IRS Bounty Hunters (2011 Oct)

by Barry A. Liebling

What do you call a government program that brings out the worst in people – a program that rewards citizens for being sneaky, deceitful rats while it gives taxpayers reason to suspect that they could be set up at any time for an IRS audit, monetary fines, and even prison? Answer – the IRS Large-Awards Program.

According to Laura Saunders of The Wall Street Journal congress created the IRS Large-Awards Program in 2006 for cases involving $2 million or more of tax booty. It supplements the older Small-Awards program that is concerned with less substantial sums of money.

Here is how it works. The ambitious IRS bounty hunter gathers information on an employer, relative, or friend that might not be paying as much in taxes as the IRS would like. It is up to the IRS to decide whether or not to take on any particular case. Apparently the IRS rejects most of the proposals brought to its attention and concentrates on those that are most likely to yield substantial revenues. Several years might pass while the “concerned citizen” surreptitiously and diligently collects damning evidence. Once the IRS is convinced that the case can be lucrative it launches a full investigation – supplemented by the documentation supplied by the informer. The goal is to get all of the taxes it believes are due plus penalties and interest payments.

In the end the “concerned citizen” is rewarded with as much as 30% of the money the IRS reaps from the exercise. A significant feature of the program is that the “IRS tries to protect whistle blowers’ privacy.” Neither the snitch’s employer or acquaintances are informed of his identity. However, there is no law that protects the informer from employer retaliation.

What makes the Large-Awards Program so insidious? And how is an IRS bounty hunter different from a conventional bounty hunter?

The government incentivizes the informer in the program to be deceitful and to nudge his prey into defying the IRS. The federal bounty hunter is compensated according to how much money the IRS is able to squeeze from the target. This means that while the informer is gathering information he will hope that the company’s – or individual’s – transgressions are as large as possible. If a company notices that, in error, it has failed to pay enough to the Department of Treasury it may try to correct itself by making compensatory payments to the IRS. But this is exactly counter to the interests of the informer who stands to gain more if the company’s liability and culpability are greater. Thus, the “whistle blower” who is an employee is quietly noting all the things that can be used against the company but has no incentive to help the company avoid trouble. An IRS bounty hunter, who is essentially a mole, garners a larger prize the more his target violates the will of the IRS.

Notice that conventional bounty hunters do not operate this way. A regular bounty hunter is promised a certain amount of money if he captures a fugitive. It is not to the bounty hunter’s advantage for the fugitive to remain at large for a long time while committing ever more serious crimes. Also observe that in general conventional bounty hunters go after criminals. By contrast, the targets of IRS bounty hunters may be criminals but may also be companies and citizens that have made honest mistakes or are ignorant about the complexities of satisfying the IRS.

Consider the issue of secrecy. The IRS makes a big deal out of protecting the “privacy” of its paid informers. But why is this important? The IRS informer wants to conceal his identity precisely because he knows that most members of the community will not trust him and may even despise him. Do this thought experiment. Suppose you are a scrupulously honest business owner. Would you want to hire someone who has participated in the Large-Awards Program? The reason you would be reluctant is that you know this person is not straight with the company that employs him. You suspect that an IRS informer will be hoping your company will slip, in a big way, so he can capitalize on your mistake. You understand that if he detects irregularities in your company’s tax compliance he would rather secretly document your trouble than warn you and help you fix it. You do not need an employee who is inclined to betray you.

By contrast, conventional bounty hunters do not try to conceal their identities. They typically boast about their profession to the outside world. Ordinary citizens who are not wanted by the law have no reason to fear them.

And notice how the IRS bounty hunter’s desire for secrecy can be used against him by the IRS. Think of all the police dramas you have seen where a detective has a stoolie – someone who secretly spies for him. The stoolie is always afraid that his contact will reveal that he is really working for the police. How many movies have you seen where a police officer threatens to out the stool pigeon unless he does just one more favor for him? Will the Large-Rewards Program create a class of citizens who have spied for the IRS and are permanently under the thumb of unscrupulous IRS agents?

What is wrong with the IRS Large-Rewards program? It encourages deception, it is not transparent, it turns citizens against one another, and it delivers illegitimate power to IRS agents. Congress should repeal this 2006 mistake.

*** See other entries at in “Monthly Columns.” ***

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