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244 IRET Congressional Advisory 1 (2008)

handle is hein.taxfoundation/iretcgadv0241 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. September 22, 2008 Advisory No. 244 WHISTLEBLOWERS AND TAX ENFORCEMENT Executive Summary Throughout history, governments have relied on informants to help identify those who break the law. The U.S. government has sought to encourage tips through various techniques, such as by establishing hot lines and by trying to protect whistleblowers from retaliation. In some instances the government also offers rewards for tips that prove valuable. In 1867, Congress passed legislation allowing the U.S. Treasury to pay informants for tips that lead to the recovery of unpaid taxes. Rewards are a percentage of what the government collects, with the percentage depending, within limits, on the usefulness of the information. In 2006, Congress established a special Whistleblower Office at the Internal Revenue Service (IRS) and set higher percentage rewards for tips that lead to very large recoveries (over $2 million). On net, evidence and economic analysis indicate that the tax whistleblower program is effective and better than many other current or proposed tax enforcement tools. A 2006 study by the Treasury Inspector General for Tax Administration found that the informants' program was highly cost effective for the government. Formal investigations based on tips were more likely to result in recoveries and they cost the IRS less per dollar recovered than investigations based on the IRS's own statistical formulas for spotting tax underpayments. Moreover, by providing the government with an additional enforcement tool, a whistleblower program reduces tax evasion by making it riskier. Although not mentioned in the 2006 study, a welcome hidden value of the whistleblower program is that it places fewer paperwork demands on taxpayers and third parties than many other enforcement programs. It is also less likely to entangle innocent taxpayers in IRS investigations. A key reason why the whistleblower program works relatively well is that the IRS carefully and independently screens the tips it receives and only proceeds if the charges appear to have substance. A word of caution: tax-enforcement efforts, of which the whistleblower program is only one, are more acceptable if a nation is a democracy, follows the rule of law, respects taxpayers' rights, keeps tax burdens low, and enacts tax rules that are clear and understandable. The current U.S. tax system is too complicated. It should be simplified for fairer and more efficient tax enforcement. Calls to increase taxes sharply on the taxpayers who are already bearing the heaviest burdens should be resisted.

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