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28 Va. Tax Rev. 237 (2008-2009)
Should Tax Informants Be Paid - The Law and Economics of a Government Monopsony

handle is hein.journals/vrgtr28 and id is 239 raw text is: SHOULD TAX INFORMANTS BE PAID? THE LAW AND ECONOMICS OF A GOVERNMENT MONOPSONY Kneave Riggall More than 140 years ago, the United States Government began to solicit information about violations of federal tax law. Currently, the Internal Revenue Service (Service) runs two reward programs for tax informants, with rewards of up to 30% of the amounts collected as a result of the information supplied. This article analyzes the demand for information about tax cheating microeconomically, legally and mathematically. It concludes that the Service is essentially a monopsonist in this market, since almost no one else will pay for such information. This leads to a prediction that the number and quality of tax tips, and the resulting federal revenues, will be maximized if Congress unifies the Service's two reward programs and uses the more generous reward structure of its whistleblower program. Next, this article analyzes the supply of information about tax cheats. In addition to the overwhelming likelihood that the Service will not pay an informant for her information, she must consider the potentially huge costs of being exposed as a tax informant. This article describes those costs of production and proposes that Congress shift some of them to the Service by waiving federal immunity to the claims of informants for breach of the Service's promises of confidentiality. This article details various federal and state laws, some based on professional rules of conduct, that forbid certain potential tax informants from sharing their information with the Service on pains of disbarment from their professions or imprisonment. This article then Attorney/Certified Tax Law Specialist, South Pasadena, California. My thanks to Michael Asimow, Rod Kiewiet, Eric Posner, Bruce Watkins, an anonymous referee and the attendees of the Tax panel at the 16th Annual Meeting of the American Law and Economics Association for their comments on earlier drafts. My thanks also to Tyler Southall for his careful editing. Each remaining error and omission is mine.

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