Beware the IRS Rat: Tax Cheats and Paid Informants

If you have any tax skeletons in your closet, beware of the IRS rat. They're everywhere, scurrying about our small and large business in search of fodder; running rampant in our accounting departments, our social circles and yes, even our homes. 

Indeed, a family law attorney once told me, spurned ex-wives sing their songs of bittersweet vengeance to the IRS. 

It's true. The Internal Revenue Service actually pays people to turn in tax cheats. 

Correction; it pays them in theory. 

The IRS has a special program, the Whistleblower Program, designed to entice citizens to turn informer. Pre-2006, this award was discretionary.  After the 2006 Tax Relief and Health Care Act, however, the tables turned. 

Well, the tables turned for big-dollar informants. The little rats were still left out in the rain, fending for themselves. Under the new regime, informants on cases of $2 million or more could be paid between 15% and 30% of the taxes, penalties and interest collected. 

Recently, a former UBS employee, Bradley Birkenfeld, showed up at the IRS' door with papers showing how UBS had helped its wealthy clients hide funds offshore. This act led to great uproar and panic among the clients, especially after UBS agreed to release the names of its American clients. The result was the mad dash to make voluntary disclosures, under the IRS's special program. Under the voluntary disclosure program, many of these potential tax cheats and offshore account holders got cut some slack by the IRS if they disclosed their accounts by a certain deadline and following certain conditions. 

Unfortunately for Birkenfeld, he is facing prison time for his role in the tax fraud. Then again, he could have millions in reward money waiting for him when he gets out. 

But IRS informants aren't always known to the public. Quite the contrary, actually. The IRS tries to keep the names and even the existence of the informant a secret. 

There is one drawback, though. The IRS pays the informants once the tax is paid, which could take years given the fact that tax cases take a long time to build and may still go through appeals. 

Nevertheless, the potential reward can be enormous. 

Bottom line -- even more reason to dot your i's and cross your t's when paying your taxes. 

Related Resources

• History of the Whistleblower/Informant Program (irs.gov)
• How Do You File a Whistleblower Award Claim (irs.gov)
• IRS Use of Federal Law Enforcement Techniques (irs.gov)
• Tax Law Updates (provided by Weisberg and Kainen)