The Internal Revenue Service (IRS) is publishing today a new proposed regulation for its whistleblower reward program. In today’s Federal Register, the new regulation makes clear that whistleblowers can receive a reward for providing information that prevents the IRS from issuing a refund that is not actually owed under law.   The new regulation resolves an issue raised last year by Iowa Senator Charles Grassley.  In a statement to IowaPolitics.Com, Sen. Grassley said:

These regulations are good news for whistleblowers. The Commissioner made the common-sense decision of ensuring that individuals who blow the whistle on improper refund claims will be rewarded, as I intended when I wrote the law. These new regulations will help the IRS target tax fraud. This is an issue of fairness for honest taxpayers. I hope these new regulations mean the IRS has turned the corner on encouraging whistleblowers and that this program will be a success. Next, the IRS needs to finalize these regulations quickly so they will apply to all the whistleblowers who filed claims after the 2006 law and have been waiting for their awards.

The IRS explained the proposed regulation as follows:

This regulation clarifies the definitions of proceeds of amounts
collected and collected proceeds for purposes of section 7623 and that
the provisions of Treas. Reg. Sec. 301.7623-1(a) concerning refund
prevention claims are applicable to claims under section 7623(a) and
(b). In clarifying the definitions of proceeds of amounts collected and
collected proceeds, this regulation provides that the reduction of an
overpayment credit balance is also considered proceeds of amounts
collected and collected proceeds under section 7623.

The regulation is proposed to be an amendment to 26 CFR Section 301.7623-1.

Here is the text of the newly proposed regulation:

Sec. 301.7623-1 Rewards and awards for information relating to
violations of internal revenue laws.

(a) In general–(1) Rewards and awards. When information that has
been provided to the Internal Revenue Service results in the detection
of underpayments of tax or the detection and bringing to trial and
punishment persons guilty of violating the internal revenue laws or
conniving at the same, the IRS may approve a reward under section
7623(a) in a suitable amount from the proceeds of amounts collected in
cases when rewards are not otherwise provided by law, or shall
determine an award under section 7623(b) from collected proceeds.
(2) Proceeds of amounts collected and collected proceeds. For
purposes of section 7623 and this section, both proceeds of amounts
collected and collected proceeds include: tax, penalties, interest,
additions to tax, and additional amounts collected by reason 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.
* * * * *
(g) Effective/applicability date. This section is applicable with
respect to rewards paid after January 29, 1997, except the rules of
paragraph (a) of this section apply with respect to rewards and awards paid after these regulations are published as final regulations in the Federal Register.

The IRS will accept comments on the proposed regulation until April 18, 2011. The IRS might choose to hold a public meeting on the proposal.  It it decides to do so, it will publish another notice in the Federal Register with the date, time and place.