IRS Informant Reward Program
(a.k.a. Snitch)

In the former Soviet Union, people had to be very careful about discussing their business and personal affairs because almost everyone was a spy for the secret police agency known as the KGB. It appears that the Internal Revenue Service has studied the "Soviet Model" and has set up a new division known as The Informant Reward Program.

When Congress passed the Tax and Healthcare Act on October 6, 2006, it radically changed IRC § 7623 that authorizes the IRS to contract with private individuals to act as part-time IRS Agents who will investigate business entities and individuals involved in civil and criminal tax violations. This new program will become the "Central Intelligence Agency" for processing and managing all information received from informants nationwide. It will also establish revenue production goals, communication procedures, data bases, and operating guidelines for handling the new informants that will be contracting with the IRS. This new office will be located in Fresno, California, and it will be similar to the Special Situation Room used by the FBI for monitoring federal crimes in the U.S.

Many people who have personal knowledge of federal tax violations will suddenly want to give up their day jobs and become subcontractors for the Internal Revenue Service. Unfortunately, most of these people will be disgruntled corporate employees, former business partners, ex-spouses and professionals who have inside information including, but not limited to, lawyers, accountants, bankers, and stockbrokers. This new program is guaranteed to not only enrich the IRS coffers (its primary purpose) but it will also enrich the bottom line for the new breed of IRS Informant.

Commissions for IRS Informants

Rewarding snitches that inform on taxpayers has been around since 1939, but the early Code only authorized IRS to pay rewards to informants for criminal tax violations. The statute was changed in 1996 to authorize payment of rewards relating to civil tax violations. In 1997, IRS raised the reward ceiling from $100,000. to 2 million. In 2004, the IRS raised the reward ceiling to 10 million. The 2006 Act changed Code § 7623 by allowing the reward payments to be based on a percentage of the amount of tax, interest, and penalties actually collected. The new percentage range is 15% to 30% and the actual percentage for each reward depends upon the amount of credible information provided by the informant.

Example: Let's say a high-level accounting employee works for a large corporation that decides to engage in a scheme that will allow it to avoid paying $100 million in federal income tax. Should this employee decide to become an IRS informant, the amount of the tax liability could easily double to $200 million due to interest and penalties. If this employee receives only the minimum reward of 15%, he will be entitled to a check in the amount of $30 million. Similar numbers will surely appear on future IRS Recruiting Posters at a web site near you.

IRS Agents vs. IRS Paid Informants

When an IRS Agent is auditing a taxpayer and fraud is discovered, he must immediately withdraw from the case and turn the case over to the Criminal Investigation Division (CID). A few days later, two Special Agents from CID will notify the taxpayer that he is the target of criminal investigation and they will read him his Fifth Amendment Rights. From this point forward, the taxpayer does not have to answer any questions and his individual records are protected from further scrutiny.

But what happens when the informant has established a relationship with his IRS Handlers, and he continues to work at his place of employment where he will be able to monitor the actions of the taxpayer, copy records, remove and return records, make voice and video recordings and initiate probes for further information? Remember, an informant working on commission is going to be aggressive in collecting the evidence his IRS Handlers need for a successful prosecution — especially so when the informant's paycheck will be in the millions.

Informants have always been a good source of information for IRS investigations, but once the snitches become aware of the "new and improved" Informant Reward Program that allows them to collect up to 30% of the tax, penalties and interest collected by the government there will be a flood of new applicants knocking at the IRS door. The risk/reward ratio will be too great for most people who have inside information and this is the reason why IRS has dedicated an entire service center to handle the Informant Reward Program.

Under the old program, there was no central office to manage informant data and there were few regulations on how informants were hired or paid. Many informants provided information that led to successful investigations but they never got paid. Under the new program, the informant's right to a paycheck has been dramatically improved and for the first time in IRS history, the informant will have the right to demand judicial review of the amount recovered by IRS and the method that was used by IRS Managers to determine the amount of his reward.

Warning

It appears IRS has created a monster that will recruit many part-time paid informants and we will see the erosion of our rights against unreasonable search and seizure and self-incrimination under the Fourth and Fifth Amendments to the U.S. Constitution. Early this year, the Director of the Fresno Center reported that he has already received boxes and boxes of records from individuals who have applied for rewards under the new program.

The huge economic incentives offered by the IRS to recruit informants will surely result in a backlog of litigation: There will be problems associated with the Fourth and Fifth Amendment violations previously discussed, and there will be problems associated with the criminals that will be hired and paid as IRS Informants. All you have to do is look at the number of DEA and FBI paid informants who have robbed, framed, and murdered their competitors and enemies while working for the government. A more subtle example is as follows: Let's say there are two criminals that owe IRS a lot of tax on their unreported income and one of the criminals decides to become an IRS Informant; moreover, the informant agrees to testify against his partner in exchange for immunity from prosecution. In this situation, one criminal goes to the federal penitentiary for 10 years and the other criminal is on his yacht enjoying his $10 million reward courtesy of the IRS. Who says crime doesn't pay?