IRS Looks At Improving Informants Rewards Program

One would think that the IRS using paid informants to identify compliance-challenged taxpayers would generate some controversy. But it really hasn’t. As a new TIGTA audit report reveals, the IRS’ Informants Rewards Program hasn’t generated much controversy because the program has been so poorly administered.

The informant process begins when a person approaches the IRS or when someone submits a Form 211 to the IRS. The Form 211 goes through an initial screening process, which consists of a review of the alleged taxpayers tax compliance and to see if the IRS is already pursuing the matter. At this point the claim will either be rejected or accepted for further review.

If an award is to be allowed:

the reward percentage is determined by whether the information directly led to the recovery (15 percent); indirectly led to the recovery (10 percent); or caused the investigation but had no direct relationship to the determination of tax liability (1 percent). The dollar amount of the reward is computed by multiplying the reward percentage by the amount of taxes, fines, and penalties (but not interest) collected. Different reward percentages can be used if the case involves multiple taxpayers and/or tax years. The reward amount must total at least $100 to be paid and cannot exceed $2 million in total.

The audit states that $340,329,427 was recovered due to informant information for FYs 2001 through 2005. Given the size of this figure, you might be wondering if “The Dog” bounty hunter might be in the wrong business. Based on the TIGTA report, the answer is clearly “no.”

There can be little doubt that most informant claims are rejected. Even if a claim is paid by the IRS, it is likely that the information provided will be deemed to “have no direct relationship to the determination of the tax liability” - which results in a mere 1% payment. Even then, the audit report indicates that it may take up to seven and one half years to receive payment. Given these constraints, potential informants should engage a tax lawyer to help them present their claim in a way that increases the chances that they will be compensated and be compensated sooner rather than later.

If the IRS implements the TIGTA audit recommendations, it is very likely that program could become one of the most efficient means for collecting unreported and underreported tax and interest and penalties. I wonder if we will then see a cottage industry of “tax bounty hunters” spring up….