I received a special e-news for tax professionals. It states the following:
Federal budget sequestration has resulted in required cuts to certain credits and awards, effective March 1. These required cuts include a reduction to the refundable portion of the Small Business Health Care Tax Credit for certain small tax-exempt employers, a reduction in award payments to whistleblowers, and a reduction to refundable credits applicable to certain qualified bonds.
I have a serious questions for anyone who knows: Is this legal?
I am unaware of anything in the Tax Code that allows the IRS to change the rate of tax credits. I may be misreading the law (I am not an attorney), but my understanding is that, for example, whistleblower awards are set by statute. If I’m correct, the IRS cannot change the rate of credits.
Unfortunately, this is the height of tax season so my time to dig through the minutia of the Code is nonexistent. If anyone can cite chapter and verse (or I should say, Code Section) that allows the IRS to do this, please let me know.
Here’s what the IRS is using as justification for the whistleblower change:
Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, certain automatic reductions will take place as of March 1, 2013. These required reductions include a reduction to awards paid under Internal Revenue Code section 7623. As a result, the sequestration reduction is applied to award payments to whistleblowers issued pursuant to Internal Revenue Code section 7623 on or after March 1, 2013. The sequestration reduction rate will be applied until the end of the fiscal year (September 30, 2013) or intervening Congressional action, at which time the sequestration rate is subject to change. As determined by the Department in conjunction with the Office of Management and Budget, whistleblower payments subject to the reduction will be reduced by 8.7%. The reduction required by the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, will be applied after the Whistleblower Office determines the amount of collected proceeds and the applicable award percentage under section 7623. The Whistleblower Office will then compute the award that would have been paid, and then apply the reduction. Whistleblowers will be advised of the reduction in correspondence from the Whistleblower Office concerning a proposed award amount and an award determination.
The other changes have similar verbiage. I suspect the IRS has erred.