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Tax Report:  Legislation Raises the Rewards for Tips Uncovering Big Fraud

By Tom Herman, The Wall Street Journal

December 20, 2006

BLOWING THE WHISTLE on tax dodgers may soon be more rewarding.

Legislation expected to be signed into law today by President Bush authorizes the Internal Revenue Service to pay higher rewards to many informants in cases involving large amounts of money. The reward could be as much as 30% of what the IRS collects, a Senate Finance Committee summary says.

Lawmakers hope this and other incentives in the legislation will encourage more people to step forward with valuable tips that will help the IRS collect additional revenue and reduce the nation's "tax gap," the difference between what the agency collects each year and what it thinks it should collect. Earlier this year, the IRS estimated the gap at about $290 billion.

The legislation comes in the wake of a report this year by the U.S. Treasury Inspector General for Tax Administration that said the IRS needs to do a better job of managing the rewards program. The IRS said it agreed with the report's recommendations and had already begun making improvements. But that hasn't satisfied critics such as Sen. Charles Grassley, an Iowa Republican.

"It's a shame that an agency that could really benefit from whistle- blowers hasn't encouraged them, but I hope that will change with the new law," Sen. Grassley says. "One well-positioned whistle-blower could expose millions of dollars of fraud. It might take IRS auditors years to catch that much cheating on their own."

Some informants have complained about their treatment by the IRS. At a Senate Finance Committee hearing in 2004, a man dubbed "Mr. ABC," testifying behind a screen, said he worked for a "Wall Street investment bank" and tried to tell the IRS about "abusive" tax shelters. He said his experience with the IRS had been "extremely frustrating and discouraging," and that the IRS was "resistant to and suspicious of" informants.

The committee hasn't identified Mr. ABC, and Erika Kelton, a lawyer at Phillips & Cohen in Washington who says she represented him, declined yesterday to identify him.

A Senate Finance Committee aide says the new provision applies to a tipster with information involving a business or, in the case of an individual, someone whose gross income exceeds $200,000 for any year in question. In either case, the tip must involve taxes, penalties and interest of more than $2 million, the aide says.

The new provision generally sets a reward floor of 15% -- and a cap of 30% -- of the collected proceeds, including penalties, interest, additions to tax and "additional amounts," if the IRS "moves forward with an administrative or judicial action" based on the tipster's information, the Senate Finance summary says. Smaller rewards may be handed out in certain circumstances.

A congressional committee estimates the provision will raise $182 million over 10 years.

The IRS long has been authorized by law to pay rewards to tipsters. The amount depends on how valuable the IRS considers the tip to be and can vary widely. The IRS has set the reward not to exceed 15% of the amount recovered based on "specific information" that caused an investigation and resulted in recovery, a congressional report said. The reward ceiling generally has been $10 million in recent years, the report said. But the ceiling and percentages can be increased under a "special agreement."

Even with the changes, anyone itching to turn in a wrongdoer should think twice before expecting a rich reward -- or any reward at all. Officials have long rejected most reward claims, claiming the tips produced little or no helpful information.

Former IRS officials say many tips flow in from people seeking revenge against an ex-spouse, an ex-business partner or a former employer. Since the late 1960s, the IRS has received a total of about 258,000 reward claims and has issued rewards on only about 20,000, or slightly less than 8%. Total rewards paid: about $89 million.

The new legislation raises a wide range of questions, such as how the IRS will administer the program and what difference, if any, the changes will make. IRS spokesman Anthony Burke says it's too soon to comment on these and other issues.

The new incentives "will give a lot of encouragement for people to step forward who otherwise wouldn't," says John Phillips of Phillips & Cohen. He and Ms. Kelton say the new law will bring in billions of dollars of additional revenue.

Paul D. Scott, a San Francisco lawyer, predicts the changes will result in a "tectonic shift" in the way the IRS does business.

Mr. Scott says the new incentives will "undoubtedly attract an entirely new pool of knowledgeable insiders -- high-level folks who would never have stepped forward previously, based on their very legitimate concerns about whether the IRS would ever reward them and how much their reward might be."

Donald Alexander, a former IRS commissioner and now a Washington lawyer at Akin Gump, agrees the changes are likely to encourage more people to come forward. But, he says, "I doubt that it will make a major change in the enforcement of our tax laws," especially since so many tips in the past have turned out to be worthless.
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IRS reworks whistleblower program, Centralized system set to launch in August to process tips on tax cheaters, Tom Herman, Baltimoresun.com Staff, June 26, 2006 http://www.baltimoresun.com/business/bal-irs0626,0,6231329.story?coll=bal-business-indepth

IRS Reworks its Whistleblower Program, Tom Herman, The Wall Street Journal, Eastern Edition, June 22, 2006, D1 http://online.wsj.com/article/SB115093851819187043.html; http://online.wsj.com/public/article_print/SB115093851819187043-U61EwwVrbJCEGsU2FxOJt26B9Rw_20060629.html

 
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