Reid works out compromise on tax ‘snitch’ program

Paul Kane

Thursday, May 7, 1998 | 11:40 a.m.

WASHINGTON -- A little-known Internal Revenue Service program that pays out rewards to informants who provide leads on tax cheats has come under congressional fire and will be closely studied under a compromise worked out by lawmakers and the Treasury Department.

Sen. Harry Reid, D-Nev., led the assault on what he called the IRS "snitch program," which allows for anyone to collect up to $2 million in cash for turning over tax secrets.

"This program is contrary to taxpayer privacy," Reid said. "It seems to encourage a big-brother-like system where disgruntled neighbors, spouses and business partners are given a financial inducement by the federal government to turn in taxpayers."

During this week's debate on IRS reform, Reid had sought to kill off the program, in which the informants are paid 15 percent of the taxes collected because of the information provided, with a new cap at $2 million.

But the IRS defended the program as a necessary tool to go after the worst of America's tax cheats, and Treasury Secretary Robert Rubin objected to Reid's plan to simply eliminate the program without much debate.

After consulting with Rubin and other senators, Reid agreed to modify his amendment so that the Treasury could conduct a one-year study of the controversial program and report back to Congress next year. That amendment was unanimously accepted into the overall IRS reform package.

According to an analysis by the Los Angeles Times -- which labeled the program "one of the most unseemly parts of the U.S. tax system" -- 9,340 Americans sought rewards from the IRS for information they provided in 1996.

But only 650 of those tips, just 7 percent, were solid enough for the agency to act upon, leading to $103 million in recovered taxes that otherwise would have gone without notice. The IRS paid $3.5 million to its informants in 1996.

"It seems as if the IRS is merely being abusive instead of responsive to the needs of taxpayers," Reid said.