IRS Monitoring: Whistleblower Withholding & Space Income Reporting

Regulatory Twin-Bill: Whistleblowers and Astronauts

The IRS today announced the extension of information collection activities related to two seemingly disparate groups: whistleblowers seeking to minimize tax withholding on their awards, and businesses operating in the unique environment of outer space and international waters. While these are administrative renewals under the Paperwork Reduction Act (PRA), they highlight specific compliance friction points within the tax code. The IRS is maintaining its oversight on these niche but high-stakes areas of tax law.

The Price of Blowing the Whistle: Form 14693

The IRS also announced the extension of information collection activities related to Form 14693, "Application for Reduced Rate of Withholding on Whistleblower Award Payment." This form directly impacts whistleblowers seeking to minimize tax withholding on their awards.

Form 14693 is critical due to the interaction between whistleblower awards under Section 7623(b) and the above-the-line deduction for attorney fees and court costs under Section 62(a)(21). Section 62(a)(21) ensures whistleblowers are taxed on their net recovery, not the gross award. Without it, attorney fees could be subject to double taxation, especially given the suspension of miscellaneous itemized deductions from 2018-2025 by the Tax Cuts and Jobs Act (TCJA).

Here's how it works:

• Standard Withholding: The IRS typically withholds 24% from whistleblower awards, similar to lottery winnings.
• The Problem: Without knowing a whistleblower's legal fee arrangements before payment, the IRS tends to over-withhold.
• The Solution (Form 14693): Filing Form 14693 within 30 days of award notification allows whistleblowers to substantiate legal fees to the IRS Whistleblower Office (WBO). This enables the IRS to adjust the withholding rate before the award is paid, reflecting the reduced taxable income after applying the Section 62(a)(21) deduction.

Without Form 14693, whistleblowers face the risk of significant over-withholding, reducing their immediate payout. The IRS notice indicates an estimated 10 respondents annually, reflecting the specialized nature of this procedure, which likely caters to high-value informants and substantial legal fee arrangements.

Taxing the Final Frontier: Space & Ocean Income

Moving from whistleblower protections, this notice also concerns the sourcing of income from activities beyond Earth’s boundaries. The IRS is seeking comments on information collection related to Treasury Decision 9305 (TD 9305), which provides regulations under Internal Revenue Code (IRC) Section 863(d).

Section 863(d) addresses a unique challenge: how to tax income generated outside the jurisdiction of any specific country—namely, from activities in space or on/under international waters. In general, for U.S. persons, income from these activities is treated as U.S. source income. However, an important exception exists: if the income is attributable to functions performed or risks assumed in a foreign country, it can be treated as foreign source income. For foreign persons, the opposite is generally true: such income is typically treated as foreign source.

TD 9305, finalized in 2006, provides the detailed rules for applying Section 863(d). These regulations primarily affect:

• Space Operations Businesses: Companies involved in satellite launches, space tourism, resource extraction on celestial bodies (in the future), or other commercial activities in space.
• Telecommunications Companies: Businesses that derive income from transmitting communications via satellite or over international waters.

The 'winners' under this regime are those who can demonstrate that their space/ocean activities have a substantial connection to a foreign country (e.g., significant operations, personnel, or risk management located abroad), potentially allowing them to treat the income as foreign source. Conversely, the 'losers' are those whose space/ocean activities are primarily managed and controlled within the U.S., as their income will generally be taxed as U.S. source.

The IRS estimates that compliance with these regulations imposes a significant burden. The notice indicates an estimated 250 respondents spending 5 hours each annually, totaling 1,500 burden hours. This suggests that tracking and properly sourcing "space income" is a complex undertaking, requiring businesses to carefully document the location and nature of their activities to determine the correct tax treatment.

Public Comment Opportunities

The IRS, consistent with the Paperwork Reduction Act of 1995 (44 U.S.C. 3506(c)(2)(A)), is soliciting public comment on the information collection requirements associated with the sourcing of income from space and ocean activities, as outlined in Treasury Decision (TD) 9305. TD 9305 contains final regulations under Section 863(d), which governs the source of income from certain space and ocean activities, and Section 863(e), which concerns the source of communications income. These regulations primarily affect businesses deriving income from activities conducted in space, on or under international waters, or from the transmission of communications.

To ensure consideration, written comments must be received on or before March 23, 2026. Please direct all submissions to Andres Garcia, Internal Revenue Service, Room 6526, 1111 Constitution Avenue NW, Washington, DC 20224, or via email to pra.comments@irs.gov. Include ‘‘OMB Control No. 1545–1718’’ in the subject line. For additional information or copies of the relevant forms and instructions, please contact Marcus W. McCrary at (470) 769–2001.

The IRS is particularly interested in comments addressing:

• Whether the collection of information is necessary for the proper performance of the agency's functions, including its practical utility.
• The accuracy of the IRS's estimate of the burden of the collection of information.
• Ways to enhance the quality, utility, and clarity of the information to be collected.
• Methods to minimize the burden of the collection of information, including through the use of automated collection techniques or other forms of information technology.
• Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

These comments are critical for practitioners seeking to influence the future of compliance, particularly by suggesting automated collection techniques that could potentially alleviate the burden associated with tracking and sourcing "space income."