Whistleblower Awards to Nonresident Aliens Subject to Withholding Taxes

May 11, 2011, 07:01 PM

As reported by Tax Notes Today on March 22, 2011, the IRS, in program manager technical assistance, made the determination that awards paid to nonresident alien individuals under IRC Section 7623 (“Whistleblower Awards”) are deemed to be compensation for services and therefore subject to withholding taxes on the US source portion unless exempted by a US income tax treaty with the foreign country. Section 7623(a) gives the Secretary authority to pay money to individuals that affirmatively bring information to the Secretary’s attention for either detecting underpayments of tax or detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws. The payments must be paid from the proceeds of the amounts collected due to the information provided. The amount generally varies between 15% and 30% but can be limited to no more than 10% if the office determines that the information provided is not the principal basis for the administrative or judicial action taken. The determination cites a prior revenue ruling that characterized a payment made to an informant under Section 7623 as compensation for personal services for purposes of applying the U.S.- Canada income tax treaty. While the tax treaty used in the ruling is no longer in force, the determination highlights that the ruling has not been rendered obsolete. Furthermore, the determination confirms that, despite the characterization of the payment as compensation for services, no employment relationship is created between the IRS and the informant. Finally, the determination provides information regarding the treaty exceptions that would generally exempt a nonresident alien whistleblower from withholding. This determination cannot be used or cited as precedent. For a copy of the Tax Notes Today article reporting the determination, please click here.