Turning in Tax Cheats to Become More Profitable

WASHINGTON (AP) — The Internal Revenue Service is making it easier for whistle-blowers to collect rewards for turning in big-time tax cheats.

The agency proposed new rules Friday to jumpstart a 5-year-old program designed to entice people to turn in businesses or individuals trying to bilk the government out of $2 million or more in taxes.

The program has elicited a lot of tips but has yet to result in any rewards being paid out.

The IRS issued guidance last summer saying that whistle-blowers could only get rewards if their tips resulted in businesses or individuals paying additional taxes. The new rules would qualify whistle-blowers for rewards if their tips prevent businesses or individuals from claiming illegitimate tax refunds. Whistle-blowers could also benefit if their information results in a company getting fewer tax credits.

The difference is important because many corporations claim so many credits, deductions and exemptions that they end up getting tax refunds rather than tax bills. This can even be a legitimate tax strategy in the current economic climate, with many businesses struggling to post a profit. The IRS, however, wants to catch businesses and individuals trying to cheat the system.

"The guidance we issued today is we think is a more correct interpretation of the law," said IRS spokesman Frank Keith. "It allows payments to whistle-blowers in more cases than was permissible before."

Sen. Chuck Grassley, R-Iowa, said the new regulations should improve the whistle-blower program, encouraging more people with information about tax cheats to come forward. Grassley sponsored the IRS whistle-blower law and has been critical of tax collecting agency for its slow implementation.

"I hope these new regulations mean the IRS has turned the corner on encouraging whistle-blowers and that this program will be a success," Grassley said in a statement. "Next, the IRS needs to finalize these regulations quickly so they will apply to all the whistle-blowers who filed claims after the 2006 law and have been waiting for their awards."

For years the IRS has paid rewards to people who turn in tax cheats. But before 2006, rewards were generally capped at 15 percent of the disputed taxes. In 2006, Congress passed a law targeting high-income tax dodgers, guaranteeing rewards of up to 30 percent for informants if the company owed a least $2 million in unpaid taxes, interest and penalties.

Since the law was passed, tips have poured in, according to statistics provided by the IRS whistle-blower's office. In 2009, the agency received 460 tips concerning 1,941 taxpayers in cases involving more than $2 million. But the agency has yet to pay any rewards under the law.

Keith said the IRS was "fully committed" to implementing the law. "But payments can't be made until the cases that arise out of the information provided have been fully adjudicated, including exhausting all appeals, and that can be a lengthy process," he said.