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Hedging tax cheater tips

I regularly hear from readers who want to rat out someone they're convinced is cheating on their taxes.

I also get lots of messages from folks who say they told the IRS about a tax-cheating so-and-so but nothing's happened yet.

Not only is that good-for-nothing still going merrily about his non-tax-paying business, the IRS hasn't sent along any reward to the informant who provided the tip.

It's never been that easy to get a payout for turning in tax cheats. But things were supposed to get better three years ago when, as part of the Tax Relief and Health Care Act of 2006, the IRS established its new Whistleblower Office.

In addition to creating a position that focuses on reports of tax delinquents, the new law upped the rewards for such info. Now you could get from 15 percent to 30 percent of whatever money the government recovers.

The dedicated process and bigger payouts, however, have been a mixed blessing, both for the IRS and informants.

More reports of more possible tax scofflaws means the IRS has much more verification work to do before the reporting parties can get their rewards.

Private informant payouts: So that's where good ol' American ingenuity has stepped in. Seeing a market need, hedge funds, private equity firms and other investors are buying a percentage of informants' future payouts. That way, the informants get some money sooner.

It's sort of the whistleblowers equivalent of taking a smaller lump sum lottery payment now instead of getting the larger full amount over many (many, many ...) years.

Yay capitalism! But as I noted in my Bankrate Taxes Blog item Tax cheat middlemen, this option could open up the door for other potential problems.

Although there will be legitimate groups paying off whistleblowers early in the hopes of recouping even more money based on the tips, you can be sure that some sleazy groups will get into the business.

Not only will these iffy tip brokers cause problems for the IRS, which then will have more questionable info to investigate, but folks who have tax cheat info also could become targets.

A new way to scam? I also see a whole new school of scammers sending out phishing e-mails by which they get not only info (good and not so good) on alleged tax cheaters, but also from the folks who report them.

And about those alleged delinquents ... .

I'd hate to be a person who ticked off someone who then decides to get back at me by saying I owe the IRS. I suspect that with some folks willing to pay at least a little up front for the information, there will be a lot more false claims.

The New York Times article on this new whistleblower payout business says "the market was likely to expand once the I.R.S. awarded its first whistle-blower a check under the expanded program, which is expected later this year."

It will be interesting to see how much it grows and what growing pains we all experience.

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I have always had a weird feeling about the IRS' program. It allows a person the ability to use the IRS' henchmen without any recourse if the search turns up nothing.

Toni McIntyre

One thing to remember, unless they are charged with a crime(making it public record - even then good luck getting local media to cover it)or talk about it to the informant (or someone else who tells them) action could have been taken and the informant may never know.

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