This document contains final regulations implementing amendments to the Procedure and Administration Regulations (26 CFR part 301) under section 6103(n) relating to the disclosure of return information in connection with written contracts among the IRS, whistleblowers and, if applicable, their legal representatives.

The Tax Relief and Health Care Act of 2006, Public Law 109-432 (120 Stat. 2958), (the Act) was enacted on December 20, 2006. Section 406 of the Act amends section 7623, concerning the payment of awards to whistleblowers, and establishes a Whistleblower Office within the IRS that has responsibility for the administration of a whistleblower program. In connection with analyzing information provided by a whistleblower, or investigating a matter, the IRS may determine that it requires the assistance of the whistleblower, or the legal representative of the whistleblower. The Joint Committee on Taxation (the JCT) has noted that “[t]o the extent the disclosure of returns or return information is required [for the whistleblower or his or her legal representative] to render such assistance, the disclosure must be pursuant to an IRS tax administration contract.” Joint Committee on Taxation, Technical Explanation of H.R. 6408, The “Tax Relief and Health Care Act of 2006,” as Introduced in the House on December 7, 2006, at 89 (JCX-50-06), December 7, 2006. The JCT has further noted that “[i]t is expected that such disclosures will be infrequent and will be made only when the assigned task cannot be properly or timely completed without the return information to be disclosed.” Id.

Under section 6103(a), returns and return information are confidential unless the Internal Revenue Code authorizes disclosure. Section 6103(n) is the authority by which returns and return information may be disclosed pursuant to a tax administration contract. Section 6103(n) authorizes, pursuant to regulations prescribed by the Secretary, returns and return information to be disclosed to any person, for purposes of tax administration, to the extent necessary in connection with: (1) the processing, storage, transmission, and reproduction of returns and return information; (2) the programming, maintenance, repair, testing, and procurement of equipment; and (3) the providing of other services.

On March 25, 2008, temporary regulations (T.D. 9389, 2008-1 C.B. 863) under section 6103(n) were published in the Federal Register (73 FR 15668) describing the circumstances under which officers and employees of the Treasury Department may disclose return information to whistleblowers and, if applicable, their legal representatives, in connection with written contracts for services relating to the detection of violations of the internal revenue laws or related statutes. A notice of proposed rulemaking (REG-114942-07, 2008-1 C.B. 901) cross-referencing the temporary regulations was published in the Federal Register for the same day (73 FR 15687).

One written comment responding to the notice of proposed rulemaking was received. No public hearing was requested or held. After consideration of the comment, the regulations are adopted as proposed with only minor technical changes made.

The limitations applicable to section 6103(n) contracts as outlined in these regulations are not a limitation on the use of return information that may be disclosed to a whistleblower or the legal representative of a whistleblower during an award determination administrative proceeding and in an award determination appeal to the U.S. Tax Court.

The commentator recommended that §301.6103(n)-2(b)(3) of the proposed regulations be revised to eliminate any requirement that a written contract be in place for a whistleblower to be provided with basic status information about the whistleblower’s claim for award under section 7623. The commentator drew a comparison with whistleblower claims under the False Claims Act and argued that the standard for the IRS to share status information with a whistleblower should not be the same as that required to share information from the actual returns of taxpayers. Unlike other statutory schemes, however, information regarding the status of a whistleblower’s claim with the IRS is “return information” as defined in section 6103(b)(2). Like returns (defined in section 6103(b)(1)), return information is confidential under section 6103(a) and may only be disclosed if authorized by a specific provision of the Code. In order to disclose status information to a whistleblower, an exception to section 6103 must be applicable. Section 6103(n) provides authority for the IRS to make status information disclosures to a whistleblower. Because disclosures pursuant to section 6103(n) require a written tax administration contract, the final regulations do not adopt the commentator’s recommendation.

The commentator also recommended that §301.6103(n)-2(d)(3) of the proposed regulations be revised to eliminate the inspection requirement. The commentator asserted that, by contrast, §301.6103(n)-1, “Disclosure of returns and return information in connection with written contracts or agreements for the acquisition of property or services for tax administration purposes,” does not include such a requirement and argued that the requirement is unnecessary in that the regulations already provide for severe sanctions for any failure to comply with the terms of written contracts for services. In fact, §301.6103(n)-1(e)(1) does indeed contain an inspection requirement. The final regulations retain the inspection requirement as consistent with the longstanding safeguard procedures that incorporate inspection as an integral part of the contracting process under section 6103(n).

