Tax Analysts Blog

Getting Taxpayers to Rat on Each Other: Uncool

Posted on Oct 14, 2015

I must confess I've never been big on tattling, particularly when the tattlers have something to gain financially. There is a lot of that going on in the state tax world these days. I'm talking about qui tam lawsuits, of course. Most Americans don't know much about them. Indeed, a lot of legislatures don't know much about them. Yet they have been proliferating in recent years.

Here's how it works. A private citizen suspects someone is cheating on his taxes. That person brings what is known as a qui tam lawsuit (because we are lawyers, we must use terms that ordinary people don't understand). The suit is filed under the False Claims Act. If the suit is successful and the private citizen can show the taxpayer was cheating, that private citizen gets to keep a portion of the tax and penalties. Ten states have authorized tax-related private lawsuits in some manner. As State Tax Notes has reported, there has been an upsurge of litigation.

The federal government has a similar but less cumbersome program. The IRS wants you merely to inform on your neighbors. If the information pans out, you get a piece of the take. Some states also have whistleblower statutes similar to the federal law.

I understand the theory behind both the state qui tam lawsuits and the IRS whistleblower program. Our assessment system is largely voluntary, and people cheat on their taxes. Actually, a lot of people cheat on their taxes. Neither the IRS nor the state revenue departments have the resources to track them all down. But both the state lawsuits and the IRS whistleblower programs are policies unworthy of the greatest democracy that ever was.

Policing the tax laws is the responsibility of the IRS, the state departments of revenue, and their respective attorney general offices. That is where it should lie. Despite the political grandstanding about tax collection agencies, the IRS and the departments of revenue have the expertise to enforce the nation's revenue laws. No one else does. That these agencies have limited resources and cannot perform their tasks is not a reason for whistleblower programs.

Private citizens should not be in the business of administering or enforcing the tax laws. The most obvious reason is that they do not have the expertise or the context to judge whether taxes are being evaded rather than, say, avoided. It is hard enough for trained tax professionals to ascertain the difference between tax fraud and very aggressive tax planning. That task should be left to the professionals.

But more importantly, rewarding whistleblowers is untoward in a democracy. People inform on their colleagues, neighbors, and maybe even family members for a price. The informers are never interested in fair or efficient tax administration. They're motivated mostly by profit, although some are motivated by revenge. What better way to get back at someone than to file a lawsuit against them or bring the IRS to their doorstep. The great dictatorships gathered information through informants. They encouraged people to spy on each other. We should do better.

It should be noted that most qui tam lawsuits and IRS whistleblower actions are filed against businesses with real or perceived deep pockets. As a result, the likelihood of frivolous charges is high. And even if the charge is not completely frivolous, most are found to be baseless.

The solutions to the need for whistleblower programs are better-funded tax collection agencies and simpler tax laws.

A version of this post appeared in State Tax Notes.

Read Comments (10)

Bubba ShawnOct 13, 2015

David,

Absent of your "solution", IRS whistleblowers risk their professional careers
and their family livelihoods to do "the right thing" reporting tax evasion
occurring in their companies. Most IRS whistleblowers are educated accounting
professionals who don't condone tax cheating because they are honest and
ethical.

Disparaging IRS and other whistleblowers deliberately ignores the fact that
reporting tax evasion is doing the public good because tax cheating executives
have zero ethical standards toward their customers, employees and competitors.

You are dead wrong in you ill informed opinion.

AMTbuffOct 13, 2015

What's sauce for the goose is sauce for the gander. It's time for a program to
financially reward IRS employees who blow the whistle on misdeeds within the
IRS. $5000 for the whistleblower of the week, and $200,000 for the
whistleblower of the year.

Mike55Oct 14, 2015

Even the best funded police agencies in "the greatest democracy that ever was"
use informants to capture drug dealers as a standard operating procedure. So
what's so different about using informants to capture tax criminals? It can't
be the fact that tax informants are paid, because the typical process used to
motivate a drug informant is far more compulsive (i.e., "we've caught you
committing crime X, so please inform on person Y, or we'll send you to jail
Z"). You might also observe that drug dealing is a more serious offenses than
cheating on one's taxes, but to me that'd be an argument for decriminalizing
tax offenses, not an argument for how the tax laws that currently exist should
be enforced.

vivian darkbloomOct 15, 2015

Good post, David.

With respect to the observation that this is not how a democracy should
function, one of the issues I have is the apparent lack of symmetry between rex
non potest peccare and qui tam pro domino rege quam pro se ipso in hac parte
sequitur.

On the one hand, the government is actively seeking to prevent standing to its
subjects (even members of Congress!) who may attempt to sue government for its
malfeasances and, on the other hand, it actively lends standing to those who
want to help the government sue its subjects.

