Although the I.R.S. has long accepted tips from informants, until recently it seemed reluctant to investigate their complaints or reward them. For the five years ended in 2008, the I.R.S. received about 80 whistle-blower complaints a year, and recovered an average of $155 million a year from tips in previous years, paying an average of $14 million annually in awards.
Since sweetening its awards, the whistle-blower’s office has been receiving more than 500 tips a year, involving far larger amounts. In the five years through fiscal 2008, tips from informants led to 20 cases in which the I.R.S. had been underpaid by at least $2 million. Now the I.R.S. receives 40 or 50 such tips a month, about 10 percent claiming fraud of $100 million or more.
It is too early to gauge whether the program will deliver on the promise that it might recover billions each year, but the preliminary results are promising: an audit by the Treasury Department found that in 2008 alone, whistle-blowers had reported $65 billion in unpaid taxes.
Law firms have been aggressively marketing themselves by setting up whistle-blower blogs and seminars, financing taxpayer antifraud groups, firing off press releases to trumpet big claims, and holding whistle-blower boot camps to train lawyers.
Some accountants and tax lawyers warn that the lure of big money awards could taint the process, even encouraging false accusations from unscrupulous business rivals, or disgruntled employees looking to cash in.
Donald L. Korb, former chief counsel of the I.R.S., said he considered it “unseemly” for the government to encourage citizens to become bounty hunters by informing on their co-workers, employers and neighbors.
During his tenure at the I.R.S., Mr. Korb said he had tried to set up a sophisticated set of procedures to vet complaints because he feared that misuse of the program might bring new complaints about overzealousness by I.R.S. auditors. “I think it’s a bad precedent,” said Mr. Korb, now a partner at the law firm Sullivan & Cromwell. “It’s a disaster waiting to happen.”
But I.R.S. investigators say that the whistle-blower’s office will carefully screen cases to prevent abuse and that the program already precludes monetary awards for people involved in planning or initiating the tax fraud they report.
Those restrictions will be tested in the case of Bradley C. Birkenfeld, the whistle-blower who helped pierce the secrecy of the Swiss banking system.
Mr. Birkenfeld’s tip helped the government win a $780 million settlement from UBS, another big Swiss bank, and could lead to billions more because he helped the I.R.S. find thousands of Americans with offshore accounts.
But Mr. Birkenfeld also withheld information from investigators about his actions to help a client evade taxes, and is now serving a 40-month sentence. Dean A. Zerbe, who represents Mr. Birkenfeld, said the I.R.S. risked undermining the program if it reneged on paying an award.
“He came forward and helped them recover more tax money than anyone else in history,” said Mr. Zerbe, who helped write the new whistle-blower rules four years ago, while working for the Senate Finance Committee. “And if people see that he went to jail and didn’t get the kind of award the I.R.S. has been promising, why would anyone ever come forward again?”
A recent round of “program changes” by the I.R.S. announced that informants are entitled only to a portion of the money directly paid to the government. If a tip simply leads to the denial of a refund — or if the unpaid taxes are used to offset other losses — the whistle-blower comes up empty.
Erika Kelton, a whistle-blower lawyer who testified before the Senate when the rules were being amended, predicted the limits would be struck down “either in tax court or in Congress.”