SACRAMENTO — Got a neighbor bragging about using the Nevada address of his weekend ski condo to avoid paying California taxes?
State tax authorities want you to rat him out. And soon they may be able to make it worth your while.
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State's Tax Informants Might Get a Piece of the Infraction
The Franchise Tax Board, California's version of the IRS, is proposing to offer snitches cash rewards for stepping forward. Under the plan, which is part of Gov. Arnold Schwarzenegger's proposed budget, tax officials would give confidential informants as much as 10% of the unpaid taxes collected from their neighbors, bosses, spouses or any other scofflaws they report.
It is part of the state's continuing effort to get at the roughly $6.5 billion in taxes that authorities say is owed each year but not paid.
"We have tax cheats who are taking money out of the pockets of people who are paying their fair share," said state Controller Steve Westly, California's top elected tax official. "This program for whistle-blowers is one way we can get the money that is owed.... It won't collect billions. But I think we will have the chance to collect millions."
Privacy advocates say the plan is more than a little creepy.
"The government shouldn't be paying people to snoop into the tax filings of other people," said Teresa Casazza of the California Taxpayers Assn., a business advocacy group. "Based on a hunch that you are going to make some money, you might look through someone's garbage, monitor conversations or maybe try to blackmail them."
The state's proposal is modeled after an IRS program in place for more than a decade. Informants who help the feds recover unpaid taxes are entitled to as much as 15% of what the government collects. In fiscal 2004, their tips brought in more than $74 million. The IRS paid 259 confidential informants nearly $4.6 million for their help.
Officials don't want hunches based on the spending habits of the guy next door. They want bank account numbers, canceled checks and receipts that help them go after big fish: people and companies hiding more than $50,000 in income.
Perhaps aware of the Big Brother implications of such a program, the IRS says it does not go out of its way to encourage snooping or snitching.
"It is a very low-key program," said Jeaneen Heiskell, the program's senior analyst at the IRS. "It is nothing that we advertise."
She adds that "most of the tips aren't very good." Though the IRS paid rewards to 259 people in 2004, an additional 5,121 who asked for money that year received nothing.
"A lot of people just say, 'I think someone isn't paying their taxes,' " Heiskell said. "Or: So-and-so bought a new car, and we think he isn't reporting income.' "
The federal program has generated plenty of controversy. In the late 1990s, there was an effort in the U.S. Senate -- ultimately unsuccessful -- to abolish the IRS reward system. Taxpayers, accountants and lawyers testified about excruciating audits based on false leads.
Times have changed. Now the federal government and some big states are running multibillion-dollar deficits. The use of tax shelters and other accounting schemes drives treasuries deeper into the red. There is renewed interest in more aggressive enforcement of tax laws.
The U.S. Senate passed a bill last year that would have guaranteed payments to whistle-blowers whose tips to the IRS were used and doubled the amount of the awards. The measure, championed by Sen. Charles E. Grassley (R-Iowa), died in the House but could be revived again this year.
"The IRS doesn't really grant enough rewards to amount to spit in a bucket," said Jim Moorman, president of Taxpayers Against Fraud, a Washington, D.C., advocacy group for whistle-blowers. He points to several lawsuits filed by informants who claim they helped the IRS collect millions in taxes but never received any of it, and he says more incentive is needed for informants to step forward.
If California creates a reward program, other states -- which often follow the Franchise Tax Board's lead -- may do the same. An official at the Federation of Tax Administrators, a research group for state tax agencies, said Florida was the only state the group knew of where a reward program was in place.
Dave Bruns, a spokesman for the Florida Department of Revenue, said the state received 510 tips in 2004, leading to the collection of $5.2 million in unpaid taxes. Rewards totaling $88,865 were paid to 230 of those tipsters. But the program is very different from the one California is pondering.
Florida doesn't give informants anonymity, excluding a whole class of tipsters who may have inside information but fear losing their jobs or being sued if they step forward. Florida has no income tax. That limits tips mostly to issues involving businesses that aren't paying all the sales or corporate tax they owe.
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