Making tax cheats pay up and pay off -- Page 2

Reward vs. effort
While the IRS won't provide information on its largest reward or indeed any specific rewards to protect the privacy of its informants, by law it can't pay more than $2 million and, according to Levin, won't pay less than $100. Simply put, if your tax cheat isn't worth substantially more than what it will cost the IRS to pursue him, you're unlikely to see any moola.

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By law, current and former employees of the Department of the Treasury who discover a tax cheat on the job cannot apply for a reward. Nor can you collect if you were part of the scheme. In fact, you may want to think twice about turning in your former boss if you don't want the IRS peeking too closely at your own returns.

"I don't know that we're likely to look into it, but I would imagine that it might be fairly obvious if someone is the bookkeeper and they prepared the fraudulent return," Heiskell says.

"It's not a normal course of business when we receive information to do a background check on the informant," Levin aggress, "but if something happened to come out that would preclude them from getting a reward, then that may come to light."

Once you've turned in your tax cheat, don't hold your breath waiting for a check. Due to disclosure laws, the IRS won't even say what it's doing with the information you provided, although it gets plenty of calls from people wondering precisely that.

Once you've filed a Form 211, you can expect one of two things from the IRS, months or years later: a letter with a check (the exception) or a letter saying you didn't meet the criteria for a reward (the rule).

Should you be lucky enough to receive a reward, don't forget to declare it as income on your tax returns for the year in which it was issued.

You wouldn't want to cheat the IRS, would you?

Why not hunt the fat rats?
Not everyone, however, is a fan of the IRS Rewards Program. Some see the secretive way in which rewards are granted as a vestige of the arrogance for which Congress took the IRS to task in the Tax Reform Acts of 1998 and 1999.

"The problem with the program is that payment is entirely within the IRS's discretion and those who have sued in court to receive the reward have lost because the courts have held that the IRS has that discretion," says Robert L. Sommers, a San Francisco tax attorney. "If there was a neutral decision-maker in the process and clear guidelines as to the information that was needed to claim an award, the program would be very successful, especially in the offshore trust area."

Sommers says that with a little retooling, the program could easily go after the really deep pockets: offshore tax shelters. These foreign-based accounts and associated credit card scams top the IRS priority list.

"Imagine if the IRS offered a 'no-questions-asked' tax-free reward of 10 percent for all money collected based on a clear criteria. Then imagine advertising this policy in tax-haven countries where U.S. tax evasion is being practiced on a large scale. If the program was aggressively promoted and administered fairly and independently, I would expect billions to be collected," he says.

With that kind of money at stake, Sommers predicts a whole new industry of high-tech bounty hunters would gladly join the hunt for fat rats.

"If the IRS estimate of $70 billion annually being hidden offshore is true, then they would be creating a $7 billion incentive to provide information regarding these activities. Add to the offshore tax cheating domestic cheating and organized crime and the potential recovery would probably top $100 billion."

Jay MacDonald is a contributing editor based in Mississippi.