The IRS still wants your help reporting tax cheats, and they're willing to pay you for it. Now, though, you won't find it quite as rewarding.
Because of the automatic spending cuts that took effect earlier this month, the IRS has had to reduce the amount that it pays under its whistleblower program. With the cuts, whistleblowers who report tax abuse in cases where the IRS successfully collects taxes from violators will see their awards reduced by 8.7 percent.
Bounty Program Catching On
The idea behind the IRS whistleblower program was to give people a financial incentive to help produce information that helps the agency catch people with unpaid tax liability. Under the program, the person who reports the tax abuse can get as much as 30 percent of what the IRS collects in taxes, interest, and penalties.
The whistleblower program was slow to get off the ground, but activity picked up considerably last year.
For the fiscal years from 2008 to 2011, the program received more than 24,000 cases and made more than 500 awards to whistleblowers, but the amounts paid were relatively modest, totaling less than $55 million.
During fiscal 2012, however, 128 awards totaling more than $125 million were paid, though that includes one high-profile case that paid $104 million to whistleblower Bradley Birkenfeld for helping the IRS catch violators who had put money in Swiss bank accounts to try to escape taxation.
Big Cheats = Bigger Payouts
Before you get too excited about your chances of collecting a payout, though, understand that the rules governing awards are designed to reward citizen-snitches only if the cases involve high-enough dollar amounts to justify the IRS trying to catch the crooks.
Tax cases involving $2 million or more are eligible for payouts between 15 percent and 30 percent, but smaller cases have a maximum of 15 percent and are made at the IRS's discretion.
Tax Cheat Whistleblowers Get Their Rewards Trimmed
Many celebrities have gotten smacked down for failing to paying taxes. Wesley Snipes actually landed in prison for his $17 million unpaid tax bill, while Nicolas Cage owed a seven-figure amount to the IRS. A host of others, including Lindsay Lohan, Pamela Anderson, and Christina Ricci, have faced liens or tax bills for more modest -- yet still sizable -- sums.
The two main reasons for us ordinary folks getting stuck with a big tax bill are that your paycheck withholding needs changing or that you have outside income that comes without having taxes withheld. In either case, even if you can't afford to pay when the bill comes due, ignoring the problem will eventually land you in an even bigger heap of trouble. Instead, take advantage of IRS programs that let you make affordable installment payments over time.
Part of what put Wesley Snipes behind bars was his conviction on three counts of failing to file tax returns by their filing date. In part, he relied on a bogus theory that all income taxes are unconstitutional as justification for his actions.
But a much more common problem many people run into is that they can't afford to pay their tax bill right away. The mistake they often make is to assume that they shouldn't file a return at all if they can't pay. In reality, the penalties for not filing your taxes are much more severe than if you file but can't payyour taxes all at once. So even if you don't have the money to send with your return, go ahead and file. It'll save you a ton of money -- and possibly jail time -- in the long run.
AccountingWEB recently took a look at some of the great swag that celebrities received at the Academy Awards. With sponsors handing out goodies including everything from jewelry to exotic safaris, the gift packages added up to as much as $75,000 in value. But the recipients have to report it all as taxable income.
You may never be so lucky, but even more modest prizes often get reported to the IRS. If you get a Form 1099 reporting the value of something you received as a prize or award, notincluding it on your tax form could trigger a red flag at the IRS.
One allegation that Nicolas Cage raised regarding his tax problems was that his business manager mishandled his funds and caused big losses that destroyed his finances. Similarly, Martin Scorsese and Al Pacino both blamed convicted adviser Kenneth Starr for their tax woes. Starr went to prison for fraud and theft from clients.
Still, no matter where you go or how much you spend for tax preparation, youbear final responsibility for making sure your tax returns are accurate. Reputable accountants will reimburse you for any penalties and interest that result from mistakes they make, but don't count on them. Instead, make sure you understand the positions your tax pro takes so that you can defend them if a question arises.
As you look at the hijinks of your favorite celebrities, be sure not to make the same tax mistakes they made. With a little common sense and some planning, you can learn from celebrity mishaps the easy way.