Smart Money
By Lisa Scherzer

There’s a new sheriff in town, and his name is John Doe.

He may be sitting in the cubicle next to you.

Under a 2006 congressional mandate to the Internal Revenue Service, ordinary citizens can help the tax man cometh — or at least collect. The Whistleblower Office is the IRS’ attempt to give incentives for you to rat out the tax cheats you know.

That’s right. If your employer, co-worker, landlord, neighbor or father-in-law is raking in fistfuls of cash and bypassing Uncle Sam, you can anonymously report the abuse to the IRS and snag a windfall from their dishonesty. As long as the total amount of tax fraud comes out to at least $2 million — including penalties, interest and whatever else the government ultimately collects based on your report — you can get a 15% to 30% cut. If the taxpayer is an individual, his or her gross income must also exceed $200,000 for the year at issue.

The IRS modeled the program on the Department of Justice’s successful False Claims Act, which has been in place since the Civil War era and attracts tips about fraudulent claims against federal government programs.

Whistle-blowers’ new image

Ratting on your boss or ex-husband might sound sleazy, but whistle-blowers have taken on a more venerable image in recent years. That’s especially true since the Enron era, when the few employees who spoke up about the company’s misconduct were seen as folk heroes after the full extent of wrongdoing came to light.

Under the old rules, whistle-blowers could seek rewards up to 15% of the amount recovered by the IRS. But it was deemed a failure, mostly because the IRS was under no real obligation to compensate people who came to them with information of underpayments.

Under the new law, however, a whistle-blower can make an appeal in Tax Court if the IRS decides not to issue a reward.

“If people are concerned about the consequences, and if there’s no guarantee of what they recover, they’re much more hesitant about doing it,” says Paul Scott, a San Francisco trial attorney, formerly with the Department of Justice, who sponsors “This gives people more security, to be able to assert that claim in court.”

Trying to close the tax gap

Money, obviously, is a big issue, for both potential whistle-blowers and the IRS, which estimates that the difference between what Americans owe in federal taxes and what they actually pay every year — the so-called tax gap — is about $300 billion.

The IRS received leads on 1,900 potential tax dodgers in fiscal 2009, up from 1,246 the previous year. Many of the tips came with reports of tax losses in nine digits or more.

Scott says the increased rewards will have a profound effect on motivating people to report instances of large tax fraud. The range of risk will now be greater. Think about it: It’s not just the IRS that tax cheats have to worry about. It’s also their employees, colleagues and acquaintances.

Given human nature, however, the IRS may unwittingly provide incentive for vengeance seekers to come forward. So should the IRS take motivation into consideration when analyzing or investigating a claim?

Looking for insiders

Scott says the higher monetary threshold makes it easier for insiders at companies, rather than people with personal grudges, to report fraud to the IRS. “There are plenty of individuals with that kind of money not paying taxes,” he says. “But I think the corporate impact of it will be significant.”

Sullivan’s Atlanta firm represents whistle-blower cases and has been contacted by several people who work in financial roles at their companies, asking about the new IRS law. It’s typically this kind of person — an ethically minded employee in a company’s accounting department, for instance — who’s likely to come forward with information, according to Sullivan.

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