This report presents the results of our review of the Internal Revenue Service’s (IRS) Informants’ Rewards Program. The overall objective of this review, initiated at the request of the Senate Finance Committee, was to determine whether the IRS uses its Informants’ Rewards Program as a viable tool to identify, investigate, and address potential tax law violations with equitable rewards for cooperating informants.
The IRS uses its Informants’ Rewards Program to administer the authority provided by Internal Revenue Code Section 7623 (2004) to make payments to private citizens for assistance in “(1) detecting underpayments of tax, and (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws.” Rewards are paid as a percentage of the taxes, fines, and penalties collected based on the relationship of the informant’s information to the recovery. Rewards can also be paid on amounts collected prior to receipt of the information if the information leads to the denial of a claim for refund that otherwise would have been paid. This Program has been an effective method of identifying and collecting unpaid taxes. From Fiscal Years (FY) 2001 through 2005, over $340 million in taxes, fines, penalties, and interest were recovered based on information obtained through the Informants’ Rewards Program, with rewards of over $27 million paid to informants.
The Informants’ Rewards Program has significantly contributed to the IRS’ efforts to enforce tax laws, but additional management focus could enhance the effectiveness of the Program as an enforcement tool and make the process more accommodating to informants. Our analysis of IRS data indicated that examinations initiated based on informant information were often more effective and efficient than returns initiated using the IRS’ primary method for selecting returns for examination.1
However, we found that a lack of standardized procedures and limited managerial oversight resulted in control weaknesses over the Program. We reviewed a judgmental sample of 22 paid claims for reward and 69 rejected claims for reward processed at 3 of the 5 Informants’ Claims Examiner (ICE) units2 in operation during FY 2005. We noted that each ICE unit maintained its own records because a nationwide database of informant claims does not exist. For the paid informant claims in our sample, we found that 45 percent of the case files reviewed had problems with basic control issues (missing copies of key forms, no record of letters to informants, etc.), and we were unable to determine the justification for the reward percentage awarded to the informant in 32 percent of the cases. For the rejected informant claims in our sample, we were unable to determine the rationale for the reviewer’s decision to reject the claim in 76 percent of the cases reviewed.
We also found that an average of over 7 ó years passed between the filing of the initial claim by the informant and the payment of the reward. We observed lapses in the monitoring of taxpayers’ accounts for payment activity, which may have contributed to delays. For the rejected claims in our sample, an average of over 6 ó months elapsed between the date of the claim and the letter to the informant rejecting the claim. We observed instances of lengthy delays in the processing of rejected claims, such as unexplained delays between the receipt of the claim and the initial or subsequent review of the claim by ICE unit personnel. The lack of centralized and active management oversight of the Program increases the risk of errors such as improper payment of rewards or incorrect rejection of valid claims. Additional management focus could also assist in reducing the processing time for paid claims, which would make the Program more attractive to future informants wishing to report violations of tax laws.
We recommended the Deputy Commissioner for Services and Enforcement centralize management of the Informants’ Rewards Program to increase oversight of the Program and standardize the processing of informant claims. We also recommended the Deputy Commissioner for Services and Enforcement ensure a detailed nationwide database of informant claims is developed and implemented to provide increased visibility of the processing and disposition of informant claims.
IRS management agreed with our recommendations. Management’s response stated that the IRS had conducted its own review of the Informants’ Rewards Program in 2005 and was taking a number of steps to improve the management and oversight of the Program. These steps include designating an Informants’ Rewards Program coordinator for each operating division, establishing a National Oversight Committee for the Informants’ Rewards Program, consolidating informant claims processing at the Ogden Campus, and implementing a nationwide web-based system to track, monitor, and control informant claims. Management’s complete response to the draft report is included as Appendix VII.