People are Making Millions by Snitching on Tax Cheats

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The Internal Revenue Service (IRS) has long invited people to provide tips that can help the agency nab individuals who are cheating on their taxes. If the information is valuable enough, tipsters are even rewarded for snitching, receiving a cash payout based on a percentage of the uncollected revenue that the tip helped the IRS find.

Last year, according to a report by the Wall Street Journal, the IRS awarded over $312 million to individuals who provided tips. This amount far exceeds the last record year, 2012, when approximately $125 million was paid out to whistleblowers.

In 2019, the agency has already paid out $115 million to tipsters, and that may be just the tip of the iceberg.

While many of the payouts to individual whistleblowers are fairly modest, last year, one tipster received around $100 million for submitting details about a multinational corporation. That whistleblower, a client of lawyer Dean Zerbe, chose to remain anonymous.

At this time, the largest known payout went to Bradley Birkenfeld in 2012. The former UBS AG private banker received about $104 million for turning in the Swiss bank, a financial entity that had encouraged US taxpayers to hide assets overseas.

The increase in awards could be related to an expansion of the IRS whistleblower program. The change, which was enacted by Congress in 2006, allows tipsters to receive up to 30 percent of the revenue that can be collected after providing a tip, suggesting that the case is large – usually involving over $2 million in taxes.

“The large-awards whistleblower program is now hitting on all cylinders,” said Zerbe.

Tips that result in fewer tax collections can still receive a reward, though the percentage is commonly much smaller.

While the financial incentive may encourage more people to become possible whistleblowers, the process isn’t easy.

Approximately three-quarters of all tips are rejected immediately. Of those that move forward, around one in seven actually ends up with a payout.

The majority who do receive an award end up requiring services from a tax attorney when filing their submission, and the lawyers usually charge a fee of 25 percent to 40 percent of the award received.

According to attorneys, the IRS requires a substantial amount of documentation to back up a claim, ranging from account statements to internal memos to emails. At times, even voice recordings may end up in the package to the IRS, as one whistleblower had to wear a wire – twice, as the device malfunctioned during one attempt – to get the incriminating details she needed to move forward.

“The key to getting an award is to give the IRS the case on a silver platter,” said attorney Jeffrey Neiman.

Additionally, there can be a very long wait before a tipster actually receives their award. According to the 2018 report, it usually takes a minimum of seven years. A payout after just five years is considered “fast.”

It’s also important to note that the payout itself is subject to taxation. Whistleblowers in the US owe taxes on the full amount, minus any attorney’s fees, based on their usual tax rate. In most cases, the taxes are withheld.