The IRS Criminal Investigation Division’s Use of Informants

The IRS Criminal Investigation Division, or CI, relies on informants to help build cases against suspected tax cheats. Informants provide tips and inside information that CI agents can use to uncover evidence of criminal tax violations. But the use of informants raises important questions about ethics, legality, and fairness in the criminal justice system.

What is a CI Informant?

A CI informant is someone who provides information about suspected tax crimes in exchange for money. The IRS has a whole system set up to recruit, manage, and pay informants. CI agents cultivate relationships with potential informants and sign them up using Form 8561. Informants can include accountants, bankers, business associates, employees, and even family members of the person being investigated.

Informants are motivated by the prospect of receiving reward money, which can be as high as 30% of the taxes, penalties, and fines that the IRS collects based on the information. The exact percentage depends on the value of the information provided and other factors.

How CI Uses Informants

CI agents rely heavily on informants to initiate new investigations and provide evidence in existing cases. According to the IRS Manual, information from informants should be thoroughly evaluated and verified through independent investigation.

Some specific ways CI uses informants include:

• Getting tips about potential tax crimes
• Learning how a scheme works from an insider
• Obtaining documents and records
• Wearing a wire to secretly record conversations
• Testifying as a witness in court

In grand jury investigations, informants may be used to provide background information or summaries of documents. But all testimony and evidence presented to the grand jury must be supported independently.

Pros of Using Informants

Supporters argue there are several benefits to the IRS using informants:

• Informants incentivize people to come forward with information.
• They provide valuable insider knowledge.
• CI gains efficiency by focusing investigations based on informant tips.
• Informants can provide evidence not available through other means.
• Tax cheats are more likely to be caught and prosecuted.

Studies have found that CI investigations based on informant tips tend to result in higher recommended sentences and criminal convictions. So informants clearly help in building strong cases.

Cons of Using Informants

However, there are also significant downsides to relying on informants:

• Informants are motivated by financial gain, not justice.
• Tips may be exaggerated or fabricated to earn rewards.
• Informants may entrap people who would not otherwise commit tax crimes.
• Rewards are paid even if the information is unreliable.
• Tax privacy of innocent parties may be violated.
• Legal precedent allows broad use of informants with minimal oversight.

Critics argue there are not enough protections against abuse of informants. And if people think they could become targets through loose informant arrangements, it could undermine voluntary tax compliance.

Ethical and Legal Considerations

The IRS maintains that use of informants is both ethical and legal. Agents are prohibited from inducing people to commit crimes. And payments require approval based on the value of the information.

However, others contend relying on informants for evidence crosses ethical lines. And despite prohibitions on entrapment, informants have great leeway to persuade targets into breaking the law.

Key legal considerations include:

• The attorney-client privilege does not prevent disclosure of communication in furtherance of a crime.
• The Taxpayer Browsing Protection Act limits some disclosures but there are exceptions for criminal investigations.
• Courts have given the IRS broad authority to use informants under the tax whistleblower statute.

Overall, the law provides minimal restrictions on how the IRS uses informants. Some legal experts argue for stronger protections to prevent abuse.

Famous IRS Informants

Some high-profile examples of IRS informants include:

• Bradley Birkenfeld – Exposed UBS tax evasion schemes and collected a $104 million reward.
• Frank Auerbach – Helped take down infamous mob boss Al Capone for tax evasion.
• Joseph Newton – Informant against former Trump attorneys Michael Cohen and Jeffrey Gettleman.

These cases show how informants can sometimes take down powerful figures who seem untouchable. But it also raises concerns when tax enforcement is used selectively against specific targets.

Balancing Act

The IRS has to strike a delicate balance with its use of informants. While valuable for gathering information, relying too heavily on informants risks undermining public trust in tax administration. Oversight and accountability are critical to prevent misuse.

With enhanced focus on high-wealth taxpayers, the CI division will likely depend more on whistleblower tips to build cases. This makes it even more important to have proper controls in place as informant arrangements expand.

Informants will remain a key tool for IRS criminal enforcement. But the agency must be thoughtful in wielding this powerful weapon and avoid letting zeal for tax prosecutions override all other concerns. If not, the IRS risks losing legitimacy as an impartial administrator of the tax system.