Paid Informers

The IRS has the power to approve rewards for information leading to the detection and punishment of persons who are guilty of violating, or conniving to violate, any civil or criminal tax law. Rewards are paid out of the proceeds (not the interest) collected, and the amount of the reward is generally limited to 15% of the collected funds. However, in a recent Court of Federal Claims case, G.C. Krug v. United States (98-1 USTC 50,402), an informant learned his right to a reward was not necessarily guaranteed.

Krug provided the government with information relating to the alleged underpayment of taxes by certain third-party taxpayers. Using this information, the IRS recovered millions of dollars in unpaid taxes. To collect his reward, Krug submitted Form 211, Application for Reward for Original Information . The IRS denied his claim because there was no written contract.

Krug sued the government, arguing that IRC section 7623—read in conjunction with IRS Publication no. 733—created an “implied-in-fact” contract entitling him to a reward. The government argued that it has broad discretion in issuing, or refusing to issue, rewards to informants.

The court sided with the government. In its view, the IRS has the authority to deny a reward claim as long as its reasons for rejecting the claim are not irrational.

Observation. CPAs should advise their clients who provide information that helps convict someone of a tax law violation that the only way to bind the government is by negotiating and signing a written contract that fixes a specific reward amount.

—Michael Lynch, CPA, Esq., associate professor of tax accounting at Bryant College, Smithfield, Rhode Island .