IRS Pays for Information on Tax Law Violations : Reward: Tipsters, such as the one who recently turned in a Mission Viejo couple accused of embezzling nearly $8 million, can earn up to $100,000 if unpaid taxes are recovered.

The mystery tipster who notified the Internal Revenue Service about Daniel and Susie Hernandez may be entitled to a portion of whatever income taxes the Mission Viejo couple avoided on nearly $8 million the government says they bilked from the precious-metals firm where Daniel worked.

The identity of the person who tipped off the IRS that the Hernandezes were living far beyond their means and triggered a yearlong investigation of the couple’s finances has been kept secret, in accordance with the IRS’ policy of protecting the identity of informants.

Assistant U.S. Atty. Stephen Wolfe would only describe the tipster as “someone in the community” who “didn’t report (them) in the hopes of a reward.”

But under a 25-year-old program, similar to those offered by other federal and local agencies, tipsters who provide information to the IRS that sparks an investigation and leads to the recovery of unpaid taxes can earn up to $100,000.

Last year alone, 13% of the IRS’ criminal investigations nationwide were triggered by tips, which resulted in 671 rewards totaling $1.7 million. The IRS, for its part, was able to recover $83.7 million in previously unpaid taxes. The previous year, the agency paid 732 rewards for $1.5 million and recovered $58.4 million in taxes.

“There are people who have specific information that we would never get if we didn’t have this program,” said Wayne McEwan, chief of the criminal investigation division for the IRS district office that includes the southern portion of Los Angeles County, Orange County and the four other counties in Southern California.

“When you talk about taxes, there are a lot of people who have a grudge against someone else and want to tip the IRS off,” McEwan said. “We’re only interested in information where there is some evidence that someone committed a crime,” such as deliberate tax avoidance.

Although the program was set up to encourage reports of tax law violations, the provision of the federal tax code that established the reward system is not widely known, nor is it greatly publicized, although it can be found in IRS brochures.

IRS officials are careful not to be seen as promoting the rewards, which can reduce the amount the agency collects and may be construed as endorsing a “snitch” mentality.

“It’s a double edge,” said Judith A. Golden, an IRS district spokeswoman in Laguna Niguel. “We’re not encouraging people to turn in their neighbors. But we don’t want to discourage people from reporting possible violations.”

Reward amounts are determined by the amount of detailed information that caused an investigation and recovery of unpaid taxes.

For “specific and responsible” information, the reward is 10% of the first $75,000 recovered and 5% of the next $25,000. Anything recovered above that amount is paid at 1% of the total.

IRS investigators define “specific and responsible” information as a solid lead, such as a specific bank account in which illegally obtained money was stored.

“If someone knows about a second set of books someone is keeping that we would never have been able to find, or a concealed bank account, or the way in which someone has structured an illegal cash transaction, that’s specific information for a reward,” McEwan said.

For information that prompts an examination of alleged tax law violations and leads to a recovery of money but does not specifically point to where the money was stored, the reward is 5% of the first $75,000 and 2 1/2% of the next $25,000. Any recovery above that amount is paid at one-half of 1%. To be paid, the tipster must provide information that was “of value in determining tax due.”

And if someone provides information that starts an IRS investigation but did nothing else, the informant’s reward is 1% of the first $75,000 recovered and one half or 1% of anything else gathered.

Such rewards are not easy to obtain. Over the 25-year life of the program, the IRS has received 165,905 claims nationwide but has paid only 14,102, or 8 1/2% of the total.

Overall, more than $21 million in rewards has been paid, leading to a recovery of more than $1 billion in taxes. One tip alone, in 1990, brought in more than $800,000 in taxes.

In the case of Daniel and Susie Hernandez, arrested last month in connection with nearly $8 million missing from PGP Industries, a Santa Fe Springs precious-metals firm, the recovery of unpaid taxes may be difficult, officials say.

One bank account, to which federal investigators had traced more than $7 million, contains only $160, and another contains $130. A third account contains $14,000, according to search warrant returns.

The Hernandezes had very little equity in the real estate properties and automobiles they possessed, and it is unclear what the government may get from seizing these assets, sources close to the investigation said. Although the government alleges that Susie Hernandez spent $400,000 on jewelry at Neiman Marcus between 1989 and 1992, sources say the value of the jewelry recovered so far doesn’t come close to that amount.

If the couple is convicted, the government will be free to sell their assets. Once income taxes and secured loans are paid, what remains can be split in any of three ways: as restitution to the victims; in fines to the U.S. Treasury Department, or as a contribution to a federal asset-forfeiture fund that is used for crime fighting. Most often, the money goes to the asset-forfeiture fund, from which the reward amount is calculated.

Rewarding Program

Since 1967, the Internal Revenue Service has been paying rewards for information about tax violations. Rewards are made after money is collected, and $100,000 is the top amount any one person may collect.

Number of claims: 165,905

Percentage of claims paid: 8.5

Value of claims paid: $21,197,141

Taxes recovered: $1,070,073,597

PROGRAM PARTICULARS

Who can apply: Anyone except current Treasury Department employees or other former federal workers who obtained information in the course of official duties.

Contact: The criminal investigation division of any IRS office or district.

Helpful information: Suspected violator’s name, aliases, addresses, birth date and Social Security number; specific financial data, such as bank accounts and assets.

How to file a claim: Request and complete IRS Form 211 (Application for Reward for Original Information). You may remain anonymous, but must attach to the claim proof that you gave the information.

Source: Internal Revenue Service