IRS pays
informants to squeal on tax cheats
While it may seem Orwellian, thousands of people each
year take advantage of the IRS program. Here's how it
works.
By Jeff
Schnepper
"He's dead meat if he doesn't pay me. I won't sue him
. . . I'll destroy him with one phone call!"
Don't make Dave Cohen angry.
Dave is a New Jersey tax attorney. His clients pay their
bills or they suffer the hell of an IRS civil and criminal
investigation. What Dave does is clearly unethical (that's
why we can't use his real name), but he can't be caught.
Dave is a snitch for the IRS.
Dave had a client who was a restaurant owner. He gave
Dave a $1,000 cash deposit, but refused to pay the balance
of his bill. The restaurant owner was pocketing lots of
cash income that never made it to his tax return -- a
clear civil and criminal violation. As an attorney, Dave
couldn't publicly violate attorney-client privilege, so
he had a friend call the IRS with enough information to
start an investigation.
Swarms of agents descend
Tips are important to the IRS. Annually, it collects more
than $100 million and pays out from $2 million to $5 million
to snitches. If you've ever heard the horror stories about
the invasiveness of a normal IRS audit, they pale in comparison
to a criminal investigation.
In the case of the not-so-innocent restaurant owner, swarms
of agents descended upon and paralyzed his business. For
the next nine months, the owner endured the torture of
Treasury agents peeling away every layer of his financial
life, resulting in multiple thousands of dollars in taxes,
fines, penalties and interest.
He avoided jail only by hiring another attorney to negotiate
a settlement with the IRS. The non-paying owner ended
up spending more money on legal fees than on the tax he
should have paid originally.
Dave's friend even received a substantial reward for the
information. And, of course, Dave's legal bill was finally
paid.
Motive isn't profit but revenge
While the Internal Revenue Service doesn't publicly encourage
tax informers, its representatives admit that many investigations
couldn't be successfully conducted, or even started, without
the use of paid informants or the direct purchase of evidence.
Most informants are former employees of a business that
has been underreporting its income. A disgruntled employee
who doesn't inform on the business itself may squeal on
its owner or a disliked manager.
But a neighbor who objects to your loud stereo at midnight
or becomes jealous of your new car each year may just
as quickly turn informer. The emotional whirlpool of divorce
is another great breeding ground for IRS informants, so
be kind to your former spouse.
Anyone who provides information that leads to the detection
and punishment of any violation of the tax laws may be
eligible for a reward (except for federal workers who
get the information in pursuit of their duties). However,
don't think this is the path to riches. Since 1960, only
about 8% of filed claims have resulted in rewards.
How to claim a reward
IRS Publication 733 details the regulations for claiming
a reward. You must complete Form 211, Application for
a Reward for Original Information, which can be requested
from the IRS by calling (800) TAX-FORM. Neither document
is available on the IRS Web site. Your information can
be delivered personally to any IRS office, or in writing
to:
Head of the Criminal Investigation Division
Internal Revenue Service
Washington , DC 20224
If a recovery is made as a direct result of information
you provided, you may qualify for a reward of 15% of the
amount recovered including taxes, fines and penalties,
but not interest -- with a maximum payment of $2 million.
If your information was valuable, although not specific,
in determining liability, you may be rewarded with as
much as 10% of the amount recovered, again with a $2 million
cap.
If your information was the originating cause of the investigation,
but had no direct relationship to the determination of
tax liability, the reward is 1% of the amount recovered,
again with that $2 million limit.
Using an assumed name
If you're not claiming a reward for the information, you
can use an assumed name. But if you want to claim a reward,
you must use your own name. The IRS is legally
prohibited from disclosing the identity of an informer
to unauthorized persons.
The IRS heard from 9,530 informants and paid out 650 rewards
totaling $3.5 million in the fiscal year ending Sept.
30, 1996, the most recent year for which statistics were
available. In that year, the IRS collected an extra $102.7
million in taxes, fines and penalties because of the informants.
No matter what you tell the IRS, and no matter how much
they collect, all rewards are discretionary,
not mandatory. The IRS is never obligated to pay a reward,
unless you negotiate a signed contract in advance of providing
the information. Moreover, all rewards are taxable income.
Reasons why a reward might not be paid include:
- The information was of no value, or
- The information was already known by the IRS, or
- The information was available in public records.
Rewards are paid only after the tax is recovered, and
that can take as long as five years or more. The informant
isn't kept posted as to the progress of the investigation,
but can check to see if the claim for a reward is still
under active IRS consideration.
The idea of informing on neighbors, colleagues or business
associates is distasteful to most people; it's Orwellian.
Yet, it's the honest taxpayer who winds up paying for
tax fraud, and it's not just nickels and dimes. The IRS
estimates that the gap between taxes owed and taxes paid
is $127 billion. That's $1,000 extra in taxes for every
individual return filed last year.
And by the way, I always pay "Dave." |
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