There's a new sheriff in town and his name is John Doe. And he may be in the cubicle next to you.
Under a newly amended rule from the Internal Revenue Service, ordinary citizens can help the tax man cometh, or at least collect. The new Whistleblower Office is the IRS's attempt to give incentives for you to rat out the tax cheats you know.
That's right. If your employer, co-worker, landlord, neighbor or father-in-law is raking in fistfuls of cash and bypassing Uncle Sam, you can anonymously report the abuse to the IRS and snag a windfall from their dishonesty.
As long as the total amount of tax fraud comes out to at least $2 million (including penalties, interest, and whatever else the government ultimately collects based on your report), you can get a 15 to 30 percent cut.
The IRS modeled the new program on the Department of Justice's successful False Claims Act, which has been in place since the Civil War era and attracts tips about fraudulent claims against federal government programs. In 2006 alone, the government recovered more than $1.4 billion through that law.
Ratting on your boss or ex-husband might sound sleazy, but whistleblowers have taken on a more venerable image in recent years. That's especially true since the Enron era, when the few employees who spoke up about the company's misconduct were seen as turned from Cassandras to folk heroes after the full extent of wrongdoing came to light.
Snitching on tax cheats wasn't always so lucrative. The previous incarnation of the Whistleblower Office was called Form 211, with the less-than-snazzy title of "Application for Reward for Original Information." But the program was criticized for offering inadequate incentive and protection for would-be whistleblowers to come forward with information.
"It was ineffective by almost anyone's description," says Michael Sullivan, an attorney with Finch McCranie, an Atlanta law firm, which runs a whistleblower blog. "It produced very little recovery for the IRS."
Under the old rules, whistleblowers could seek rewards up to 15 percent of the amount recovered by the IRS. But it was deemed a failure, mostly because the IRS was under no real obligation to compensate people who came to them with information of underpayments. Under the new law, however, a whistleblower can make an appeal in court if the IRS decides not to issue a reward.
"If people are concerned about the consequences, and if there's no guarantee of what they recover, they're much more hesitant about doing it," says Paul Scott, a San Francisco-based trial attorney, formerly with the Department of Justice. "This gives people more security, to be able to assert that claim in court."
Money, obviously, is a big issue, for both the potential whistleblower and the IRS, which estimates that the difference between what Americans owe in federal taxes and what they actually pay every year -- the so-called Tax Gap -- is more than $300 billion.
For the fiscal year 2005, the IRS collected just $93.5 million based on information from whistleblowers, according to Stephen Whitlock, the newly appointed director of the Whistleblower Office. And, of course, only a fraction of that amount was paid out to informants.
Scott says the increased rewards will have a profound effect on motivating people to report large instances of tax fraud. The range of risk will now be greater. Think about it: It's not just the IRS that tax cheats have to worry about. It's their employees, colleagues and acquaintances.
This isn't a forum to get even for small-fry spats, though. The $2 million threshold is there precisely so the IRS won't have to deal with personal disputes. "We want to make sure that the message is clear," says Whitlock. "We're talking about high-value noncompliance, not 'I've got a dispute with my landlord.'"
Given human nature, however, the IRS may unwittingly be giving more incentive to vengeance-seekers to come forward. So should the IRS take motivation into consideration when analyzing or investigating a claim?
Whitlock says yes, but only up to a point. "The motive of the individual -- the disgruntled ex-wife, or fired former employee -- only takes you so far in saying, 'Is this credible or not?'" he says. "The quality of information is really what matters, and that will vary from case to case."
Scott says the higher monetary threshold will make it easier for insiders at companies, rather than someone with a personal grudge, to report fraud to the IRS. "There are plenty of individuals with that kind of money not paying taxes," he says. "But I think the corporate impact of it will be significant."
Sullivan's Atlanta firm represents whistleblowers' cases and has been contacted by several people who work in financial roles at their companies, asking about the new IRS law. It's typically this kind of person -- an ethically-minded employee in a company's accounting department, say -- who's likely to come forward with information, according to Sullivan.
"There's just a certain number of people who are self-righteous," says Brian LaBovick, whose firm LaBovick LaBovick & Wald represents whistleblowers in both federal and state cases. "They won't let it stand. They'll come out and say, 'I want to report this person and I don't care if I never get paid a penny.'"
So how much dirt does a whistleblower wannabe need to get paid by the IRS?
Whitlock was only appointed to the director position in February, and is at work outlining the investigation and collection process. "We have a lot of issues to sort out," he says.
For example, calling the IRS and saying "I overheard my wife's rich cousin talk about underpaying his taxes -- you might want to look into that" is probably not enough evidence to prompt an investigation.
"You have to come to the government with new and valuable information," says LaBovick. "The more information you have, the better your recovery and the more you can get."
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Whoa. So go ahead and narc. I'm sure the IRS knows from Big Fish. Just make sure YOU are clean
Demonstrations are a drag. Besides, we're much too high
Good. I pay my taxes, I don't see why anyone else should get away with it. The largest tax cheats are rich people and businesses. Notice the article says that it has to be a tip that earns the gov't $2 million. Not exactly applicable to most people.
So, if I rat on someone and make the 15-30% from the IRS, do I then have to pay taxes on the reward as well? You'd also have to be in a position to observe someone or some company hiding at least $5-6 million in earnings. That's a pretty high bar. And, for someone with that kind of inside knowledge, I'm not convinced the reward would be worth the cost.
"Teach children that they have great potential because they are human." -Warrior