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Paragraph 1. The authority citation for part 301 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.6103(n)-2 also issued under 26 U.S.C. 6103(n). * * *

Section 301.6103(n)-2 also issued under 26 U.S.C. 6103(q). * * *

Par. 2. Section 301.6103(n)-2 is added to read as follows:

This document contains proposed amendments to 26 CFR part 301 under section 6104(c), which will replace current §301.6104(c)-1 in its entirety. Section 6104(c) governs when the IRS may disclose to state officials certain information about organizations described in section 501(c)(3) (“charitable organizations”), organizations that have applied for recognition as organizations described in section 501(c)(3) (“applicants”), and certain other exempt organizations. Section 6104(c) was added to the Code by section 101(e) of the Tax Reform Act of 1969 (Public Law 91-172, 83 Stat. 523) and significantly amended by section 1224(a) of the PPA (Public Law 109-280, 120 Stat. 1091).

Section 501(c)(3) organizations may be affected by the expanded disclosures to state officials authorized under the statute and proposed regulations. First, the IRS is now authorized (under new section 6104(c)(2), as added by the PPA) to disclose information about certain proposed revocations and proposed denials before an administrative appeal has been made and a final revocation or denial has been issued. For those organizations that have received a determination letter stating that they are described in section 501(c)(3), the IRS may disclose a proposed revocation (before any administrative appeal) to an appropriate state officer (ASO). This broader authority applies both where the organization was required under section 508 to apply for the determination letter and where the organization elected to apply for a determination letter even though it was not required to do so. The IRS continues to be authorized to disclose final revocations and final denials issued after any administrative appeal has been concluded for any section 501(c)(3) organization.

Second, under the authority of new section 6104(c)(2)(D), as added by the PPA, the IRS may disclose returns or return information of any section 501(c)(3) organization to ASOs on its own initiative, regardless of whether it has initiated an examination, if it determines that the information may be evidence of noncompliance with state laws under the jurisdiction of the ASO. Thus, if the IRS believes these conditions are met, it may, for example, disclose to ASOs a proposed revocation of exemption for a section 501(c)(3) organization that does not have a determination letter. All disclosures authorized under section 6104(c) may be made only if the state receiving the information is following applicable disclosure, recordkeeping and safeguard procedures.

The statute and proposed regulations also permit disclosure of information to state officials about all applicants for section 501(c)(3) status.

Exempt organizations other than section 501(c)(3) organizations also may be affected by the disclosures to state officials authorized under the statute and proposed regulations. The IRS is authorized to disclose returns and return information of these organizations to ASOs upon written request, but only to the extent necessary to administer state laws regulating the solicitation or administration of charitable funds or charitable assets. Again, all such disclosures may be made only if the state receiving the information is following applicable disclosure, recordkeeping and safeguard procedures.

Section 6104(c)(1), which is unchanged by the PPA, directs the IRS to share certain information with ASOs regarding charitable organizations and applicants. Specifically, section 6104(c)(1) provides that the IRS is to notify the ASO of the following final determinations: (1) a refusal to recognize an entity as an organization described in section 501(c)(3); (2) the operation of a section 501(c)(3) organization in a manner not meeting, or no longer meeting, the requirements of its exemption; and (3) the mailing of a notice of deficiency for any tax imposed under section 507, chapter 41, or chapter 42. See section 6104(c)(1)(A) and (c)(1)(B). The directive under section 6104(c)(1)(A) to notify ASOs of an organization no longer meeting the requirements for exemption under section 501(c)(3) includes not only notice of a revocation of exemption, but also notice (when the IRS is so informed) that a charitable organization is terminating or has dissolved in accordance with its governing documents. Upon request, an ASO may inspect and copy the returns, filed statements, records, reports, and other information relating to a final determination as described in this paragraph, as are relevant to any determination under state law. See section 6104(c)(1)(C).

The PPA amended section 6104(c) by striking paragraph (2) and inserting new paragraphs (2) through (6) as follows.

(1) The IRS may disclose to an ASO proposed refusals to recognize organizations as charitable organizations, and proposed revocations of such recognition. The PPA also allows disclosure of notices of proposed deficiencies of excise taxes imposed by section 507 and chapters 41 and 42 relating to charitable organizations. See section 6104(c)(2)(A)(i) and (c)(2)(A)(ii). Previously, only final determinations of this kind (denials of recognition, revocations, and notices of deficiency) could be disclosed under section 6104(c).

(2) The IRS may disclose to an ASO the names, addresses, and taxpayer identification numbers of applicants. See section 6104(c)(2)(A)(iii). Previously, information on applicants, other than information relating to a denial of recognition, could not be disclosed under section 6104(c).

