Senator Grassley has proposed 15 amendments to the Senate bill for the Tax Cuts and Jobs Act. Two of those amendments are important to whistleblowers, so we are going to examine them in more detail here.
Amendment #1 from Grassley is intended to unify the tax treatment of whistleblower awards. The amendment seeks to extend the current above-the-line deduction available to successful whistleblowers under the Federal False Claims Act and IRS whistleblower program for attorney fees and court costs to other whistleblower programs.
What is an above-the-line deduction?
It means that the US does not require the whistleblower to pay tax on the entire award (before subtracting out the portion paid under the False Claims Act or Internal Revenue Code Section 7623 (IRS Whistleblower program). This is provided for in IRC section 62(a)(20) and 62(a)(21).
If there is no above-the-line deduction, then the whistleblower pays tax on the entire amount of the reward as income and then the attorney would separately claim and pay taxes on the portion they are paid for fees as income.
The amendment would eliminate double taxation for the rewards under the State False Claims Acts, the SEC Whistleblower program, and the CFTC Whistleblower program.
Interestingly, the summary of the amendment does not mention the Motor Vehicle Safety Whistleblower Act, which was enacted in December 2015 as part of the FAST Act. This auto whistleblower law created a program at the Department of Transportation, likely to be handled by the NHTSA. As far as we have seen, the Department of Transportation has yet to issue the implementing regulations for it through. However, the NHTSA is accepting whistleblower tips according to its terms, which provide for submissions before the adoption of the final rules. We’ll be keeping a close eye when the precise language of the amendment is available.
Since the firm’s engagement letters do not cover tax advice on rewards and this is a complicated area of the law, we are unable to answer questions about specific situations. However, we do wholeheartedly support this amendment to avoid double taxing whistleblower award payments.
Amendment #2 by Grassley would clarify an important area of the IRS whistleblower program that has resulted in litigation in the U.S. Tax Court over the past few years. The amendment would define the term “proceeds” in IRC section 7623.
The proposed definition is: “(A) taxes, penalties, interest additions to tax, and additional amounts provided under the internal revenue laws, and (b) any proceeds arising from laws for which the Internal Revenue Service is authorized to administer, enforce, or investigate including (i) criminal fines and civil forfeitures, and, (ii) violations of reporting requirements.”
This word has been a point of contention because the U.S. is only required to pay out awards as a percentage of collected proceeds. The IRS interpretation has defined this term broadly, to exclude certain money collected by the IRS in enforcement actions. In a U.S. Tax Court lawsuit decided last year, the IRS took the position that only fines pursuant to Title 26 were collected proceeds. However, the Tax Court sided in favor of an expansive definition for whistleblowers.
Senator Grassley clearly wants to make sure that there is no more confusion over the desired scope of the whistleblower program, and has given it a broader definition than provided for in last year’s opinion. The adoption of this change would be in the interest of tax whistleblowers and we support it as well.
We’ll be closely following these amendments as their full text is published and they are debated. Stay tuned!