As you say, "not cool"

vivian darkbloomOct 16, 2015

"Disparaging IRS and other whistleblowers deliberately ignores the fact that
reporting tax evasion is doing the public good because tax cheating executives
have zero ethical standards toward their customers, employees and competitors."

Bubba,

Unlike Patrick's comment, I don't find the above offensive; however, if you
don't mind I will disagree with it.

First, I didn't take from this column that David was "disparaging IRS and other
whistleblowers". I also don't think he's "deliberately ignored" anything. In
fact, I'd suspect that if you asked David this question, he'd answer in the
affirmative:

Do you think whistleblowing to report tax and other fraud should be encouraged
and protected, albeit without financial rewards?

As I read it, David was certainly not "disparaging Whistleblowers"; he was
disparaging the practice of bounty hunting.

Now, you may argue that bounty hunting is good because it can help increase the
detection of fraud (most qui tam actions, I understand, involve not tax but
government contracting fraud). That may be true: the financial returns are
relatively easy to calculate. The fact that it "makes money"; however, is not
the only consideration, especially in a democracy. David appears to be
concerned, as am I, at the more intangible costs to democracy and our culture
of paying ordinary citizens to become part of the law enforcement apparatus.
It's rather hard to put a dollar cost on that; but, in my view, and presumably
David's, the costs outweigh the benefits. If you disagree, fine, but I think
that is the issue you should be addressing.

vivian darkbloomOct 16, 2015

One further point, Bubba. The amount of revenues ostensibly "raised" by these
qui tam actions are not the only side of the ledger. In addition to the
intangible costs I referenced in the prior comment, the practice strongly
encourages frivolous suits from "bounty hunters" and revenge seekers. The
costs of defending against this are real. I think David alluded to that.

vivian darkbloomOct 16, 2015

@Patrick Burns

I don't think you read David's column very carefully.

He made absolutely no assertion that the *IRS Whistelblowers Program" is
administered under the False Claims Act. His focus was on qui tam actions,
which are. The reference to the IRS Whistelblowers programs was an aside, at
most.

To even suggest that Brunori here has argued that he is comfortable with tax
fraud is grossly incorrect and offensive, particularly given his recommendation
for better funded collection programs (and simpler tax laws).

You are not doing your organisation any favors with these unsubstantiated and
offensive claims.

david brunoriOct 16, 2015

Viv, Thanks for the comment. Patrick, I certainly did not suggest that cheating
on taxes was okay. I would never do so. The IRS and departments of revenue are
best able to combat tax evasion. I simply do not believe we should encourage
people to inform on their neighbors, bosses, or ex spouses.

Patrick BurnsOct 17, 2015

Almost every line of this piece is packed with serious errors of fact.

For starters, the IRS whistleblower program does NOT operate under the False
Claims Act. It is a separate program, entirely administered by the IRS.

Second, there is no private of action under the IRS whistleblower program,
which means that if the IRS does not see fraud, the “case” dies then and
there.

The core assertion of this editorial, that private citizens are in the business
of administering or enforcing tax laws at either the federal or state level, is
simply wrong as a matter of fact and law, which means the entire thesis is bunk.

To the extent this piece references the False Claims Act, it falls down in
failing to quantify the extraordinary success of that law (the most successful
piece of anti-fraud legislation in U.S. history).

To the extent this article references the federal tax gap (i.e. taxes owed
under current law, but not paid due to fraud), it fails to quantify that gap,
which the IRS says is now greater than the entire federal deficit.

At its core, Mr. Brunori seems to be arguing that honest taxpayers should
subsidize dishonest taxpayers because he is personally uncomfortable with the
notion of civic duty and incentivizes for integrity.

What Mr. Brunori does not seem uncomfortable with is tax fraud itself.

Here he waves his hand and gives the Big Wink to tax fraud as usual.

There is no call for increased penalties for tax scofflaws, or any serious
proposal for funding and staffing a larger or more efficient Internal Revenue
Service.

Strip it down, and what we have is a not-very-well-researched, and almost
entirely inaccurate, apology for lying, stealing, and cheating.

If this piece was submitted by a college undergraduate, it would qualify for a
failing grade. As a piece submitted by the deputy publisher of Tax Analysts,
it is an embarrassment.

Patrick Burns
Taxpayers Against Fraud Education Fund

Bracket CreepOct 21, 2015

While much of the focus of this article is in the context of the False Claims
Act and Whistleblower program, David ignores that much of IRS enforcement
relies upon the reporting of information by third parties. For example, the IRS
relies on the payer of alimony to include the Taxpayer Identification Number of
the recipient on Line 31b of their tax return. This information not only
substantiates the deduction for alimony, but also allows the IRS to determine
the recipient’s reporting compliance.

Is this considered “ratting” out or a cost-effective enforcement tool?

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