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Terrorist Informers, Rewards and Taxes

May 3, 2011 · 3 comments

So here’s a sight that I didn’t expect to see any time soon:

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But yet, there it is on the FBI’s Ten Most Wanted list today: Bin Laden’s picture with the word “Deceased” underneath.

No, wait, I’m not going to get all political on you. I don’t think I need to. You’re a grown up and you can draw your own conclusions about the importance of this event and what it means for our country.

Instead, I’m going to do what I always do: talk tax. You see, the tax geek in me perked right up when I heard that there’s already chatter about the $25 million in reward money which had been offered for information on Bin Laden’s whereabouts. Or to be technically accurate, $25 million plus. In addition to the $25 million offered as part of the Rewards for Justice program, the Airline Pilots Association and the Air Transport Association have offered $2 million and an additional $1 million may still be forthcoming, too, under anti-terrorism laws.

Of course, we don’t know whether or not the money will actually be paid out and, like Wolf Blitzer last night, I don’t want to speculate (if you watched CNN for the President’s announcement, you totally know what I’m talking about). What I will do is talk facts.

The $25 million reward for information about Bin Laden is supported by the Rewards for Justice Fund. This gets a little confusing because of similarities in names between the Fund and the Department of State’s Rewards for Justice Program. The informant program itself was established by the 1984 Act to Combat International Terrorism, Public Law 98-533; it is administered by the U.S. Department of State’s Bureau of Diplomatic Security. However, the Rewards for Justice Fund is a non-governmental, 501(c)(3) charitable organization. That means that donations to the Fund are tax deductible.

The Fund was created by a group of private American citizens led by Scott Case, one of the founders of priceline.com, and Joe Rutledge, a marketing and communications leader. The group approached the Department of State after 9/11/2001 and requested approval to raise money through donations (and eventually the sale of “United We State” license plates in Connecticut, Florida, Massachusetts, New Jersey, South Carolina and Virginia). The Department agreed (who wouldn’t want free money?) and has given the Fund the green light to operate. The Fund turns money over to the State Department to pay rewards offered for the receipt of information about named terrorists – and yes, taxpayer dollars are used for this purpose, too.

Since the inception of the program in 1984 – again not to be confused with the Fund which has been around for less than 10 years – it’s paid out more than $100 million. That money has been awarded to sixty individuals for information that prevented international terrorist attacks or helped bring to justice those involved in prior acts. So, I’m sure you want to know: did they pay taxes on that money?

Assuming that they otherwise were required to pay U.S. income tax, I think they probably should have paid taxes on the reward money. I can’t find any specific exemption for dollars paid out to informers who provide details on suspected terrorists. One would think they might have put something like that into the Patriot Act to encourage informers but I couldn’t find anything in my readings that would support such an argument.

That said, I can’t help but wonder if there isn’t a little wink and a nod going on from time to time. While payments to informers aren’t specifically exempt, and would therefore necessarily be included as taxable income (right?), there’s a bit of “who’s going to know?” going on. Payments made to informers for terrorism are generally kept anonymous under the Rewards for Justice Program. They’re also not required to be reported to the IRS if they meet certain criteria. According to the instructions for the form 1099-MISC:

A payment to an informer as an award, fee, or reward for information about criminal activity is not required to be reported if the payment is made by a federal, state, or local government agency, or by a nonprofit organization exempt from tax under section 501(c)(3) that makes the payment to further the charitable purpose of lessening the burdens of government. For more information, see Regulations section 1.6041-3(l).

You can read the cited Regs section here:

(l) A payment to an informer as an award, fee, or reward for information relating to criminal activity, but only if such payment is made by the United States, a State, Territory, or political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing, or, with respect to payments made after December 31, 1987, by an organization that is described in section 501(c)(3) and that makes such payments in furtherance of a charitable purpose to lessen the burdens of government within the meaning of §1.501(c)(3)–1(d)(2).

So there you go. Likely taxable under our current system but who’s going to enforce it… and how? I’m not one to throw around special exemptions but this one feels like one that would make sense under the circumstances just to keep things clean.

Mostly, this post is for fun. I’m fairly certain that whoever might have been responsible for the information that led U.S. forces to Bin Laden isn’t Googling tax blogs for advice… but it is an interesting bit of tax policy to think about.

And even though I said that I wasn’t going to get all political, I am going to say this: to the NAVY Seals who did their job, to the Navy personnel serving all over the world (and that includes my brother) and to anyone who ever put on a military uniform and went to work to do a job that we don’t always understand and rarely say that we appreciate, THANK YOU. You rock.

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{ 3 comments… read them below or add one }

1 taxquery May 4, 2011 at 7:00 am

Great & timely article!

Maybe , the real winner of award , if there is one , really stumble upon your article and get some real tax advice !!

taxquery

2 American Delight May 11, 2011 at 6:13 am

I think “informer” means somebody who knows the criminal or wants to stay anonymous. A high-profile terrorist or criminal spotted outdoors by a random person, rather than an insider, would probably not constitute an “informer.”

The reward money seems taxable to me like most winnings. And the way I look at it, if you’re a bounty hunter, the bounty/reward would constitute income.

3 alex October 4, 2012 at 7:24 pm

Thanks for the article, however it is unlike a bounty hunter since it is not
a non profit or government agency, the rewards for justice program does go into a bit of detail rather than a specific quick question and answer, but does not go into specifics, payments should be anonymous, what if the person is audited or folks who know you suspect?

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