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Tax cheat tip middlemen

By Kay Bell · Bankrate.com
Thursday, May 20, 2010
Posted: 1 pm ET

We've all heard the stories. A co-worker has a friend who's got a relative who lives next door to a guy who's ripping off the IRS. If we're paying our fair share of taxes, then he should, too. Wouldn't it be great if someone turned that tax cheat in?

Yes, it would. And that's been a possibility for ages. But things didn't always work out as smoothly as the IRS or informants hoped.

So in 2007, the IRS created a new Whistleblower Office. Authorized under the Tax Relief and Health Care Act of 2006, the office evaluates tips and those that pan out could get informants rewards of at least 15 percent and as much as 30 percent of what the IRS collects.

The higher rewards and new reporting system, however, has shown mixed results. The IRS has been getting a lot more reports of tax cheats, but the processing of, and potential payouts related to, them have slowed.

Now the private sector has stepped in.

The New York Times reports that law and accounting firms are stepping in and paying tipsters a portion of what they might one day get from the IRS. In this case, though, the informants don't have to wait for Uncle Sam to finish his case.

In what the newspaper says is believed to be the first such structured tax tip payout, an informant who reported that an overseas multinational corporation had underpaid its taxes by billions of dollars received $4 million last month from a private equity firm. The firm eventually will receive part of the official IRS reward.

This is appealing to tipsters who don't want to or can't afford to wait for the IRS.

And the examples cited by the paper seem to be legitimate firms that demand a lot of substantiation of tips.

But my concern is that as with any business, some less than honest players might become involved, both as folks offering tax cheat info and companies going forward with the evasion charges.

Honest but cash-strapped tipsters could be cheated by such middlemen. Just as bad, false charges could be created by some to get hold of some relatively quick cash from the tip payout firms.

If you knew of a tax evader, would you be willing to take a smaller reward from a private firm? Or would you want to go the official IRS route and possibly get more money later?

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