(3) The IRS may disclose to an ASO the returns and return information of organizations with respect to which information is disclosed as described in paragraphs (1) and (2) of this section II (proposed determinations and applicant identifying information). See section 6104(c)(2)(B). Prior law allowed for disclosure under section 6104(c) only of returns and return information related to final determinations.

(4) Proposed determinations, identifying information, and the related returns and return information with respect to charitable organizations and applicants may be disclosed to an ASO only upon the ASO’s written request and only as necessary to administer state laws regulating charitable organizations, such as laws governing tax-exempt status, charitable trusts, charitable solicitation, and fraud. See section 6104(c)(2)(C). Prior law provided for automatic disclosure (without a request), but only of final determinations and their related returns and return information.

(5) The IRS may disclose to an ASO on its own initiative (without a written request) returns and return information with respect to charitable organizations and applicants if the IRS determines that this information might constitute evidence of noncompliance with the laws under the jurisdiction of the ASO. See section 6104(c)(2)(D). There was no such provision under section 6104(c) previously.

(6) The IRS may disclose returns and return information of section 501(c) organizations other than those described in section 501(c)(1) or (c)(3) to an ASO upon the ASO’s written request, but only to the extent necessary in administering state laws relating to the solicitation or administration of charitable funds or charitable assets of such organizations. See section 6104(c)(3). Previously, only information relating to charitable organizations or applicants was disclosed under section 6104(c).

(7) Returns and return information of organizations and taxable persons disclosed under section 6104(c) may be disclosed in civil administrative and civil judicial proceedings pertaining to the enforcement of state laws regulating such organizations, under procedures prescribed by the IRS similar to those under section 6103(h)(4). See section 6104(c)(4). There was no such provision under section 6104(c) previously.

(8) No return or return information may be disclosed under section 6104(c) to the extent the IRS determines that such disclosure would seriously impair federal tax administration. See section 6104(c)(5). This disclosure prohibition, though new in the PPA, was provided previously by regulation. See current §301.6104(c)-1(b)(3)(ii).

(9) The IRS may disclose returns and return information under section 6104(c) to a state officer or employee designated by the ASO to receive such information on the ASO’s behalf. See section 6104(c)(2)(C) (flush language) and (c)(3). Prior law did not provide for IRS disclosures to persons other than ASOs.

(10) An ASO is defined as the state attorney general, state tax officer, any state official charged with overseeing charitable organizations (in the case of charitable organizations and applicants), and the head of the state agency charged with the primary responsibility for overseeing the solicitation of funds for charitable purposes (in the case of section 501(c) organizations other than those described in section 501(c)(1) or (c)(3)). See section 6104(c)(6)(B). Before its amendment by the PPA, section 6104(c)(2) defined ASO as the state attorney general, state tax officer, or any state official charged with overseeing organizations of the type described in section 501(c)(3).

The PPA amended section 6103(p) to make the disclosure of returns and return information under section 6104(c) subject to the disclosure, recordkeeping, and safeguard provisions of section 6103. These provisions include—

(1) section 6103(a), which is the general prohibition on the disclosure of returns and return information, except as authorized by Title 26 of the United States Code;

(2) section 6103(p)(3), which requires the IRS to maintain permanent standardized records of all requests for inspection or disclosure of returns or return information under section 6104(c) and of all such information inspected or disclosed pursuant to those requests; and

(3) section 6103(p)(4), which requires an ASO, as a condition for receiving returns or return information under section 6104(c), to establish and maintain certain safeguards, such as keeping permanent standardized records of all requests and disclosures, maintaining a secure information storage area, restricting access to the information, and providing whatever other safeguards the IRS deems necessary to protect the confidentiality of the information. See §301.6103(p)(4)-1 and IRS Publication 1075, Tax Information Security Guidelines for Federal, State and Local Agencies. Publication 1075 can be found at www.irs.gov/formspubs.

The PPA also included amendments to sections 7213, 7213A, and 7431 to impose civil and criminal penalties for the unauthorized disclosure or inspection of section 6104(c) information.

In general, before any federal or state agency may receive returns and return information from the IRS under a particular Code provision, it must file with the IRS a report detailing the physical, administrative, and technical safeguards implemented by the agency to protect this information from unauthorized inspection or disclosure. Only upon approval of these safeguards by the IRS, as well as satisfaction of any other statutory requirements (such as submission of a written request), may an agency receive the information to which it is entitled under the Code, and then only for the use specified by the relevant statute. See section 6103(p)(4).

