Information provided to the
IRS by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a corporate taxpayer (
Corporation), describes and documents specific
facts relating to
Corporation's activities, and, based on those
facts, alleges that
Corporation owed additional taxes. Based on the information provided by the whistleblower, the
IRS proceeds with an examination of
Corporation and determines adjustments that would
result in an unpaid
tax liability of $500,000. During the examination,
Corporation informally claims a refund of $400,000 based on adjustments to items of income and expense that are wholly unrelated to the information provided by the whistleblower. The
IRS agrees to the unrelated adjustments. The
IRS nets the adjustments and determines a
tax deficiency of $100,000. Thereafter,
Corporation makes full payment of the $100,000 deficiency. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
collected proceeds include the $400,000 informally claimed as a refund and netted against the adjustments attributable to the information provided, as well as the $100,000 paid by
Corporation.
(3) Amended returns. Amounts collected based on amended returns constitute collected proceeds if—
(i) The IRS proceeds based on the information provided;
(ii) As a result, the person subject to the action(s) with which the IRS proceeds files amended returns; and
(iii) The amounts collected based on the amended returns relate to the activities or facts described in the information provided.
(4) Criminal fines. Criminal fines deposited into the Crime Victims Fund are not collected proceeds and cannot be used for payment of awards.
(5) Computation of collected proceeds.
(i) In general. Pursuant to § 301.7623-4(d)(1), the IRS cannot make an award payment until there has been a final determination of tax. For purposes of determining the amount of an award under section 7623 and §§ 301.7623-1 through 301.7623-4, after there has been a final determination of tax as defined in § 301.7623-4(d)(2), the IRS will compute the amount of collected proceeds based on all information known with respect to the taxpayer's account, including with respect to all tax attributes, as of the date the computation is made.
(ii) Post-determination proceeds. If, based on all information known with respect to the taxpayer's account as of the date of the computation described in paragraph (d)(5)(i) of this section, there is a possibility that the IRS may collect additional proceeds, then the Whistleblower Office will continue to monitor the case. If the Whistleblower Office identifies additional collected proceeds, then the IRS will compute and pay accordingly.
(iii) Partial collection. If the IRS does not collect the full amount of taxes, penalties, interest, additions to tax, and additional amounts assessed against the taxpayer, then any amounts that the IRS does collect will constitute collected proceeds in the same proportion that the adjustments attributable to the information provided bear to the total adjustments.
(e) Amount in dispute and gross income.
(1) In general. Section 7623(b) applies with respect to any action against any taxpayer in which the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000 but, if the taxpayer is an individual, then only if the taxpayer's gross income exceeds $200,000 in at least one taxable year subject to the action.
(2) Amount in dispute.
(i) In general. For purposes of section 7623(b)(5) and §§ 301.7623-1 through 301.7623-4, the term amount in dispute means the greater of the maximum total of tax, penalties, interest, additions to tax, and additional amounts that resulted from the action(s) with which the IRS proceeded based on the information provided, or the maximum total of such amounts that were stated in formal positions taken by the IRS in the action(s). The IRS will compute the amount in dispute, for purposes of award determinations described in § 301.7623-3(c)(6), when there has been a final determination of tax as defined in § 301.7623-4(d)(2).
(ii) Examples. The provisions of paragraph (e)(2)(i) of this section may be illustrated by the following examples:
Example 1.
Information provided to the
IRS by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a corporate taxpayer, describes and documents specific
facts relating to the
taxpayer's activities, and, based on those
facts, alleges that the
taxpayer owed additional taxes. The
IRS proceeds with an examination of the
taxpayer based on the information provided by the whistleblower; makes adjustments to items of income and expense and allows certain
credits; and, ultimately, determines a deficiency against the
taxpayer of $1,900,000 and issues the
taxpayer a statutory notice of deficiency. The
taxpayer petitions the notice to the
United States Tax Court. The
Tax Court sustains the
IRS's position resulting in a deficiency of $1,900,000. Following the final determination of
tax, the
IRS computes that the total of
tax,
penalties,
interest,
additions to tax, and additional amounts that resulted from the
action was $2,500,000. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
amount in dispute is $2,500,000.
Example 2.
Same
facts as
Example 1, except the
IRS determines a deficiency of $1,500,000; the
Tax Court sustains the deficiency of $1,500,000; and, following the final determination of
tax, the
IRS computes that the total of
tax,
penalties,
interest,
additions to tax, and additional amounts that resulted from the
action was $1,750,000. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
amount in dispute is $1,750,000.
Example 3.
Same
facts as
Example 1, except the
IRS determines a deficiency of $2,100,000; the
Tax Court redetermines a deficiency of $1,500,000; and, following the final determination of
tax, the
IRS computes that the total of
tax,
penalties,
interest,
additions to tax, and additional amounts that resulted from the
action was $1,750,000. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
amount in dispute is $2,100,000.
(3) Gross income. For purposes of section 7623(b)(5) and §§ 301.7623-1 through 301.7623-4, the term gross income has the same meaning as provided under section 61(a). The IRS will compute the individual taxpayer's gross income, for purposes of award determinations described in § 301.7623-3(c)(6), when there has been a final determination of tax as defined in § 301.7623-4(d)(2).
(f) Effective/applicability date. This rule is effective on August 12, 2014. This rule applies to information submitted on or after August 12, 2014, and to claims for award under sections 7623(a) and 7623(b) that are open as of August 12, 2014.
