Why Does the IRS Make It So Tough to Rat Out Tax Cheats?

We spend a lot of time at Nextgov looking at ways entrepreneurs can build businesses using open government data.

Last month, the team at This American Life put together a great story about how one entrepreneur found a niche compensating for government failures on the data collection end rather than data use.

The story follows Al Drucker, a former IRS investigator who noticed his agency didn’t make it very easy for people to rat out tax cheats. There’s a form (3949-A), which must be submitted by mail. There’s also a tax fraud hotline, but that only points callers to a URL for the tax form or instructs them on how to order a paper version of form 3949-A if they can’t access and print it online.

After retiring, Drucker launched a Web service called Taxsqueal.com. Drucker’s site asks visitors for essentially the same information as the IRS form but they can fill it out online and submit it anonymously. Then Drucker transfers the information to 3949-A and mails it in himself. (A lot of his business comes from exes, he told producers Alex Blumberg and Chana Joffe-Walt -- ex-spouses, ex-employees, ex-friends, the works).

For a $3 fee, Drucker will also send the subject of the report a postcard letting him or her know about the “squeal,” a service Joffe-Walt described as “like a little extra ‘screw you.’”

This raises the question, of course, why the government didn’t launch Tax Squeal on its own. If the IRS is eager to collect unpaid taxes, it would seem reasonable for the agency to at least allow people to report tax fraud online.

This could be a case of the private market stepping in to correct for a government failure. A 2013 auditors’ report on government efforts to reduce tax fraud and evasion, for example, doesn’t even mention voluntary reporting.

However, it’s also possible that the actual market for tax squealing isn’t large enough to warrant much increased effort. According to This American Life’s report, Drucker’s business hasn’t fared very well so far. The accountants and tax attorneys he expected to support the site through advertising haven’t come through and not many people are shelling out for the $3 “you’ve been squealed on” postcards.

“Most people…don’t want to squeal” Blumberg concludes. “Sure there are a lot of ex-employees and ex-spouses out there eager to squeal. Just not enough to support a business.”

The full story is available here.  

(Image via PTstock/Shutterstock.com)