If You Pay Them, They Will Come

Here’s a crazy thought: if you give people a financial incentive, you can make them do almost anything (trust me, I watch a lot of reality TV).

For the IRS, the financial incentive comes in the form of increased rewards for turning in tax cheats. A new law, which was established by the Tax Relief and Health Care Act of 2006, rewarded taxpayers who reported tax cheats in the workplace. But they aren’t looking for small potatoes: the tax, penalties, interest, additions to tax, and additional amounts in dispute must exceed $2 million for any taxable year (that’s the sother restrictions also apply).

Is it working? Boy is it ever. The IRS whistleblower office announced this week that tips have increased to about 100 per month – up from 10-20 per month before the incentives. And it’s big money: 64 of the cases from last year alleged underpayment of $100 million or more. Run the quick numbers on that. If true, it’s mind-boggling.

That doesn’t mean that things have gone smoothly. The law is still very new (it took effect in 2007) and tax cases take a long time to investigate and prosecute. As a result, there hasn’t yet been a single payout to a tipster.

The program has met with mixed reactions in Washington. Some point to the increased numbers of complaints and say that it’s proof that upping financial incentives was the right thing to do – and that it’s just a matter of working out the kinks for payment. Others claim that the process is too slow and will discourage future tipsters from coming forward. Still others claim that the process actually encourages fraud. Joe Francis (of Girls Gone Wild fame) is a prime example: Francis claimed that his accountant set him up by preparing returns without his knowledge and then turned him into the IRS under the whistleblower program to get a reward (Francis later took a plea for filing false returns).

What do you think? Is the program a good idea? Or a bad idea with some good press?

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