Reporting a tax cheat and getting a reward is not for the faint of heart. It is not a get-rich-quick scheme, as cases that are pursued can take several years from the moment you report a tax cheater to when you actually reap a reward. Not only does the IRS have to determine guilt, it has to actually collect the amount owed before paying you. Also, the IRS gets to decide whether or not your tip substantially contributed to their detection and recovery of taxes; if it hasn’t, even if the IRS receives money, you will not. Finally, only a small percentage of cases are actually ever pursued.
Still, cases of people reaping huge rewards from informing the IRS on tax cheaters pop up from time to time. From 2004-2005, 428 informants received a total of $12 million for their information that recouped the IRS $168 million. The first large reward paid from the new program (discussed below) occurred in April of 2011 to the amount of $4.5 million (this was 22% of the amount collected by the IRS).
Reward Amounts for Reporting Tax Cheaters
The reward amount was increased under the Tax Relief and Health Care Act in 2006 (effective 2008). The IRS will now pay between 15%-30% to people who tip-off tax cheaters for cases of $2 million plus (note that if the tax cheat is an individual, their gross income must be at least $200k). If the amount in question is less than $2 million, you may still be awarded money. However, the award is up to the discretion of the Commissioner. In this case the maximum discretionary award is 15% of the tax recovered, up to $10 million.
Common Types of Tax Evasion Practices
Most of us pay our taxes and do so in a truthful way (or to the best of our knowledge of an extremely complex tax code). But there are cheaters out there who are not paying their portion of the tax bill. In fact, I was contacted the other day by a reader of my blog who has not filled out an income tax return in over eight years. While I about fell out of my chair, they seemed to be pretty calm about the whole thing (I advised them to immediately gather up all of their documents and head to a tax professional…I hope they take action before the IRS finds them!).
Below is a list directly from the IRS website of typical tax evasion practices:
- False Exemptions or Deductions
- False/Altered Document
- Failure to Pay Tax
- Unreported Income
- Organized Crime
- Failure to Withhold
Information You Will Need to Report a Tax Cheat
It is not enough to “think” that someone or an organization is evading taxes; you need actual evidence and proof that someone or an organization has unreported income. Besides, if you do not have actual proof then your time is truly wasted as the IRS will either not pursue the case at all or will pursue it but determine that you did not substantially contribute enough to receive a reward.
At the minimum, to report a tax cheater, you will need the alleged cheater’s name, address, social security number (or employer identification number for a business), a description of the alleged violation and a description of how you became aware of the situation, the duration of the violation, and the estimated dollar amount that was not reported to the IRS. You are able to give your address and identifying information, but you can also remain anonymous. If you have actual records or books, this will be very helpful (though not necessary).
Tax Cheater Forms to Fill Out
Once you have determined that one of the above types of tax evasion is occurring, and that you have sufficient information and evidence, you will need to fill out IRS form 3949-A. You will need to print this completed form and mail it to: Internal Revenue Service, Fresno, CA 93888.
In order to claim any future reward money for your information, you will need to fill out IRS form 211. You will need to print this completed form and mail it to: Internal Revenue Service, Whistleblower Office, SE: WO, 1111 Constitution Ave., NW, Washington, DC 20224.
While not many cases are pursued, you do have a chance. Before you pursue this yourself, there are a few things to think about. Make sure you would be okay with the tax cheater knowing that you were the one who turned them in as your testimony may be needed in order for the IRS to get their money. Also, if you have cheated on your own taxes you may not want to draw attention to yourself.
Would you turn in a tax cheater to reap a reward?