WASHINGTON — Americans voluntarily hand over most of the $1.3 trillion owed to the Internal Revenue Service each year, but a tiny fraction of tax collections depends on an obscure and increasingly controversial IRS program of using paid informants.
Motivated by a combination of greed and revenge, informants are typically business associates, employees, acquaintances, neighbors or ex-spouses of tax cheats. Many experts say the program is one of the most unseemly parts of the U.S. tax system.
However, IRS officials say they exercise great care in handling the informants, weeding spurious allegations, and that the rewards play an important role in the nation's tax enforcement system.
The IRS pays the informants up to 15% of the taxes it recovers from their tips--up to a maximum of $2 million--though the vast majority of informants end up empty-handed.
After a series of recent congressional disclosures about widespread taxpayer abuses, watchdog groups are growing concerned about the ethics of the agency's informant reward program.
"We should refocus our efforts on good citizenry, not bribing people to answer questions," said John Berthoud, president of the nonpartisan National Taxpayers Union, who called on the IRS to end the program in an interview with The Times.
The program has been sharply criticized by individuals who say they were victimized by bogus allegations, and even by informants, such as Mary Case of Sherman Oaks, who say the IRS has stiffed them on their rewards.
The Senate Finance Committee, which has been broadly investigating IRS abuses over the last year, is expected to unveil new evidence later this month that taxpayers have been devastated by aggressive IRS investigations based on phony information from snitches.
One Tax Accountant Snitched on His Client
Tax attorneys and accountants generally decry the informant reward system, asserting that the government is on thin ice in offering money to taxpayers to turn each other in. They argue that a cornerstone of the U.S. tax system is the protection of taxpayer privacy and that the IRS is wrong to encourage people to breach confidential business or family relationships. In one case, a St. Louis tax accountant informed on his own client.
"It smacks of communism, turn in your parents if you catch them cheating," said San Francisco tax attorney Frederick Daily, author of the book "Stand up to the IRS."
Bruce Hockman, a top Los Angeles tax attorney whose clientele includes the rich and famous, refuses to help clients snitch to the IRS. "I have had people come in and ask me to take them downtown to IRS district headquarters," Hockman said. "I say no way. The Nazis did it, turn people in. It is unseemly."
Of course, Congress authorized the IRS to create the informant reward program in the first place. Former IRS historian Shelley Davis says her research indicates that informant rewards date back to the Civil War era.
Tipsters are one of the important parts of the IRS toolbox for enforcing tax compliance, says Thomas J. Smith, assistant IRS commissioner for examination and chief of the agency's informant reward program.
93% of Snitches' Tips End Up in Trash Can
IRS figures for 1996, the last year for which data are available, show that 9,430 Americans sought rewards. Of those, the IRS acted on just 650--meaning that 93% of the tips ended up in the IRS garbage can. The IRS paid out about $3.5 million in rewards and recovered $103 million in taxes.
"If you look at the last three years, we have had 2,000 cases closed, resulting in taxes of $797 million," Smith said. "So, in terms of dollars, most people would judge that as reasonably significant. It does supply a very useful source of information for us."
The IRS has a national informant hotline (1-800-829-0433), though many informants walk in or call in to the IRS' 33 district offices or 10 regional service centers, Smith said.
With little fanfare and with no explanation, the IRS last year decided to substantially boost the maximum allowable award to $2 million from $100,000. It also set a minimum reward of $100, eliminating a lot of penny ante payments.
In 1996, the agency's largest award was a jackpot-size $1.06 million. (The agency does not disclose who gets the awards or what cases they involve.) The agency's smallest was just $18--less than the typical reward advertised in newspapers for lost dogs.
Under the new guidelines, rewards range from 1% to 15% of the tax recovered, depending on the assistance provided by the informer. But all awards are at the "discretion" of IRS officials, who make their decisions behind closed doors. Of course, the rewards are taxable income.
The IRS takes a low-key approach, not seeking to send the message that the federal government is actively recruiting paid stool pigeons. The agency does not make Form 211, which informants must fill out to claim a reward, widely available. It isn't even kept in the IRS national headquarters lobby, where the agency has almost every form on display.