Of snitches and riches: Optimal irs and sec whistleblower rewards

The past decade has seen a dramatic shift in the enforcement of tax and securities laws, from an almost exclusive reliance on designated agents for the detection of violations of these laws, to a great reliance on whistleblowers, driven by the desire to obtain a reward. This shift has led to the payment of hundreds of millions of dollars in whistleblower rewards by the IRS and the SEC in recent years. Although legal scholars have devoted much attention to this shift in law enforcement, this literature has failed to explore one central question relating to the use of whistleblower rewards: How much should the IRS and the SEC pay whistleblowers? This Article fills this gap in the literature by developing a new economic model to capture the deterrent effect of whistleblower rewards. Using this model, this Article highlights three major determinants of the minimal deterring whistleblower reward: the gain to the violator from violating the law, the personal cost to the whistleblower, and the likelihood of a successful report. Three counter-intuitive findings emerge from this analysis: first, reports of less severe violations of the law may deserve a greater whistleblower reward; second, different whistleblowers may receive different rewards for providing the same type of information; and third, a greater likelihood of a successful false report may require a greater whistleblower reward. Recently adopted regulations that are intended to guide the IRS and the SEC in determining the size of whistleblower rewards do not consider the three abovementioned determinants of whistleblower rewards. Therefore, an improved whistleblowing policy would consider these factors as central factors when determining the level of whistleblower rewards.