Under various disclosure programs, the IRS and other federal and state agencies often execute agreements detailing the responsibilities of the parties and the terms and parameters of the disclosure arrangement. For example, under section 6103(d), the IRS executes a disclosure agreement (the “Basic Agreement”) with each state tax agency to which it discloses information. The Basic Agreement, which serves as the written request required by section 6103(d), has been the foundation of the state tax disclosure program under this provision of the Code for over 30 years. See Internal Revenue Manual Exhibit 11.3.32-1 (sample Basic Agreement).

After the PPA, the IRS revised its disclosure procedures under section 6104(c) to model them after the highly successful section 6103(d) program. The section 6104(c) program uses a disclosure agreement patterned after the Basic Agreement but tailored to the specific requirements and restrictions of section 6104(c).

These proposed regulations provide guidance regarding disclosures under section 6104(c), as amended by the PPA. The PPA amendments to sections 6104(c) and 6103 expand the scope of information the IRS may disclose to an ASO, but make such disclosures contingent on the ASO adopting the safeguard standards and procedures of section 6103 that apply to federal and state agencies that receive returns and return information under other provisions of the Code. Accordingly, these proposed regulations provide that, without prior safeguard approval, the IRS will not give automatic notification of any determinations or other information that may be disclosed under section 6104(c).

Under these proposed regulations, the IRS may (and currently does) require an ASO to enter into a disclosure agreement with the IRS, which will stipulate the procedures for disclosure under section 6104(c), as well as the restrictions on use and redisclosure. These proposed regulations provide that this agreement, or any similar document, satisfies the requirement under section 6104(c) for a written request for disclosure.

An ASO who meets the safeguard and other procedural requirements of section 6103(p)(4) may receive information from the IRS to be used in the administration of state laws governing charitable organizations, as well as laws governing the solicitation or administration of charitable funds or charitable assets of certain noncharitable exempt organizations. The information available to ASOs under these proposed regulations not only is greater in scope than what was available under section 6104(c) before its amendment by the PPA, but comes at an earlier stage in the IRS administrative and enforcement processes. Thus, the IRS may disclose such information as whether an organization has applied for recognition as a charitable organization and, if so, whether the IRS proposes to deny such recognition, or the organization has withdrawn its application; whether an organization’s charitable status has terminated; whether the IRS proposes to assess any chapter 42 excise taxes (for example, the tax on excess benefit transactions under section 4958); and whether the IRS has revoked an organization’s exemption, or proposes to revoke the recognition of its exemption.

Without a written request, but still subject to the safeguard requirements of section 6103(p)(4), the IRS has the authority under section 6104(c)(2)(D) to disclose returns and return information of charitable organizations and applicants if it determines that such information may constitute evidence of noncompliance with the laws under the ASO’s jurisdiction. The IRS may make these disclosures on its own initiative. These proposed regulations clarify that the IRS’ authority under section 6104(c)(2)(D) is in addition to its disclosure authority under other provisions of section 6104(c)(1) and (c)(2), to the effect that discretionary disclosures may be made before the IRS issues a proposed determination or takes other action. The proposed regulations also make clear that the determination required by the statute concerns possible noncompliance with state laws regulating charitable organizations and not just any state law violation.

The disclosure provisions of section 6104(c), as amended by the PPA, offer significant advantages to states in their enforcement efforts. The ability of the IRS to disclose returns and return information early in its own administrative and enforcement processes, as well as the IRS’ authority under section 6104(c)(2)(D) to disclose information on its own initiative, greatly enhance the administration and enforcement of state laws, both tax and nontax, governing charitable activities, funds, and assets.

These proposed regulations define certain key terms for purposes of section 6104(c), including “appropriate state officer”, “return”, “return information”, and “taxable person.”

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866; therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to the proposed regulations; therefore, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the proposed regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comments regarding their impact on small businesses.

Before these proposed regulations are adopted as final, any written (signed original and 8 copies) or electronic comments timely submitted to the IRS will be considered. The IRS and Treasury Department request comments on the clarity of these proposed regulations and how they might be made easier to understand. Of particular interest are comments on whether paragraph (e) of these proposed regulations, describing the organizations to which disclosure applies, lists all the organizations with respect to which ASOs might legitimately need information. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person who timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register.

Paragraph 1. The authority citation for part 301 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.6104(c)-1 also issued under 26 U.S.C. 6104(c). * * *

Par. 2. Section 301.6104(c)-1 is revised to read as follows: