A new Treasury report praises the Informants' Claims for Reward Program for bringing in large amounts of money for little cost, but says the IRS needs to do a better job of managing the program efficiently and fairly. The IRS says it agrees with the recommendations and has already begun making changes.

The program has brought in $340.3 million in just the past five years, according to the report by the Treasury Inspector General for Tax Administration. Since the late 1960s, the program has recovered nearly $3 billion.

Typical informants include what one government official calls "the exes" - ex-boyfriends and girlfriends, ex-spouses and ex-business associates. Bookkeepers, accountants and others with access to a business's financial records are often among the most reliable informants. Some of the best tips have involved the inner workings of complex tax shelters and their participants.

Yet the idea of paying tax snitches makes many people uneasy. Senate Minority Leader Harry Reid of Nevada has described the program as "rewards for rats." Critics fear that someone who has a grudge to settle with a former employer or even a noisy neighbor may try to use the program to enlist the IRS into harassing them.

IRS officials say that they are keenly aware of this issue and that they screen tips very carefully. Indeed, very few turn out to be fruitful. "Over 90 percent of informant reports we receive yield little or no usable information," says Mark Matthews, IRS deputy commissioner for services and enforcement.

"Realistically, we know that many credible informants acquainted with wrongdoing have motives that are less than pure," Mr. Matthews says. "Mother Teresa they are not."

Other informants are "angry," says Jeff A. Schnepper, a tax lawyer in Cherry Hill, N.J., and author of several books on taxes and finance. Chief among them are ex-spouses or business partners "seeking revenge." Mr. Schnepper recalls one woman who was married to a doctor who didn't report all of his cash income from patients. The couple got divorced, she reported him to the IRS several years ago - and eventually received "a substantial reward," says Mr. Schnepper.

Lately, the amount of the average payout has been on the rise, IRS data show. In fiscal 2005, the agency handed out 169 rewards totaling $7.6 million to informants. That was the fourth-highest annual dollar amount on record - and a 66 percent increase from nearly $4.6 million the prior year. Over the past six years, the average reward has been nearly $24,000.

Being an informant can be lucrative - the maximum payout is $10 million - but very few tips result in rewards, and it typically takes many years for tipsters to get any money. In cases analyzed by Treasury investigators, informants waited an average of more than 7 1/2 years to be paid. Much of this delay is due to a law that generally requires rewards be paid only once money has been collected from taxpayers, the Treasury report says.

One recent case involved a California woman who married a man she later discovered had long refused to pay federal taxes; thus, she filed on her own. As her marriage was breaking up, she went to a tax consultant - and a former IRS official - who helped her turn in her husband and file a reward claim. The man later was sentenced to prison. But the woman still hasn't gotten any reward, probably because the IRS hasn't yet collected.

The Treasury report criticizes the IRS's management of the program, citing a "lack of standardized procedures and limited management oversight." For one thing, Treasury analysts couldn't figure out how the IRS arrived at a reward in 32 percent of the paid claims they studied.

Other critics say the IRS needs to treat informants better. The Treasury report "makes clear" that the IRS and Treasury "still are far short in having a professional, effective office to benefit from whistleblowers," says Senate Finance Committee Chairman Chuck Grassley (R., Iowa). The IRS and Treasury "are in a tough fight against tax cheats, and they need to put out the welcome mat for whistleblowers."

Sen. Grassley says he plans to raise this report and the overall issue with Henry Paulson, President Bush's nominee for Treasury Secretary, and Eric Solomon, the nominee for assistant Treasury secretary for tax policy. Mr. Solomon's hearing is scheduled for Tuesday.

"I want a clear road map of reform so Treasury and the IRS no longer treat whistleblowers like skunks at the picnic," Sen. Grassley says.

"Corrective actions" are "already under way," an IRS official says. The IRS is consolidating the program at its Ogden, Utah, center - a move that is expected to be completed by Aug. 31 - and creating a nationwide database of informant claims. That includes routing any tipster claims to the Ogden campus for "control and processing" in an attempt to standardize treatment of claims.

The IRS faces an uphill struggle in combating tax cheating and collecting unpaid taxes. Nobody knows precisely the extent of the problem. But IRS researchers estimate the nation's "tax gap" - the difference between what taxpayers actually pay and what they should be paying - is about $290 billion a year, based on data for the 2001 tax year.

Individuals represent by far the biggest part of the tax-gap problem. That is especially so for self-employed workers and others who deal in large amounts of cash and where earnings aren't reported to the government and taxes aren't withheld. Moreover, millions of people who should be filing tax returns aren't doing so.

The IRS acknowledges its tax-gap figures are estimates. Even so, congressional critics say it is clear that the dollar losses are huge and that the government isn't doing nearly enough to reduce the gap. Those concerns have increased in recent years amid rising concern about federal budget deficits.

Amid these problems, the informant program "has made a significant contribution to the detection of tax-law violations," says J. Russell George, the Treasury Inspector General for Tax Administration.

IRS officials agree the informant program is valua$7,138.20 in 1998 and didn't report it. He argued that he had shared the award with several co-workers. In Tax Court, however, a special trial judge said the letter the IRS had sent the man identifying the reward was addressed solely to him and didn't indicate he had an obligation to share it with anyone else.

If you have information you think the IRS would be grateful for, you can hand it over in person or in writing to someone from the IRS's criminal investigation division at a local IRS office. Or call 800-829-0433. The IRS says useful information includes such things as the wrongdoer's Social Security number, "financial data" (such as bank accounts and assets) and their location, as well as other documentation (such as books and records).

IRS officials say they try to protect the confidentiality of all informants, but acknowledge there is no such thing as an ironclad promise. Some prominent tax lawyers who have defended people fingered by informants say it is often easy for them to figure out who the tipster was because of the specific nature of IRS questions that ensue.

How big a reward you get depends on the IRS's evaluation of how important your information is and how much it collects in taxes, fines and penalties - but not interest. Among the most common reasons the IRS gives for rejecting reward claims: The IRS already had the information you gave it. The tip didn't cause an investigation or result in recovery of taxes, penalties or fines. Or the taxes recovered were too small to justify a reward.