In an annual report to Congress submitted last month, the IRS said it received 460 submissions in fiscal year 2009, which ended Sept. 30, 2009. The tipsters identified 1,941 taxpayers, each suspected of avoiding at least $2 million in tax. That compares with 475 submissions identifying 1,246 alleged tax cheaters in the previous year.

Even so, the agency has yet to pay a single reward under the new program. Grassley said in December that the program was being "underused" after the IRS said it had failed to pay an award for the third consecutive year since the law was enacted.

George Clarke, a partner at the Miller and Chevalier law firm in Washington, said the proposed regulations are apt to encourage more claims. "I think it will definitely cause more growth in the cottage industry," he said. "There's now a very clear other set of taxpayer filings that can be put in jeopardy by information from a whistleblower."

Jack Blum, a Washington attorney representing two whistleblowers including Heinrich Kieber, the Liechtenstein computer technician who reported clients of LGT Group to tax authorities around the world, said the biggest signal the IRS could send that it is serious would be to pay up.

Paying Rewards

"These guys are still, as far as I can tell, not paying anything," Blum said. "As far as I know that office is deadwood," he said, referring to the IRS's whistleblower office.

The regulations proposed today remove two barriers to payment that the IRS had affirmed as recently as July.

Under those procedures, informants could receive payment only if their information resulted in an additional collection of taxes by the government. Awards were denied if the information merely stopped fraudulent refunds. They were also blocked when an accused taxpayer had too many losses to owe taxes even after the IRS disallowed a fraudulent transaction.

Payment would be denied, for example, if a bank's tax director informed the IRS of a bogus $100 million transaction that made the bank appear to have a net loss. The agency would deny half of the transaction as a result of the information.

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