Tattling for Dollars: The Growing Ranks of IRS Informants

The numbers of people who are informing the IRS about delinquent taxpayers is growing.

The agency gets about 40 to 50 tips a month from ex-spouses, disgruntled business associates and other individuals angry at someone they believe is cheating Uncle Sam, reports Bloomberg, because they can get a potential reward of 15% to 30% of the money collected in excess of $2 million.

Inundated With Tips

Ever since Congress passedThe Tax Relief and Health Care Act of 2006, the Internal Revenue Service has been inundated with tips from people eager to help the agency recoup back taxes because of the possible rewards. Previously, it was up to the government's discretion whether a tipster would get a payout, which was capped at $10 million. Now, there's big money to be made.

"After the law was enacted, the Miami-based Ferraro Law Firm, which specialized in personal-injury cases involving cancers related to asbestos, opened a Washington office that recruits and represents clients making such claims," Bloomberg reports. "The firm has said it made several claims alleging more than $1 billion in unpaid taxes."

Ferraro could not immediately be reached for comment. Erika Kelton, a partner at Phillips & Cohen who represents whistleblowers, says the IRS has received information from informants that it wouldn't have obtained otherwise. She notes that over three years, thousands of cases have been filed, dozens of which are valued at more than $100 million, adding: "The IRS can only be at so many places at once."

IRS Under Pressure to Collect

Bradley Birkenfeld, the former UBS (UBS) banker who blew the whistle on a massive tax evasion scheme by wealthy Americans, is reportedly seeking a reward in the billions. The Swiss bank agreed to pay a $780 million fine to settle allegations related to the information he provided authorities.

Federal officials in turn have argued that Birkenfeld deserves no money because he played a role in the tax evasion by helping billionaire Igor Olenicoff cheat on his taxes, a crime for which he's serving a 40-month jail term. The New York Daily News recently did a jailhouse interview with the banker where he claimed that some U.S. politicians also kept secret accounts at the bank. UBS denied the accusation.

In the current economic downturn, the IRS is facing additional pressure to collect taxes. Those who need the agency's help often have trouble getting it. According to the IRS's National Taxpayer Advocate, an in-house consumer watchdog, the agency made the fewest agreements with taxpayers in a decade to settle their debt for less than the full amount due.

Doing the Right Thing -- Eventually

Tax authorities continue to rely on taxpayers to do the right thing, and most do. According to the IRS, the compliance rate is about 85%. The laggards can often rely on tax amnesties at the state and local level. For instance, delinquent Pennsylvania taxpayers who pay up by June 18 can have their penalties waved and their interest charges slashed by 50%. Ads have blanketed the state proclaiming, "If you owe PA back taxes, we know who you are."

At the federal level, officials know plenty of people who know delinquent taxpayers and probably don't like them.