The Role of an Informant in Tax Fraud Investigations

Written by TaxSqueal. Posted in Blog

An informant in a tax fraud investigation is someone who has specific knowledge of a tax crime and provides this information to the proper taxing authorities, directly or indirectly.  Informants, aka “rats” or “snitches” are generally able to supply information that otherwise is unavailable or unknown to tax investigatory agencies like the IRS. Surprisingly, credible informants may prompt an investigation or greatly enhance an on-going tax fraud investigation.

Informants supply information, anonymously or otherwise for a variety of reasons. Oftentimes, informants themselves are involved in the tax fraud or other financial crime and attempt to deflect suspicions concerning their own activities. In addition, when facing a jail sentence, informants may “squeal” in an attempt to mitigate a potential prison term based upon their cooperation. Still others want to “do the right thing” and report a tax fraud that they may find troublesome, immoral or dishonest. Some informants have no other motivation than their belief that everyone should pay their fair share of taxes and simply desire to level the playing field. There are also those informants who are motivated by the possibility of a monetary reward based upon their knowledge of wrongdoing (FYI-the myth of an automatic 10% finder’s fee is erroneous). Unfortunately, such reward pay-outs are rare unless they involve hundreds of thousands of dollars in taxes. Additionally, the information provided must result in an additional tax assessment, which must be paid in full before any portion of the applicable reward percentage, if any, becomes payable. This is an extremely time consuming and drawn out process. Additionally, any reward payments are considered taxable income, while the aspects of maintaining complete anonymity become limited. Revenge is perhaps the most common reason informants come forward. Many feel they have been cheated or are trying to get even. The best informants are the ex’s; ex-spouses, ex-employers or ex-anybodies (friends, neighbors, etc).
It is vital that investigators determine the motivation of the informant if possible, since this will enable proper evaluation/assessment of the details/facts provided, as well as how to deal with the informant in the future.
  • Why is the information being provided by the informant?
  • How does the informant know what he/she knows?
  • Does the informant appear credible?
  • Are the allegation details provided plausible?
  • Is the informant willing to testify in a legal proceeding?
  • Can the informant be utilized in an undercover capacity?
  • Will the informant agree to recorded consensual monitoring?
Control is the key factor for any investigator when dealing with an informant. The informant MUST take direction from the investigator and not vice-versa. Without proper control the integrity of the investigation, as well as the safety of those involved could be jeopardized.  Informants are a powerful resource when investigating tax fraud, but all information supplied should be corroborated via other sources and means to validate its accuracy.